As part of an ambitious plan to increase growth and create jobs in Europe, the European Commission has set out “the Digital Single Market” as one of its flagship initiatives. Though not focusing as such on financial services it will serve as the policy background for the ongoing competition between the incumbent banks and the disrupting FinTech companies on the future of the financial market.
Just before the summer break the European Commission adopted the Digital Single Market (DSM) Strategy which aims to propel Europe into the digital economy, relying on innovative new comers from the technology industry to improve EU competitiveness. The strategy marks a significant shift from the focus regulators have hitherto had on tangible goods and services in the internal market. This shift will unleash a wave of regulatory reforms that will impact financial services in terms of payments, cloud and big data computing, personal data protection, and cybersecurity requirements. In particular, innovation and innovative solutions in response to “market failures” lie at the core of the debate.
From a financial services perspective, the initiative could be seen as adding insult to injury. On the one hand banks have been subject to a massive push from EU executives to continue their deleveraging – in the continuity of the tsunami of prudential regulations that followed the financial crisis – to become “more stable” and on the other hand there has been a regulatory push to have them be “more integrated” in funding the so-called real economy and now regulators are pushing for everyone (including the financial services sector) to be more flexible and digitalised.
In an oversimplified and very bi-polar perspective this would leave banks and other incumbents with few and narrow choices of either deciding to work with FinTech through for instance partnerships, acquisitions or calling for stricter legislations, setting out a regulatory environment less biased by disruption. However, this perspective seems oversimplified: firstly the incumbents can rely on some core strengths. They have large customer bases that largely remain loyal, even in times of distrust and crisis, making them the holders of enormous amounts of data – the real currency underpinning any digital development. Besides, on a day to day basis, banks remain the main interface for their customers and one of the most important carriers of digital interaction, no matter which digital platform the customer chooses.
That said when it comes to digital innovation the incumbents will have more than a few Achilles heals to address. Indeed the development and implementation of digital innovation requires a flexible and customer responsive business model – for instance to implement the latest user-friendly interface. But because of the complexity of their structures, the stiffness of their decision-making process, regulatory demands on everything from individual KYCs to general governance structures, the incumbents face situations where any innovation they develop themselves could be obsolete even before it hits market and where more flexible market-operators choose other partners in the “shadow banking” sphere, simply because decision-processes and need-for-speed do not match.
By and large, the disruptive FinTech companies have grasped this opportunity to progressively gain market shares thanks to their smaller and more flexible structure propitious to innovation but also because of a less regulated environment. They have developed revolutionary software and apps resulting in better tailored and cheaper financial services for customers. As a result, these FinTech companies have progressively put the incumbents’ relationship with their customers into play in the competition for the future market, something unthinkable only a few years ago.
However, the current “light” regulatory environment the FinTech companies are in is likely to raise questions related to cybercrime, data protection or prudential and systemic risk thus going full circle back to finding a balanced approach between the different market combatants. Indeed, certain FinTech companies have already raised voices asking for more regulations, this to gain more credibility notably with regard to consumer protection.
In light of this, EU (and other) legislators and regulators will have a key role to play to ensure that customers would in-fine beneficiate from the robustness and reliability of banks and on the other hand the innovative and consumer oriented nature of FinTech. In the recently adopted PSD2, the legislators took the approach of making the platform accessible for 3rd parties in a non-discriminatory way allowing for increased competition between both the incumbents and disruptive innovators, thus setting up a system that “works both ways.” This approach, adapted to the specificities of the different parts of the market could be beneficial to customers notably with regard to portability, choice of products, safety, and ultimately contribute to restore growth in Europe.
Looking forward, the European Commission will adopt the main legislative initiatives from the DSM Strategy by 2016 and supplement it with the launch of a broad consultation on retail financial services expected this month (December 2015) where the role of FinTech is likely to be addressed further.
About Martin Bresson
Martin Bresson is Senior Policy Advisor to FleishmanHillard Brussels. Martin specialises in policy and regulatory issues impacting the financial sector.
About Arnaud Eard
Arnaud Eard advises financial services companies on EU policy and regulation. He specialises in retail financial services and banking.
About FleishmanHillard
FleishmanHillard (FH), a global leading public relations and communication firms, operates throughout the Americas, Europe, Asia, Australia, and South Africa. In Brussels, FH focusses on EU government relations. It provides strategic consulting services to companies affected by EU legislation across different sectors, including leading financial services and technology companies.
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