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Financial regulations 20 Dec 2017

Six questions (and answers) about the future of fintech in Europe

What is the future of fintech? A group of experts recently met in the European Parliamentary Financial Services Forum (EPFSF) to discuss the European Fintech Action Plan. The meeting brought together about 60 representatives of the European Parliament, the European Commission, consumer groups and the financial industry. BBVA was represented by Alvaro Martín, Head Economist for Digital Regulation at BBVA Research.

The debate revolved around the following questions:

 1. What opportunities does fintech offer in terms of developing a truly single digital financial services market? The fintech phenomenon facilitates the supply and demand of financial services across European countries, contributing to the development of a truly single market in Europe. In this new fintech ecosystem, which consists of both nimble startups and large corporations, technology companies and banks, regulators and supervisors, it is essential to ensure ongoing communication between all parties. For this reason, the creation of fintech hubs, i.e. fintech business centers, offers a good opportunity to promote alliances and synergies.

Also, financial technology offers an opportunity for Europe to escalate innovative business models, including, cross-border and data-based models. Also, fintech promotes the democratization of a convenient service offering for customers, efficiency improvements, and the emergence new anti-fraud technology.

2. And what would the challenges be? In first place, creating an ecosystem where players from different niches can cooperate in a balanced and safe way. In addition, it is convenient to standardize national regulations through a harmonized regulatory framework that allows reaping the benefits of new technologies – such as cloud computing – while ensuring cybersecurity, based on the adoption of international standards.

3. How can Europe benefit from financial technologies compared to other markets such as America or Asia? To increase the competitiveness of the European financial sector and to take full advantage of fintech’s potential, the EU should harmonize its regulatory and consumer protection framework. Thus, both banks and startups and technology companies providing financial services will be able to compete according to the same rules, something that is currently not happening.  This would allow EU financial service providers to, for example, attract talent and adopt new technologies.

4. What can regulators, supervisors and legislators do to facilitate the adoption of fintech in Europe? Promote initiatives such as the development of regulatory sandboxes – safe test and innovation environments – open to all financial service providers, within a common framework for Europe to avoid divergencies between countries. Other measures include cutting out bureaucracy, facilitating talent recruitment and simplifying cross-border operations.

5. Is the creation of an EU licensing framework for fintech activities a positive development? Fintech licenses, designed as specific licenses for certain activities, are useful for protecting consumers and defining a level regulatory playing field for all actors in the digital financial ecosystem.

6. Is the new European cybersecurity package enough to address the current threats? Authorities must develop mechanisms to protect sensitive infrastructures, such as financial services. In this regard, the EU should promote the exchange of information on cyber incidents at global level to increase resilience, as establishing a way to make incidents easier to report.

Chronology of European fintech initiatives

On November 2016, the European Commission set up the Task Force on Financial Technology. This forum is aimed at providing a meeting point for financial regulation and digital single market authorities, along with experts in competition and consumer protection policies, to foster high-level debate between the public and private players. The goal is to  formulate policy recommendations and propose regulatory initiatives in 2017 and 2018.

In March 2017, the European Commission published a public consultation entitled ‘FinTech: a more competitive and innovative European financial sector‘.  Two months later, the European Parliament published a report listing a series of measures that the EU could implement to promote financial technologies, calling for the application of three principles:  1) ‘Same services, same risks’, that is, same standards regardless of the type of legal entity concerned or its location in the EU; 2) Technological neutrality; and 3) Risk—based approach.

From that point on, the MEPs asked the European Commission to prepare a fintech action plan within the Capital Markets Union and the Digital Single Market;  along the way, other authorities have spoken up.  In August, the EBA published a discussion paper on its approach to fintech.  In September, the European Central Bank launched a public consultation on guidelines for companies with a fintech business model who wish to apply for a banking license.  As a next step, the European Commission is expected to publish an action plan or roadmap on fintech in early 2018.

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