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 empirical evidence on whether they accelerate productive entry — or just produce regulatory press releases — has lagged. What does the UK record actually show, and what should U.S. and other developed-economy regulators learn from it?
Empirical evidence on what regulatory sandboxes actually do to FinTech-firm performance — and what U.S. and other developed-economy regulators should 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 empirical case for whether sandboxes actually accelerate productive FinTech entry has lagged the policy-adoption curve. The U.S. Consumer Financial Protection Bureau is again deliberating a federal sandbox-style framework; the Office of the Comptroller of the Currency is on the same question. Several U.S. states — Arizona, Utah, West Virginia — have run their own variants, with mixed results.
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 accumulated substantial downstream citation, including at tier-1 European universities and in journals influencing subsequent policy discussion. The institute's forthcoming third paper in this program extends the analytical framework to the available U.S.-state sandbox programs.
The issue area's research questions span: how sandbox participation affects FinTech-firm performance and which firms it helps or harms; how U.S.-state sandbox programs compare to the UK FCA's; and what specific design recommendations follow from the empirical record for federal-level U.S. policy proposals.
Plain-language explainer
What this means for you
Imagine a small digital-banking startup applying for a regulatory sandbox program. The sandbox promises a limited window to test products with real consumers under relaxed compliance requirements, in exchange for sharing performance data with the regulator. The pitch is compelling: faster entry for innovative firms, real-world data for consumer-protection rule-making, lower compliance costs during the test phase. Everyone wins — if the sandbox actually works.
Fifty-plus jurisdictions have adopted regulatory sandboxes since 2016, including Arizona, Utah, and West Virginia among U.S. states, plus active proposals at the federal level from the CFPB and the OCC. The empirical evidence on whether these programs actually deliver — faster entry, productive innovation, useful consumer-protection learning — has lagged the policy-adoption curve substantially. Most sandbox claims rest on press releases and graduation counts, not on rigorous post-program performance data.
FAME-funded researchers ran one of the few empirical studies of UK regulatory-sandbox effects on digital-bank performance. The findings cut against the innovation-accelerator pitch: sandbox participation was associated with a statistically significant decline in bank performance across every standard metric, concentrated in the larger, more established firms — the ones that most often lobby for these programs — while only the youngest, smallest firms showed any positive signal. U.S.-state programs are not yet operating at sufficient scale to replicate the analysis in U.S. policy contexts.
This matters for working families because the alternative to evidence-based sandbox policy is regulator-by-press-release: programs adopted on the promise of innovation that quietly produce neither the consumer-protection learning nor the productive-entry acceleration they advertised. A predatory FinTech product that enters market through a sandbox and graduates to general operation without meaningful consumer-protection learning is a worse outcome than no sandbox at all. The research is how we tell the difference.
Your support funds the slower analytical work that turns sandbox graduation counts into actual evidence — the kind that lands on the desks of CFPB and OCC staff writing the next generation of federal FinTech regulation, and the kind that congressional committee staff can cite when industry lobbyists arrive with their own talking points.
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 — the firms whose advocacy most often drives sandbox adoption — 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
See the full Positions surface for the institute's positions across all issue areas.
Commentary & outputs
Briefs, op-eds, and comments in this area
policy brief · in-development
2026-06
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 specific design recommendations for CFPB and OCC 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
2026-06
What the UK's regulatory sandbox actually did for its digital banks
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 severe for the large, established firms that most often lobby for these programs. Pitched at CFPB and OCC policy staff considering federal sandbox-style frameworks.
Forthcoming outputs
- — Policy brief on regulatory-sandbox effectiveness for U.S. FinTech policy
- — Op-ed for American Banker BankThink translating the UK evidence for U.S. policy audience
- — Third FAME-funded paper: U.S.-state sandbox programs replication
- — Regulatory comments on CFPB and OCC sandbox-related rulemakings
Policy actors we engage in this area
- CFPB Office of Innovation
- OCC Office of Innovation
- Federal Reserve Board Division of Supervision and Regulation, Financial Innovation Section
- FDIC FDITech
- Senate Banking Committee staff
- House Financial Services Committee staff