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[Editor’s note: This story originally was published by Real Clear Wire.]

By Logan Kolas & Agnes Gambill West
Real Clear Wire

Following overwhelming support in the Ohio General Assembly, Governor Mike DeWine recently signed into law legislation creating a “regulatory sandbox” for financial technology. Regulatory sandboxes, which are taking shape in a number of states, allow businesses to temporarily experiment with new products and services under the watch of expert regulators without incurring the usual cost of complying with red tape.

Sandboxes can provide regulatory relief for one or more industries. This one focuses solely on financial technology, or “fintech” — something with a lot to offer Ohio families and entrepreneurs. However, other states’ experiences reveal that the work is just beginning.

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Ohio has been at risk of losing promising fintech companies to other states with more innovative regulatory codes. Cincinnati alone boasts 51 fintech startups, some of which may help connect the more than 36,000 unbanked households in the metro area.

For example, BrightFi, a fintech company with a mobile banking app founded in Ohio, moved to Arizona to take advantage of the regulatory flexibility provided by their sandbox. BrightFi offers cheaper alternatives to more expensive banking service providers, like payday lenders, so traditionally underserved communities that do not manage their financial lives through big banks have more options. As is the case in many states, policymakers in Ohio are working hard to attract new businesses, and they cannot afford to deter innovators because of an outdated regulatory code.

The problem is fundamental: Well-designed regulation can become antiquated quickly. More than ever, emerging tech and new business models collide with laws tailored to fit legacy industries. Regulatory sandboxes can help solve this problem. They provide a venue where innovators can educate regulators about technological disruption. Likewise, they give regulators a way to maintain flexibility and an entrepreneurial mindset in reforming outdated laws and providing guidance when legal uncertainty arises.

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However, not all state sandboxes have been successful. Only a little more than a quarter have participants, a dismal showing to say the least. Research points to strict physical residency requirements and the lack of flexibility in extending products and services to customers across state lines as potential barriers to participation. After all, businesses need customers in other states, too. Ohio’s regulatory sandbox model includes provisions allowing for flexible residency requirements and reciprocity that makes participation easier.

That does not guarantee other states accept Ohio businesses into their own sandbox programs, which is why states should create reciprocity agreements explicitly spelling out that their sandbox participants can operate in other state sandboxes, and vice versa. Lawmakers should also partner with regulatory agencies in Washington, D.C. so businesses opting into their sandboxes get federal regulatory relief.

Even more can be done to increase the odds of success.

Ohio businesses, for example, already deal with the high cost of regulatory compliance. Ohio is the sixth-most regulated state in America, with more than a quarter of a million regulatory restrictions in its codebooks. Businesses seeking clarity or relief are often firms with thin profit margins who struggle under the heavy hand of government. Instead of relying on businesses to determine which laws are problematic, officials in heavily regulated states should shoulder more of the burden of identifying the pain points.

By design, legislation limits how long participants can stay in the sandbox. In Ohio, the program lasts 24 months. That’s a short runway to set up sustainable businesses in full regulatory compliance. To help firms successfully exit their sandboxes, regulators should consider creating partnerships with other programs — such as Ohio’s three innovation districts — and with nonprofits that support entrepreneurs.

Leaders in Ohio and elsewhere deserve commendation for their ambitious efforts to create a more welcoming system for entrepreneurship. Let’s hope that the new sandbox, and whatever comes next, make it easier for Ohio families to access innovative financial services while also making Ohio more open for business.

Logan Kolas is an economic policy analyst with The Buckeye Institute’s Economic Research Center, and Agnes Gambill West is visiting senior research fellow with the Mercatus Center at George Mason University.

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