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Arizona to Fintech Companies: Come Play in Our Sandbox!

Arizona has become the first state in the United States to enact a law to create a “Fintech Sandbox” – a safe zone for fintech startups to test new applications and financial services otherwise subject to state money transmitter, banking, and similar licensing requirements without having to obtain a state license. Although other countries, such as the United Kingdom, Singapore, and Australia, have created similar fintech sandboxes, similar legislation or regulations thus far have not been adopted in the United States at the federal or state level.

The Fintech Sandbox idea was promoted by the Arizona attorney general and will be administered by the Arizona Office of the Attorney General (AZ OAG). However, the Fintech Sandbox does not mean that fintech companies will be unregulated in Arizona. There will be a substantive application and oversight process.

Any applications for the Fintech Sandbox will be required to “contain sufficient information to demonstrate that an [applicant] has an adequate understanding of the innovation and a sufficient plan to test, monitor and assess the innovation while ensuring consumers are protected from a test’s failure.” Further, there are limits on the products that will be approved for the Fintech Sandbox, including

  • the product may only be offered to Arizona residents;

  • the product may be only offered to a limited number of consumers, depending on the type of product and the capitalization of the applicant; and

  • the product will be subject to a number of Arizona laws, including Arizona’s Consumer Fraud Act and all statutory limits and caps related to financial transactions (e.g., usury laws).

The form of application and the associated fees have not yet been determined by the AZ OAG, although under the new law the application will likely include

  • a requirement to identify key personnel and disclosure of past criminal convictions;

  • detail regarding the product being tested, including benefits and risks to consumers; and

  • the proposed testing plan and timing for pursuing any necessary licensing.

The timing for a fully developed application and fee schedule has not been determined but is expected to occur late in 2018.

In considering Fintech Sandbox applications, the AZ OAG is required to consult with the regulatory agency that would otherwise regulate the proposed product or activity.  Further, approval of an application is at the discretion of the AZ OAG and will not be considered an appealable agency action. Under the new law, the Fintech Sandbox program is scheduled to end on July 1, 2028.


Given the patchwork of complex state laws that apply to a number of fintech products in the marketplace and that are being developed, the Fintech Sandbox presents an opportunity to test products without incurring the full cost and burden of state licensing in a popular consumer market, and for that reason it may spur innovation. However, while it may enable established companies and/or startups to “incubate” new products at lower cost, the Fintech Sandbox only applies to activities conducted with or for Arizona’s seven million residents. Therefore, in order to scale their activities nationally, participants in the Fintech Sandbox would ultimately have to pursue a national licensing strategy.

Some in the industry hope that state laws such as Arizona’s will spur federal regulators or other states to launch similar fintech safe harbors. However, any federal action raises the question of federal preemption of state consumer laws, a hot-button topic for both state and federal regulators, as well as whether and how the Consumer Financial Protection Bureau would be prepared to accommodate the sandbox concept from a consumer protection standpoint.

Given this uncertainty at the federal level, and the general lack of similar activity at the state level, fintech companies with products that are subject to state licensing will continue to face substantial legal and compliance costs in connection with state laws and licensing. Fintech company opportunities may nevertheless increase if other states follow Arizona’s lead.

Copyright © 2022 by Morgan, Lewis & Bockius LLP. All Rights Reserved.National Law Review, Volume VIII, Number 103

About this Author

Melissa R.H Hall, Financial services attorney, Morgan Lewis
Of counsel

Melissa R. H. Hall represents US and overseas banks, nonbank financial services companies, investors in financial services, and technology companies in regulatory and corporate matters. She advises them on a wide range of state and federal financial regulatory laws and regulations. She provides counsel on financial regulatory compliance and enforcement, including state and federal licensing requirements, consumer financial products and compliance, payment systems, corporate and transactional matters, financial institution investment and acquisition, and the development...

Charles Horn, financial services attorney, Morgan Lewis

Charles M. Horn is a partner in Morgan Lewis's Investment Management and Securities Industry Practice. Mr. Horn focuses his practice on regulatory and transactional matters, primarily in the areas of banking and financial services. He works on behalf of domestic and global financial institutions of all sizes on regulatory, supervisory, enforcement and compliance matters before all major federal financial institutions regulatory agencies, and leading state financial regulatory agencies.

Andrew Ray, Corporate attorney, Morgan lewis law firm

Andrew Ray is the leader of the firm’s interdisciplinary corporate practice in Washington, DC, where he  represents public and private companies, financial sponsors, and management teams in a broad range of industries, including technology, financial services, life sciences, real estate, and the not-for-profit sector. Various industry publications recognize Andy as a leader in both M&A and in communications law, among other fields. He recently led the team representing Oculus VR in its $2 billion sale to Facebook, which was named the M&A Advisor M&A Deal of...