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Analysis and opinion 27 Apr 2016

Regulation: The key to the European digital single market for financial services

The creation of a digital single market across Europe is an exciting prospect for both consumers and businesses. According to the European Commission, it could add €415 billion annually to our economy and bring jobs and better services to the EU. In my role as BBVA’s Chief Development Officer and Head of New Digital Businesses, I passionately believe that the financial services element is fundamental to this vision – and that regulation has an essential role in making it happen.

It’s a truism to say that digital technology is changing the world. The impact of moving goods and services online and distributing them increasingly via mobile has brought consumers lower costs, greater choice and smarter products and has seen entire industry sectors turned on their heads, such as entertainment, retail and travel.  And the adoption of digital by customers and by new industry segments is only accelerating. It’s no exaggeration to say that we’re just at the beginning of the revolution.

If Europe wants to lead innovation in financial services in a global context, regulators should create an environment that decisively fosters innovation

Europe isn’t impervious to this digital wind of change and in this environment has long realised that market integration and innovation are essential to sustain the continent’s competitive edge. The current Digital Single Market Strategy builds precisely on this vision and aims to remove the barriers that prevent the European Union from developing world-leading cross-border digital services. I should point out that there are already notable successes in this area, for example ‘passporting’ legislation that allows a financial services business approved in one EU member state to operate in another.

And the financial services industry will play a significant role in improving Europe’s digital competitiveness. On one hand, some of the continent’s financial institutions are already worldwide digital champions exporting their know-how to markets across the globe. On the other, a sound financial system will support the growth of digital companies by providing capital and liquidity for them to grow.

Banks are embracing digital change through the adoption of new technology, partnership and investment in the start-up community and culture change – all for the purpose of developing better products and services for their customers. At BBVA, we began this process more than eight years ago with the installation of a new technology platform to support digital growth, and then invested in the brightest and best digital financial services businesses and completely reshaped customer experience and relationships based on an optimized use of data and user-centric design, without compromising our core values of trust, integrity, privacy and security. Results so far are encouraging – as of January 2016, BBVA has over 9 million mobile banking customers and over 4 million customers for our proprietary mobile payment and card management app BBVA Wallet.

To support this ongoing change, authorities are now challenged to provide in the shortest possible timeframe a regulatory framework that balances the promotion of digital innovation and protection against associated risks. Regulation will also need to find equilibrium between financial stability and the development of new business models that introduce efficiency gains in the market.

If Europe wants to lead innovation in financial services in a global context, regulators should create an environment that decisively fosters innovation, following the example of the UKs FCA with ‘Project Innovate’ and its digital-first policies, which have led London to become one of the world’s most important ‘fintech’ hubs.

A clear understanding of the implications of digital transformation should lead regulators to adopt some basic principles for the creation of future-proof rules. First, a holistic approach is needed in order to anticipate the interconnected nature of digital, competition and financial regulations. Cooperation between different authorities is paramount to ensure that policy goals are effectively reached without having any unintended consequences.

Pan-European harmonisation is the second requirement.  Despite the ongoing efforts by the European Commission, our continent is still a mosaic of divergent national regulations or supervisory practices in critical areas such as anti-money laundering, data management, cyber security and cloud computing. Some of these issues are addressed by recent European regulatory packages, but further international coordination will be needed in these areas, which are global by nature.

Third, regulatory sandboxes are needed to be the ‘safe spaces’ in which businesses can test innovative products, services, business models and delivery mechanisms without immediately incurring all of the normal regulatory burden or risk. This is particularly needed in areas such as blockchain (distributed ledger technologies), which is a potentially disruptive technology that still lacks maturity. BBVA is currently using sandboxes as part of our alpha trial of APIs in Spain and the US.

Finally, given the diversity of providers in this new ecosystem, there is need for a competitive environment in which similar products or services receive similar regulatory treatment. So regulation should be tailored to specific use cases and business models, regardless of who the provider is.

If these conditions are met with the appropriate pace for the fast evolving digital world, we will be able to develop a digital single market for financial services, improving competition and fostering innovative offerings for European citizens, as well as building businesses that are digital champions which can lead across the world.

*Teppo Paavola is BBVA’s Chief Development Officer and Head of New Digital Businesses.

Carlos Torres Vila at Money2020; BBVA increases fintech fund to $250m; BBVA launches 8th edition of global fintech startup competition BBVA OpenTalent