- Frank Chaparro
NEW YORK – Japan’s push to attract innovative financial technology startups to the country could spell trouble for the US.
On Wednesday at the New York Stock Exchange, Japanese Prime Minister Shinzo Abe said the government was moving forward with a plan to roll back regulations on some fintech startups to help spur the development of emerging technology and drive growth in the country.
“When one wants to conduct a world-first trial, such as with new financial services made possible through fintech, it is impossible to predict the sort of regulations with which the trial will come into conflict,” Abe said.
As such, Abe is pushing for a regulatory sandbox program that would allow fintechs, startups looking to automate or digitize aspects of financial services, to operate and scale without meeting existing regulations.
“We will make a sandbox in which it is possible for certain participants to conduct trial and error freely on new business for a certain period of time without conforming to existing regulations,” Abe said.
Inaki Berenguer, the CEO of CoverWallet, a New York-based fintech company, told Business Insider that the proposed sandbox in Japan would help foster an environment in which entrepreneurs have more leeway to innovate.
While such an environment is understood to exist in Silicon Valley more broadly, Berenguer said, those hoping to break through specifically in the financial industry in the US are often required to subscribe to the same regulations as their much larger peers.
That often means paying lawyers to ensure compliance, costs that can force entrepreneurs to put off investing in their product and team. This creates a sort of Catch-22 for some startups. Venture-capital backers are less likely to give entrepreneurs money without a product, but it’s more difficult to create a product with less money when also paying legal costs. Berenguer says this has made financial technology harder to break into relative to the overall tech industry.
“This suppresses innovation,” he said.
Singapore, UK sandbox
Some companies, he said, are seeking greener pastures in Singapore and the UK, where a sandbox program has existed for some time. “With them goes their ideas and the potential jobs and wealth those ideas could bring to fruition,” Berenguer said.
“The addition of Japan gives fintech companies another option,” Frederic Nze, the founder and CEO of Oakam, a UK-based startup lender, told Business Insider.
Japan’s sandbox program could add further pressure to the US fintech industry. According to Mark Brnovich, Arizona’s attorney general who has long advocated regulatory overhaul in financial services, US fintech firms received only 33% of fintech venture capital spending, lower than the 56% US share of total VC spending.
“This underperformance may have many causes, but our global competitors are certainly exploiting their regulatory advantage to get ahead in fintech,” Brnovich wrote.