Mitigation Effects of FinTech Regulatory Sandboxes on SME Financing Constraints
Wei Chang1, Lingfang Xie2,*.
1, School of Information Science and Technology, Northwest University, Xi’an 710119, China.
2, School of Finance, Shanghai Lixin University of Accounting and Finance.Shanghai,201209, China.
First author: Wei Chang, changwei0307@163.com
Second author and corresponding author: Lingfang Xie, wmxfd_shangcai@163.com
Abstract
Purpose: This study investigates the mitigation effects of FinTech regulatory sandboxes on small and medium enterprise (SME) financing constraints, examining how innovative regulatory frameworks facilitate financial inclusion and ecosystem development across diverse institutional contexts. Methodology: The research employs a mixed-methods approach, combining qualitative comparative case analysis with quantitative impact assessment, systematically analyzing regulatory sandbox frameworks across three distinctive jurisdictions: the United Kingdom, Singapore, and Hungary, spanning the period from 2016 to 2024. Data collection incorporates triangulated secondary sources including regulatory documents, policy statements, statistical reports, and academic literature to ensure comprehensive coverage and analytical rigor. Findings: The analysis reveals that regulatory sandboxes consistently generate positive outcomes in alleviating SME financing constraints through multiple complementary mechanisms including innovation facilitation, regulatory learning enhancement, and ecosystem development. However, effectiveness varies significantly across jurisdictions, reflecting differences in regulatory maturity, institutional capacity, and strategic priorities, with mature economies demonstrating superior innovation diversity while emerging markets excel in regulatory compliance integration. Conclusion: Regulatory sandboxes represent transformative institutional innovations that extend beyond traditional regulatory facilitation to encompass comprehensive ecosystem restructuring and creation of new forms of regulatory capital for SME financial access. Practical Implications: The findings provide evidence-based insights for policymakers seeking to optimize regulatory frameworks for FinTech innovation and SME financial inclusion, emphasizing the importance of holistic approaches that balance innovation facilitation with appropriate risk management and institutional capacity building.
Keywords: regulatory sandbox; FinTech innovation; SME financing constraints; financial inclusion; comparative regulatory analysis
1. Introduction
The contemporary financial landscape is experiencing an unprecedented transformation driven by the rapid proliferation of financial technology (FinTech) innovations. This technological revolution, characterized by the emergence of digital payment systems, blockchain-based solutions, artificial intelligence-driven financial services, and decentralized finance platforms, has fundamentally altered the traditional paradigms of financial service delivery and regulatory oversight. The exponential growth of FinTech companies has created a complex regulatory environment where traditional financial supervision frameworks struggle to accommodate novel business models that often transcend conventional sectoral boundaries [1]. The rapid pace at which new Financial technology start-ups are being developed and the sluggish pace at which regulation is being implemented calls for urgent action by regulators [2]. This regulatory lag has prompted financial authorities across diverse jurisdictions to explore innovative approaches to financial supervision, with regulatory sandboxes emerging as a prominent policy instrument designed to bridge the gap between technological innovation and prudential oversight.
Small and medium enterprises face particularly acute challenges in accessing financing, with traditional credit assessment mechanisms often inadequately serving firms lacking extensive credit histories or collateral assets. The emergence of FinTech innovations offers potential solutions to these longstanding constraints, yet regulatory uncertainties have limited the development and deployment of SME-focused financial technologies. This context makes regulatory sandboxes particularly relevant for SME financing, as they provide controlled environments for testing innovative solutions specifically designed to address small business financing gaps.