The experience we have of the traditional financial service industry is rapidly transforming with emergence of open banking, crowdsourcing, regulatory technologies, cryptocurrency and so forth. Global Investment in Fintech has grown substantially to $111.8 billion in 2018 compared to $ 50.8 billion in 2017. While the rise is primarily driven by the Americas particularly USA, significant growth has been witnessed in Europe with investment hitting $34.2 billion in 2018 composite of 536 deals. UK remains the leader in Europe accounting for half of the top 10 deals while London retains its title as the start-up and financial capital of Europe. The concerns over looming Brexit, however brings EU capitals like Berlin, Stockholm, Paris and Amsterdam on constant race to become the next fintech capital. On top of all the fintech activities surrounding these economies, are the core trends apparently governing and shaping the future of European fintech revolution.
Crowdfunding:An action plan was unveiled by European Commission in 2018 to help crowd-funding platforms thrive across EU as a single market. A new integration made to this regulation includes the creation of crowdlending passport which can give businesses unrestricted access to the entire European Union as a single market without any border constrains. With this legislation coming into effect, more jobs will be created and Europe will run high on savings with start-ups gaining easy access to both money and market. Crowdfunding has already surpassed funds collected via venture capital and is growing more appealing to the young investors seeking to fund young businesses. The traditional stock or pension market is becoming increasingly boring and distant for the young investors compared to the exciting alternative of investing in a firm that offers more involvement and interaction.
The European Legislation:As with crowdfunding, the action plan aims to enable various other innovative business models to scale up, support adoption of new technologies and increase cybersecurity. The plan includes steps like creation of EU Blockchain Observatory and Forum with a mission to promote blockchain in Europe. It includes hosting EU Fintech Laboratory that can interconnect national databases to promote digitisation of information published by listed companies across Europe. The plan promotes establishment of ‘innovation facilitators’ that typically takes the form of ‘innovation hubs’ and ‘regulatory sandboxes’. According to the joint report published by Joint Committee of the European Supervisory Authorities, the ESAs will also set out ‘best practices’ regarding the design and operation of innovation facilitators. So far, the legislations have given sufficient incentive for Europe to emerge as a global fintech hub.
Open Banking: The Payment Services Directive 2 (PSD 2), yet another remarkable legislation, puts pressure on banks to facilitate open banking. Banks have access to a pool of consumer data pertaining to their transactions, expenditures, investments etc. and have exercised authoritative monopoly over them for a long time. However with PSD II in force, all banks will need to remain open and equipped to share their stored data and information with a third party processor (TPP), (generally fintech start-ups) who can use it to create new products for customers. The new products can take the form of money management tools, updated and consolidated financial information and so forth. In order to ensure data privacy, the account holders’ explicit approval is sought before any information exchange. Open banking opens door for great innovations in the European market with huge benefits in store for customers.
Consolidations and Collaborations:Europe is expected to see more M&A within the fintech space. It will be driven by banks buying out fintech and fintechs merging with other fintechs. Post the roll out of PSD II, consolidations/mergers has been sought as a way out to adapt with the disruptive industry trends. The banks are opting for M&A for their strategic objectives and to face the risks of open banking while fintechs to face increasing competition among start-ups by gaining greater scale and growth. Increased fintech activity related to open banking is expected in the next few quarters in Europe. One of the noticeable trends has been the collaboration of companies from different fields – working together to create new business models. For instance, insurance companies and automobile companies sharing their customers’ data and designing insurance programs based on it. Collaborative opportunities are especially garnering interest in areas like insurtech recently.
Brexit and Fintech: Amidst these bustling fintech activities, Britain’s yet to be decided post-Brexit deals with EU leaves fintech companies with UK-issued licences uncertain about their right to provide financial services to the EU in near future. Global fintech and financial institutions looking to establish a European market presence are thus garnering their interest in countries like Ireland and Lithuania. One study showed that over 55 fintech or financial services companies established a presence in Ireland during 2018, estimating that over 4,500 jobs would be created as a result. Lithuania also saw an increasing number of global and UK-based companies applying for electronic money institution (EMI) licenses that includes companies like Revolut and Google Payments. This suggests that global firms are concerned about hard Brexit on EU and working to overcome challenges.
The benefits and challenges that fintech might bring to Europe as a whole in coming years, are bound to be many and the region appears to be well equipped for being on top of the fintech game. The legislations brought in time not only enhance preparedness for the continent to embrace the fintech revolution but also ensures protection apparently threatened parties like banks to weather the challenges early on.
Palpasa Shrestha, Senior Research Analyst at A2Z Insights
