When the concept of FinTech - financial technology - emerged a number of years ago, it soon became a buzzword. It seemed that FinTech players would soon conquer and fundamentally the world.
In short, expectations were high. Now, it seems that this may now evolve at a slower pace, or at least take a little longer than expected.
However, this does not mean that the impact and magnitude of the transformation should be underestimated.
According to a recent KPMG study, by mid-2018 the total investment in FinTech worldwide was already higher than for the whole of 2017.
The study further claimed that leading FinTech players specialising in payment services and lending will continue to emerge in markets with a mature banking sector, focusing on expanding their range of products and services.
The original idea of strong competition between FinTech and traditional financial players has also given way to a more diversified approach.
For this reason, the European Banking Authority (EBA), in a recent report, set out four models. It showed that the best way to approach with FinTech is by forging partnerships with new FinTech entrants.
“Member States have considerable freedom to use the existing flexibility in European financial regulation”
Other suggestions were to develop FinTech solutions internally, collaborate with other stakeholders and invest in new-entrant FinTech firms. While the situation varies markedly from country to country, FinTech continues to grow steadily and irreversibly.
While the results of this is not yet known, it will inevitably see fundamental and drastic changes to the way banking and financial services are provided and used.
So, we need to be forward-looking. Against this backdrop, the publication of the Commission’s FinTech Action Plan should be welcomed.
This plan, published in Spring 2018, was drawn up at the request of the European Parliament and the European Council to create a more forward-looking regulatory framework for this area.
The plan states that the Commission “considers that the case for broad legislative or regulatory action or reform at EU level at this stage is limited.”
However, it proposes developing a number of targeted initiatives aimed at helping the EU embrace financial sector digitisation.
While this approach seems warranted, it is still important that any objectives set have safeguards. Here, the plan is probably too vague.
“While the situation varies markedly from country to country, FinTech continues to grow steadily and irreversibly”
Indeed, in the absence of regulatory standards and within the framework of the proposed soft law and similar initiatives, Member States have considerable freedom to use the existing flexibility in European financial regulation.
Some of them already exercise this, for example, to creating FinTech facilitators of various kinds (innovation hubs or regulatory sandboxes), while others take a more cautious or even dismissive attitude.
Therefore, we risk arriving at a fragmented European regulatory framework. Indeed, if the Commission’s aim of encouraging cooperation between national supervisors does not bring the desired harmonisation between all Member States, this will be the inevitable outcome.
The risk of such fragmentation also exists at international level. Alongside initiatives taken in individual countries, I would highlight the establishment of the “Global Financial Innovation Network” (GFIN).
This joint initiative between the UK’s Financial Conduct Authority (FCA) and 11 other financial regulators and related organisations builds on earlier proposals to create a “global sandbox”.
To mitigate those risks and speak with one voice in the future, not only within the EU but also globally, we should consider similar initiatives at European level. More specifically, we should pose the question as to why no progress could be made within the EU on establishing European regulatory sandboxes within a relatively short space of time?
We should give considerable attention to cross-border projects. These would also be useful from the perspective of further completing the Banking Union and building a Capital Markets Union.
At the same time, it would improve the stability and resilience of the financial system. This seems all the more appropriate now that this path is also being cautiously considered in the Action Plan, albeit in the longer term and at the end of the learning process.
Indeed, the plan states that “this could lead to considering an EU experimentation framework for adopting and adapting to new technologies.”
In addition, every effort must be made to create a level playing field for all stakeholders. This should ensure that all banking and financial services users enjoy the same level of protection in terms of consumer protection, privacy and cybersecurity, irrespective of the provider.
New FinTech players should be subject to the same rules as the traditional financial institutions. Indeed, as they both offer the same services and are both exposed to the same risks, they should both be subject to the same constraints.
This is essential to ensure the full confidence of consumers and businesses in these services.
Such an initiative could also help give innovative business models a European dimension. Under the current circumstances, this would be greatly welcome.