FinTech – A digital single market for the European financial sector?

FinTech remains the megatrend of the European financial services industry. According to a KPMG survey, about US$36.6bn has been invested in European FinTech companies between 2010 and 2016. Key players from venture capitalists to regulators have put FinTech at the top of their agenda.

Regulatory barriers do, however, remain in place making it difficult for FinTech start-ups and incumbents to provide innovative financial services to consumers throughout Europe. The existing European regulatory framework has been designed primarily to avoid financial instability and protect consumers rather than to promote financial innovation and digital transformation. European initiatives like the revised payment services directive (PSD2) or the regulation on electronic identification and trust services for electronic transactions in the internal market (eIDAS Regulation) are a step in the right direction towards harmonization and digitalization but national licensing requirements and regulatory requirements still diverge across Europe.

The European Banking Federation (EBF) published the paper Innovate Collaborate. Deploy in November 2016, which identifies areas of action to be addressed by the European Commission.  These include improvements to electronic identification and digital onboarding, as well as regulatory, prudential and accounting rules applicable to the banking sector, data protection, cloud computing, digital platforms and cyber security. The EBF has suggesting setting up an "EU framework for experimentation" to support new technologies and start-up business models.

Moreover law-makers and regulators do recognise the importance of digital innovation to ensure global competitiveness of the European financial sector.  According to Sabine Lautenschläger, a Member of the Executive Board of the ECB and Vice-Chair of the Supervisory Board of the ECB, in her statement Digital na(t)ive? Fintechs and the future of banking, "customers want to extend their digital life to banking; they want banking services anytime and anywhere. Those who can satisfy their needs will become dominant players". The ECB is considering a euro area-wide hub for FinTech innovation. However FinTech start-ups should not expect too much from this initiative as the mantra of the ECB is still "same business, same risks, same rules" and the ECB is worried about "unidentified risk" which could be caused by FinTechs.

In November 2016 the Commission responded to the FinTech megatrend and set up a FinTech taskforce and in March 2017 it presented an action plan for the establishment of a genuine single market for financial services with three main objectives:

(i)            "increase consumer trust and empower consumers";

(ii)            "reduce legal and regulatory obstacles affecting businesses"; and

(iii)          "support the development of an innovative digital world".

Valdis Dombrovskis, Vice-President responsible for Financial Stability, Financial Services and Capital Markets Union, stated: "European consumers and firms should be able to take full advantage of a true Single Market for financial services. Consumers should have access to the best products available across the EU, not just within their own country. At the same time, we want to explore the full potential of the technology that's out there. If harnessed well, it has the potential to change for the better the financial industry and the way people access financial services." The Commission invites all interested parties to respond to the consultation paper FinTech – A more competitive and innovative European financial sector.

It will take time for the European regulatory framework to adapt to innovation in financial services.  For the time being FinTech companies and innovative incumbents must be content with the regulatory initiatives already established on a national level.  Nearly every national regulator, for example the AMF and ACPR in France, the CSSF in Luxemburg, the AFM and DNB in the Netherlands, and the BaFin in Germany, has set up a FinTech taskforce and/or an innovation hub to better understand and support FinTech innovations. But the perfect example how to support innovation and how to apply the existing regulatory and supervisory requirements more proportionately is still the FCA in the UK. In 2014 the FCA launched its Project Innovate providing for an innovation hub, advice unit and regulatory sandbox; i.e. a framework which allows businesses to test innovative products, services, business models and delivery mechanisms in a live environment.

No matter how long it takes, I am optimistic that there will be a truly digital single market for the European financial sector in the future, enabling FinTechs to scale up and to expand throughout Europe, whilst protecting consumers and ensuring financial stability.

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