FCA sandboxes: A fifth of firms that participate in the programme have gone out of business

Last week Rishi Sunak announced new sandbox programmes in partnership with the Financial Conduct Authority (FCA).

The chancellor is set to create a Digital Scalebox, for fintechs looking to scale their products and services, launch the second phase of the FCA's Digital Sandbox, and also introduce Regulatory Nurseries for younger fintechs.

But, just how successful are these government-backed schemes? On the whole, they seem to work, but some companies have fallen short of the mark in the years since they took part.

As another programme has been thrown into the mix (more on that below) we decided to dig around to see just how successful the three existing schemes are. 

Fintech Jargon

It’s easy to get the many types of sandbox currently on offer muddled up, after all, they are all fairly similar and closely related. 

Currently, there are three types of FCA sandboxes companies can apply to. 

Firstly a relatively-new Digital Sandbox, which has only had one cohort so far supporting early-stage ideas and proof of concept development for firms, and is not supported by the regulatory sandbox.

The Regulatory Sandbox is the longest-running sandbox with six cohorts, for companies wanting to test their product in a live environment on a small group of real customers before taking it to the wider population.

And finally, the new kid on the block, Regulatory Nurseries are designed for newly authorised firms needing extra support.

As it stands, there have been 108 entries into the six Regulatory Sandbox cohorts, with some firms entering more than once if they were not ready to begin testing in their original cohort. 

The most recent, seventh cohort has not yet been made public by the FCA after the application deadline closed at the end of 2020.

The Terrible Twos

Out of all six cohorts to the Regulatory Sandbox, the second cohort produced the most unsuccessful companies to date, with nine companies shutting up shop.

The cohort, which ran throughout 2018, saw 38 per cent, or nine companies fail, including AI and risk management platform Beekin, remittance service OKLink, blockchain-based platform OweMe that helped companies get paid earlier and cross-border money transfer platform ZipZap.

Following cohort two, the fourth cohort saw the most amount of companies close their doors, with a total of five companies going out of business.

After cohort four came cohorts one and three, both with a total of three companies no longer operating and then cohort five with two failed firms and cohort six with just one company no longer open for business—although it is pertinent to point out that cohort six was only announced in July 2020.

Big names in finance

Every bank in the ‘big four’ (Barclays,HSBC, Lloyds Banking Group and NatWest) has participated in a Regulatory Sandbox, some in tandem with other applications too, such as Mettle, an SME-focussed banking app from NatWest and Bó, a now-extinct digital bank from RBS.

Other, notable non-fintech names have also participated in the scheme, including the British Heart Foundation, the London Stock Exchange Group, the Post Office, Nationwide and Standard Life.

Two of the most notable companies to have participated in an FCA sandbox and fail are Bó from RBS and peer-to-peer lender Orca.

Bó was a retail digital banking service from RBS that only lasted less than six months before coming to its untimely end, with the digital bank failing to make a dent in the market and suffering a series of blunders that led to its closure.

Similarly, Orca (also called Orca Money) a peer-to-peer lending aggregator shut up shop in April 2020 following an unsuccessful pivot to institutional investors. 

Orca pivoted away from retail investors and towards institutional investors in 2019 during a period where the UK regulator began a marketing crackdown for the retail market.

Dizzying Heights

Despite over a fifth (22 per cent) of firms participating in the FCA's Regulatory Sandboxes going out of business, there have also been a host of success stories.

For instance, buy-now-pay-later (BNPL) fintech Zilch was a member of the fifth cohort.

The fintech later became the first UK-based BNPL firm to gain consumer credit authorisation from the FCA, just five months after it first gained its initial accreditation.

Even more recently, Zilch has closed an $80m Series B funding round, taking its total raised to date to $120m, and seeing its valuation top $500m.

Another success story is data provider Bud.

Bud participated in two cohorts, initially on its own in the first cohort back in 2017 and then later in the third alongside highstreet bank First Direct following a successful partnership deal in 2018.

The open banking-powered platform has since partnered with the likes of Blockchain.com and New Zealand’s largest bank ANZ to help the bank automate its lending.

A newer fintech on the block, Currensea recently took part in the fifth FCA Regulatory Sandbox cohort to test its direct debit travel card.

The fintech, which allows customers to link their Currensea card directly to an existing bank account, enabling users to spend money in their highstreet bank account without any of the normally extortionate charges. 

On the most part, the FCA’s sandbox programme has helped a number of both fintechs and larger financial institutions test out the waters before diving straight in with new products and services.

However, with over a fifth of firms going out of business in just a few short years after participating in the Regulatory Sandbox, it seems that widening out the scope of the FCA’s offering, including the new Scalebox and Regulatory Nursery, can only be a good thing for companies looking to participate in the upcoming cohorts.