Nexus between Regulatory Sandbox and Performance of Digital Banks—A Study on UK Digital Banks
2022Washington PB, Rehman SU, Lee E
Journal of Risk and Financial Management, 15(12), 610
Research · Issue area · FinTech Regulation
FinTech Regulatory Frameworks
Regulatory sandboxes have been adopted in more than fifty jurisdictions, but the evidence on whether they help productive firms enter the market has lagged. What does the UK record actually show, and what should U.S. and other regulators learn from it?
Empirical evidence on what regulatory sandboxes do to FinTech-firm performance — and what regulators can learn from the UK record.
About this issue area
The UK Financial Conduct Authority opened the world's first regulatory sandbox in 2016, and more than fifty jurisdictions have since adopted variants. The evidence on whether sandboxes help productive FinTech firms enter the market has lagged the policy-adoption curve. Federal agencies in the United States have considered sandbox-style programs at various times, and several states — Arizona, Utah and West Virginia among them — have run their own.
The Institute of FAME's research in this area began with Washington, Rehman & Lee (2022, Journal of Risk and Financial Management), one of the few empirical studies of UK regulatory-sandbox effects on digital-bank performance. The paper has been cited in later research on regulatory sandboxes. A planned third paper would extend the framework to U.S. state sandbox programs.
Research questions in this area include: how sandbox participation affects FinTech-firm performance and which firms it helps or harms; how U.S. state programs compare with the UK's; and what design lessons follow for federal policy proposals.
Plain-language explainer
What this means for you
Imagine a small digital-banking startup applying to a regulatory sandbox. The sandbox offers a limited window to test products with real customers under relaxed requirements, in exchange for sharing performance data with the regulator. The promise is faster entry for new firms, better data for consumer-protection rules and lower costs during testing — if the sandbox actually works.
More than fifty jurisdictions have adopted sandboxes since 2016. Evidence on whether they deliver — faster entry, productive innovation, useful lessons for consumer protection — has lagged. Many claims rest on graduation counts rather than on careful post-program performance data.
A FAME-funded study examined UK sandbox effects on digital-bank performance. Sandbox participation was associated with a statistically significant decline in bank performance across standard measures, concentrated in larger, more established firms, while only the youngest, smallest firms showed a positive signal. U.S. state programs are not yet large enough to repeat the analysis.
This matters for consumers because a sandbox adopted without evidence may deliver neither the consumer-protection lessons nor the productive entry it promised, and a product that graduates without meaningful consumer-protection learning can be a worse outcome than no sandbox at all. Research is how we tell the difference.
Your support funds the careful analysis that turns graduation counts into evidence that agency and congressional staff can use as they write the next generation of FinTech rules.
Evidence base
FAME-funded and affiliated research in this area
Peer-reviewed publications that anchor FAME's standing in this issue area.
Active programs
FAME programs producing evidence in this area
Where FAME stands
Institutional positions on questions in this area
Question
Should the United States adopt a federal regulatory sandbox modeled on the UK Financial Conduct Authority's program?
The UK Financial Conduct Authority sandbox — the world's first and most-studied — is associated in the empirical record with a statistically significant decline in digital-bank performance across every standard metric (net interest margin, ROA, ROE, yield on earning assets), robust to controls; the mechanism appears to be increased compliance and operational costs from bespoke supervisory arrangements, not the lighter-touch regulation sandboxes are typically marketed on. The harm is concentrated in larger, more mature, and state-owned institutions, while only the youngest, smallest firms show positive coefficients. The institute therefore does not support general-purpose federal sandbox programs marketed as innovation accelerators. It supports, at most, narrowly scoped programs limited to genuinely novel business models facing real regulatory ambiguity (not established models seeking lighter ongoing supervision), with mandatory publication of structured post-program performance data so the U.S. record is evaluable. On one published study of 24 UK firms, the institute's position is that more evidence should precede, not follow, federal adoption.
Adopted 2026-05-08
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Commentary & outputs
Briefs, op-eds, and comments in this area
policy brief · in-development
target early 2027
What the UK regulatory sandbox actually did for its digital banks — and what U.S. policy should learn
Institute of FAME — Policy Brief Series
Translates the Washington/Rehman/Lee 2022 JRFM findings on UK digital-bank performance under the FCA regulatory sandbox into design recommendations for U.S. sandbox proposals. The paper finds sandbox participation associated with a statistically significant decline in bank performance — concentrated in larger, more established firms — and argues that U.S. programs should be scoped narrowly and required to publish structured post-program performance data.
op ed · in-development
target early 2027
What the UK's regulatory sandbox actually did for its digital banks
Target: American Banker (BankThink)
Op-ed translating the Washington/Rehman/Lee 2022 JRFM findings into a ~950-word piece for the American Banker BankThink audience. The UK data show sandbox participation associated with worse digital-bank performance — most pronounced for larger, more established firms. Written for policy staff considering sandbox-style frameworks.
Forthcoming outputs
- — Third paper: U.S. state sandbox programs (planned)
Policy audiences for this work
- Consumer Financial Protection Bureau
- Office of the Comptroller of the Currency
- Federal Reserve Board
- FDIC
- Senate Banking Committee staff
- House Financial Services Committee staff
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