An exceptional long awaited pilot scheme
In Vietnam, the decree for regulations on controlled testing mechanism for financial technology activities in the banking sector (Fintech Sandbox Decree) has been waited since its first draft in 2020. Now, this long awaited decree is expected to be enacted by Vietnam Government in the third quarter of 2023[1].
According to latest available draft of the Fintech Sandbox Decree, it is expected that only a very limited number of fintech companies could be accepted to participate in this fintech sandbox.
That sounds privileged. But, upon reviewing carefully the Fintech Sandbox Decree, one would ask: Should fintech players apply, or should they not apply, to join in this pilot scheme?
This article highlights the key pros and cons and the opportunity costs, to help decide on parachuting under this pilot scheme.
The “Pros” from Participating to the Regulatory Sandbox…
Enhancing legal assurance
With the delay of the legal framework, fintech activities have generally been in grey area for years. Many fintech companies operating in the country remain generally susceptible to legal risks. By gaining acceptance into the regulatory sandbox, Fintech companies can establish a more secure legal footing, enabling them to continue their operations and deploy their business models in Vietnam with greater confidence.
Attaining pioneering status
Fintech companies that gain acceptance into the sandbox will attain pioneering status. The pioneering status does not guarantee that the Fintech companies accepted for the pilot scheme will be granted an official license at the very end[2]. However, successful participants in this pilot scheme could enjoy certain comparative advantages when seeking official licenses. These advantages may include:
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- The participating Fintech companies have the opportunities to contribute actively to shaping the official regulatory framework (as discussed below), familiarizing themselves with the requirements and qualifications for obtaining an official license.
- Throughout the pilot period, the participating Fintech companies are monitored by the State Bank of Vietnam and other supervisory State authorities. Accordingly, these participants would find the licensing process for obtaining an official license streamlined, and the burden reduced.
Shaping the official regulatory framework
Through the sandbox, the regulators also experience how a fintech solution operates and identify the associated risks, so as to come up with an official regulatory framework. With the limited number of fintech companies to be admitted to the prospective sandbox[3], their performance data and practical insights will form a crucial part of the regulators’ experience. Eventually, the successful participants assume a more proactive role in shaping the official regulatory framework.
The “Cons” of Participating to the Regulatory Sandbox…
Time and operation limitations
Each participant’s initial duration under the sandbox will not exceed two years[4], with maximum two renewals each limited to one year[5]. At the end of the term, unless renewed, there are two possible outcomes: (i) the participant may be granted a certificate of completion (official license), or (ii) the pilot will be terminated.
Of note, even if a participant demonstrates strong performance within the sandbox, their involvement in the pilot may still be terminated in case the regulatory framework eventually fails to be formalised officially[6]. If termination occurs, participants may not be allowed to continue to operate the Fintech solution, even outside the sandbox regime[7]. This could pose a significant drawback, especially when compared to those who have opted not to apply for the sandbox at the outset, as they may still continue operating under the applicable existing laws which do not include the sandbox[8].
Top of Form
As for the operational aspect, sandbox participants generally have less autonomy and limited flexibility to implement their business models compared to those operating outside the regulatory sandbox. Similar to time constraint, the specific operational limitations are determined by the State Bank and may encompass factors such as geographic reach, transaction value, and the number of customers served[9]. In addition, the sandbox participants would be subject to supervision by the State authorities, which includes a comprehensive reporting requirement[10].
Interested in Applying for the Sandbox? – Take These Notes with You
The operational limitations should be properly crafted
The State Bank will consider imposing the time and operational limitations based on, among others, the request from the applicant[11]. Thus, it is essential for an applicant to propose a well-defined set of limitations. Once approved by the State Bank, these operational limitations may not change during the pilot period[12]. Thus, these limitations should be substantiated with justified rationale and supporting documents, to provide the applicant with necessary flexibility and align with its commercial goals during the pilot scheme.
Timing considerations
Sandbox participation is proposedly available to a very limited number of qualified Fintech companies. Considering the comprehensive and complex nature of the application documents, prospective applicants should contemplate initiating necessary preparation work well in advance, and the submission should be impeccable.
Work well with State authorities
While the State Bank of Vietnam is the primary reviewing authority for the sandbox application, it is not the sole entity involved. Various Ministries, e.g. the Ministry of Public Affairs, Ministry of Science and Technology, Ministry of Planning and Investment, Ministry of Industry and Trade, and Ministry of Finance, also play significant roles in the process[13]. This multifaceted involvement also needs to be managed efficiently.
Authors: Bui Ngoc Hong, Partner, Nguyen Quoc Bao, Senior Associate
Footnotes
[1] <https://baodautu.vn/fintech-cho-vay-sap-thoat-khoi-vung-xam-phap-ly-d197152.html>
[2] 2023 Draft Decree, Article 5.2
[3] 2023 Draft Decree, Article 5.4
[4] 2023 Draft Decree, Article 7.1
[5] 2023 Draft Decree, Article 20.2
[6] 2023 Draft Decree, Article 21.1(a)
[7] 2023 Draft Decree, Article 19.2(d)
[8] 2023 Draft Decree, Article 25.1
[9] 2023 Draft Decree, Article 7.2
[10] 2023 Draft Decree, Article 16.2
[11] 2023 Draft Decree, Articles 7.1 and 7.2
[12] 2023 Draft Decree, Article 7.2
[13] 2023 Draft Decree, Article 23.2