Why Fintech Regulation Can Accelerate Innovation

The central concept of fintech (financial technology) companies is to improve transactions, payments, loans, etc., mostly by bringing IT technologies and new methods to the financial industry.

This can quickly run into regulations that have been established for larger institutions, sometimes even conceived back when most financial transactions passed through a physical paper trail.

As such, innovations like blockchains, digital money, or digital wallets often end in a regulatory gray zone, where what is or is not authorized is unclear. Another case is when some new technology brings tangible benefits, but it runs contrary to existing regulations and cannot be deployed.

Recently, regulators have deployed so-called “regulatory sandboxes”. The idea is to create a controlled testing environment where businesses can trial innovative products, services, or business models with real consumers under relaxed legal or regulatory requirements.

This obviously can help innovative companies test new technology and discover real market needs and demands. But this can also have broader market implications.

A new study by researchers at the University of Economics Ho Chi Minh City (Vietnam) is analyzing that question.

It found that the introduction of the sandbox was associated with improved short-term operational efficiency among Australian firms, including businesses not necessarily participating in the sandbox. The strongest result was a substantially shorter Cash Conversion Cycle.

They published their findings in Journal of Open Innovation: Technology, Market, and Complexity¹ under the title “Do regulatory sandboxes diffuse innovation and efficiency? A difference-in-differences analysis”.

Explaining Fintech Regulatory Sandboxes

The concept of the regulatory sandbox model was first introduced by the UK’s Financial Conduct Authority (FCA) in 2015. It has since been adapted by various jurisdictions worldwide, including Australia, Singapore, and the EU, each tailoring the sandbox framework to meet specific market needs.

They generally combine time-bounded experimentation, ongoing interaction between firms and regulators, and modified regulatory requirements intended to facilitate testing while maintaining safeguards for consumers and the financial system.

For example, the Australian regulatory sandbox framework introduced in 2016 incorporated a licensing-exemption mechanism and covered several categories of financial services, including credit, payments, and financial advice.

The key idea is to let innovation happen, but at the same time give regulators information about new products, business models, compliance problems, and market risks before these developments are addressed through general rules or supervisory practice.

This way, new financial services and technologies can still be tested and deployed, but without creating systemic risks.

Indirect Diffusion

While regulatory sandboxes are mostly designed to test the interaction between innovative fintech companies and their customers, their effect can be felt in the wider market.

For example, the new offer may change expectations among competitors, investors, customers, and service providers.

“A provider that develops knowledge while working with a sandbox participant may later offer related services to other firms, while financial institutions and professional advisers may incorporate regulatory learning into their broader commercial practices”

It is also possible that the participating firms can develop a competitive edge over their competitor participating in the sandbox, which in turn can create pressure on the regulators to move quicker in letting other companies provide similar services by changing the general regulation.

Lastly, regulatory sandboxes can accelerate innovation in the financial sector as a whole by lowering regulatory barriers for firms seeking to experiment with new technologies.

Measuring Regulatory Sandboxes’ Impact

Gathering The Data

The researchers analyzed the impact of Australia’s sandbox implementation on firm-level operational efficiency.

To compare it to a control group, they used nearby New Zealand, as it had not yet implemented a regulatory sandbox during the study period (2013-2019). In addition, the two countries share significant economic and institutional similarities, including geographical proximity, similar levels of economic development, and comparable regulatory environments in the broader financial sector.

This period was chosen to allow for a balanced comparison between the pre- and post-implementation phases of the regulatory sandbox in Australia:

• The three years prior to the December 2016 launch (2013–2015)for a solid baseline to capture firm-level operational efficiency trends before the introduction of the sandbox.
• The three-year post-implementation period (2017–2019) to observe the immediate effects of the sandbox on firms’ operations without extending too far into the future, where additional external factors might introduce noise into the analysis.

The firm-level data utilized were drawn from Refinitiv Datastream, and key macroeconomic indicators were sourced from the World Bank’s extensive databases (GDP, unemployment, etc.).

Sandboxes’ Effects

The first most spectacular effect of Australia’s regulatory sandbox has been the optimization of the cash conversion cycle (CCC), or the measurement of the time in days it takes for a company to convert its investments in inventory and other operations into cash flows from sales.

Source: Journal of Open Innovation: Technology, Market, and Complexity

Australian firms recorded a Cash Conversion Cycle approximately 29.44 days shorter than matched New Zealand firms in the first-year analysis. The estimated difference remained similar in the two-year and three-year analyses, at 30.84 days and 30.17 days, respectively. Overall, this showed that firms are becoming more efficient in managing their operations, and the use of a control country likely indicates that the regulatory sandbox contributed to this effect.

Additionally, the sandbox’s role in attracting and developing a skilled fintech workforce likely contributes to the creation of innovative financial solutions, further enhancing efficiency.

The researchers also think indirect diffusion is partially responsible for this effect:

“As newer firms thrive in the sandbox, established firms are pushed to optimize their working capital management to stay competitive. These forces of regulatory clarity, fintech talent, and market pressure have driven meaningful improvements in the CCC, boosting short-term operational efficiency for Australian firms.”

In parallel, there were few to no significant differences in Total Asset Turnover (TAT) and Fixed Asset Turnover (FAT) between Australian and New Zealand firms.

This suggests that the sandbox’s impact may have been more concentrated on short-term operational efficiency rather than broader asset utilization.

The researchers think this is due to firms prioritizing the optimization of working capital, such as cash flow and liquidity management, through innovations in the sandbox, before focusing on more capital-intensive areas like total and fixed asset utilization.

They also found that the effects of the sandbox environment do not significantly differ between large and small firms.

“Contrary to our expectations, large firms do not exhibit superior improvements in efficiency as a result of the regulatory flexibility provided by the sandbox.”

This indicates that company size did not materially change the relationship between the sandbox environment and operational efficiency. Smaller firms did not receive a clearly greater benefit, nor did larger firms use their additional resources to produce superior gains.

However, high sales growth firms exhibit significantly better operational efficiency than other firms following the implementation of the sandbox.

So it could be that high-growth firms, which are typically more agile and responsive, are better positioned to take advantage of the sandbox’s relaxed regulatory environment.

Investors Takeaway

When looking at the country-level effect, regulatory sandboxes are not only able to stimulate innovation, but also improve the cash conversion cycle quickly.

It attracts more capital and investors into the fintech ecosystem of the country, and boosts innovation in the industry.

Regulatory clarity can function as infrastructure for innovation. It can expand the addressable market for fintech providers while helping their business customers release cash trapped in routine operations, boosting the sector as a whole.

From a direct investing perspective, high-growth firms seem to be the profile on which to focus for investors looking at individual stock picks to benefit from the implementation of a regulatory sandbox, while the size of the company is, on average, irrelevant.

Still, investors interested in stock picking will need to choose carefully a precise technology or a provider responsible for the improvement measured in this study, as a country-level analysis will not capture individual success stories or failures.

Investing In FinTech Innovation

Block, Inc.

As regulatory sandboxes are becoming more widespread and a common tool in most countries, and innovation in the financial sector accelerates, this will affect the financial ecosystem as a whole.

If regulatory sandboxes accelerate the adoption of financial technology beyond their direct participants, companies supplying digital payment and cash-management infrastructure may benefit from a substantially larger market.

Block offers investors exposure to this trend through Square, which integrates payment acceptance, invoicing, banking, and financing tools for businesses. Other products of the company include:

• CashApp, a digital wallet which allows sending and receiving money, investing in stocks or bitcoin, and filing taxes.
• ClearPay / Afterpay, to pay for purchases in installments.
• Bitkey, a self-custody Bitcoin hardware wallet.
• Tidal, a high-definition music streaming service with a catalog of over 100 million songs.
• Proto, Block’s bitcoin mining system.

Block has also been quick to integrate AI into its customer products, for example, Managerbot for sales, labor, inventory, and other parts of the operation, or Moneybot, which helps Cash App customers understand their financial lives.

AI is also deployed for coding and “builders” with many tools to create, coordinate, and use AI agents, with a focus on open-source solutions and building “open financial infrastructures”.

Source: Block

Overall, Block is not directly concerned with regulatory sandboxes, but should benefit from the global increase in financial innovation and digital transactions resulting from quicker innovation and more flexible regulatory frameworks, especially thanks to its focus on building open-source and agentic financial tools.

Latest Block (XYZ) Stock News and Developments

Study Referenced

^{1. Phuc Van Nguyen and Vu Minh Ngo. Do regulatory sandboxes diffuse innovation and efficiency? A difference-in-differences analysis. Journal of Open Innovation: Technology, Market, and Complexity. Volume 12, Issue 3, September 2026, 100856. https://doi.org/10.1016/j.joitmc.2026.100856}