THE FUTURE OF FINTECH: A EUROPEAN PERSPECTIVE
Introduction
Banks have always been an integral part of the global financial system. However, fintech companies have steadily taken over the scene, which can be contributed to multiple factors such as digitalization, declining trust in the banking system, easy access to funding, and the increasing popularity of start-ups and tech-backed companies, to name a few. Which brings us to the first question: “What is Fintech?”
Simply put, Fintech can be defined as a financial technology which encompasses innovative solutions developed to enhance various aspects of financial services, including but not limited to online banking and mobile payments.Fintech enables individuals and businesses to access banking service at their fingertips. Thanks to the digitalization of the banking sector, millions of people across the world who didn’t have bank accounts can now manage their finances in a few clicks. This industry has particularly witnessed a boom in the last decade and a half, particularly due to the continuously increasing relevance of domains like crypto-currency, NFTs, and cyber-security. While New York City and the United States of America as a whole have the best fintech ecosystem in the world, Europe follows closely.
The EU has emerged as one of the biggest and fastest-growing fintech markets, owing to its financial and political stability, innovative environment, and technological developments. At the time of publication, Europe contributes 27% to the total value of the Fintech industry. Further, it is the sector receiving the highest amount of venture capital investment in Europe. But what does the future look like? For that, we’ll first have to understand the shift in the fintech landscape in light of one of the most significant historical events in the past decade: Brexit.
London as a Fintech Hub
Not only is London home to one of the most robust start-up ecosystems in the world, but also is considered to be the best destination for fintech start-ups and companies alike. With the British capital having close to 90,000 odd fintech companies of all sizes, the sector is governed by a rather supportive regulatory system, which includes the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA). These authorities ensure that there exists a competitive and innovation-friendly business environment. Establishing a fintech start-up in London allows entrepreneurs to reap the benefits arising out of multiple government incentives such as the FCA’s Regulatory Sandbox, GFIN (Global Financial Innovation Network), Open Banking Framework, and AI Sector Deal. Other prominent schemes include the Fintech Pledge, by way of which the government ensures transparent partnerships between banks and fintech firms. The FCA’s Innovation Hub scheme further ensures that fintech firms are subject to lesser regulatory compliance.
Thanks to the multiple perks and a supportive environment, London has been long dominating the fintech scene across all of Europe. However, it would be ignorant to deny that Brexit has caused a significant shift in the fintech scene. For the unversed, Brexit is the term used to denote the United Kingdom’s exit from the European Union after nearly 5 decades of partnership. Having officially taken effect on 1st February 2020, it has caused multiple fintech companies to shift their operations to within the EU. While multiple surveys suggest that most of the firms partially relocated to the EU while keeping their UK operations intact, some firms had fully dissolved their UK establishments.
The Post-Brexit Scenario
As stated before, a major portion of fintech firms headquartered within the UK relocated their operations to the EU, with the primary destinations being Paris, Barcelona, Amsterdam, Krakow, and Sofia. While the UK, particularly London, still retains its spot as the largest market in Europe in terms of fintech investment, the overall investment has dropped by well over 50% in the first half of 2023 as compared to the first half of 2022. M&A, VC, and Private Equity Deals also witnessed a steep decline in the first half of 2023, standing at 215 as against 392 in the first half of 2022. However, Brexit is far from the sole reason for this decline, with rising inflation, high interest rates and geopolitical tensions across the globe also playing significant roles.
Despite the aforementioned series of events, the UK is working tirelessly not only to maintain its spot as the best fintech centre, but also is using its pre-existing advantages such as a network of reputed universities, skilled talent pool, and a supportive regulatory environment, to become a global leader in crypto and digital assets.
Moving on to the European Union, western European nations are emerging as hot favourites for fintech companies, particularly because they are open to innovation and are quick at adopting new technological developments. This can be substantiated by the fact that online banking is on its way to become one of the most popular payment methods in Europe. The following member states are aggressively working towards becoming the most promising fintech hubs:
- Luxembourg
Top global players including PayPal, Alipay, and Amazon have headquartered their European operations in Luxembourg, which even though is a small nation, offers a highly innovative and a business-friendly environment for fintech entities. Further, multiple private and public funding options such as the Luxembourg Future Fund, The Luxembourg Angels Network, and the Digital Tech Fund, this tiny European nation has the potential to foster multiple unicorns in the years to come.
- Malta
The Maltese government has rolled out multiple regulations aimed at block chain and crypto currency providers, thus making it an attractive location for fintech entities. Many companies have particularly moved their European operations to Malta, especially in the post-Brexit era.
- Norway
Norway is set to become one of the first countries in the world to go cashless in the coming years, which doesn’t seem too far-fetched, considering its strong focus on online and mobile banking. The Norwegian Ministry of Finance, in particular launched a regulatory sandbox in 2019, which can be utilized by fintech companies to test their products, services and technologies in a low-risk and cost-efficient manner.
- Sweden
Sweden, more particularly its capital Stockholm offers a supportive ecosystem for fintech companies, thus allowing them to thrive. The Scandinavian nation is particularly focused on developing digitally robust infrastructure, while also supporting a variety of financial initiatives to ensure the development of cutting-edge solutions. Another reason which makes Sweden stand out is the fact that 99% of the transactions herein are carried out electronically.
Other upcoming European hubs for fintech companies include Berlin (Germany), Tallinn (Estonia), and Vilnius (Lithuania). Their emergence as centres of importance can be attributed to multiple factors such as rapid year-on-year growth, favourable regulations, and competitive corporate tax rates.
The Future of Fintech: What Lies Ahead?
The European Union continues to remain at the forefront of fintech related developments, and does not show any sign of slowing down whatsoever. Multiple factors seem to be acting in favour of the conglomerate of nations, and are predicted to present a wealth of opportunities in the near future. It is predicted that the use of fintech apps is set to skyrocket, especially given the economic downturn which has seemingly impacted every nation to some extent. Fintech apps encourage users to manage their finances and make well-informed financial decisions.
Another trend which has been observed across EU nations is the rapid adoption of the concept known as Variable Recurring Payments (VRP), which is a mechanism enabling users to set up authorised payments from their accounts by way of trusted Payment Service Providers (PSPs). This facilitates subscription based payments and help users track their finances more efficiently. AI is also turning out to be a pivotal character in this saga, with experts predicting that it will be heavily used by fintech entities to tackle the menace of identity theft, as well as providing round-the-clock assistance.
However, the regulation of fintech sector comes with multiple challenges such as identity theft, data security, lack of expertise, and frauds: unarguably the biggest concerns cited by players and consumers alike. Other macroeconomic and geopolitical factors have played a significant role in slowing down the sector’s growth in the last two years.
Despite all this, several studies indicate that as compared to the traditional banking sector, fintech revenues are set to grow three-fold by 2028. Further, the imminent enforcement of regulations such as the Digital Services Act and the Payment Services Directive 3 (PSD3) will ensure transparency, security and efficiency in open banking services, which will in turn positively complement the multiple policy frameworks being rolled out by nations across Europe.
Hence, it is safe to say that theoverall prospects for the fintech industry in Europe seem bright
Authored by:
Advocate Priyamvada Lonial, Legal Associate, SUO Law Offices
