The European Commission will start shaping the environment for the fast-evolving digital revolution in the financial sector later this year in a proposal for retail financing with a clear stance: let the revolution flourish.
The institution will unveil late this year or in early 2017 an action plan on retail finance services. The plan wants to overcome barriers to the creation of a deeper Single Market in the fields of banking, pensions and investment products.
In this action plan, technology-driven new financial products and services (FinTech) will play an important role, EU officials explained, since this booming field has become crucial for the financial players and consumers, according to a public consultation held this year.
Despite all the hype around the FinTech world, the executive is not willing to rush in its response. Officials explained that it is too early to regulate this nascent sector, even more when it is hard to come up with a one-size fits all solution for the different products and services powered by the digital disruption, such as crowdfunding or blockchain, the promising technology behind the virtual currencies.
The Commission gave a hint of its hands-off approach in its effort to relaunch de Capital Markets Union.
“The Commission will continue to promote the development of the FinTech sector and work to ensure the regulatory environment strikes an appropriate balance between building confidence in companies and investors, protecting consumers and providing the FinTech industry the space to develop,” the communication published on 14 September said.
The executive has been also sympathetic to the digital disruptions seen in other fields such as the transport sector.
“The single market must keep up with the times: innovative business models must be encouraged and welcomed”, Commission Vice-President, Jyrki Katainen, said last October.
The executive believes that FinTech can bring closer companies and investors to the capital markets, offers more convenient and accessible financial services to consumers, including new ones that meet consumers’ needs better-plus it fuels competition, one of the top concerns in Brussels.
“This innovative potential should be harnessed”, the CMU communication said.
EU officials added that the upcoming framework would be technology neutral, and should help to spur the sector’s growth, while addressing some of the risks that could emerge, such as cyber attacks or money laundering.
Last January, 10 people were arrested in the Netherlands as part of an international investigation into money-laundering through sales of bitcoins, the virtual currency.
The Dutch prosecution office warned that virtual currencies are “an attractive way for criminals to launder funds” since “it is not regulated or monitored by financial authorities.”
How to strike the right balance?
Numerous authorities and task groups have been set up across Europe in order to strike the regulatory and supervisory balance “between a supportive manner and a protective manner”, as the Executive Director of the European Securities and Markets Authority, Verena Ross.
“The balance between the two is at times a challenge, but one that we consider most carefully, especially in light of our future product intervention powers,” she added in a conference in London last March.
Commission officials noted that not all EU bodies fully share its laissez-faire approach.
In its last report about the risks and vulnerabilities in the EU Financial System (August 2016), the European Supervisory Authorities (ESA) agreed with some of the advantages pointed out by the Commission. However, the joint committee of the three regulators warned that FinTech providers are “likely to challenge the sustainability of current business models” while representing cybersecurity risks and privacy issues.
The European Banking Authority, the European Insurance and Occupational Pensions Authority and the European Securities and Markets Authority said that they were considering whether new regulation could be needed “to warrant adequate levels of investor protection, financial stability and market integrity”.
On top of the “individual risk features”, the EU supervisory bodies stressed that the technological innovations’ impact on market structure needs to be monitored as well, “in order to ensure that competitive forces create a continuous and smooth diffusion processes avoiding abrupt and disruptive industrial reorganisation.”
ESA announced that it will look at FinTech in a more “holistic” way in 2017. Its efforts will be coordinated with those led by the Commission, the ECB and other authorities in member states to come up with an “appropriate” regulatory environment, the EU executive stressed.
While the digital revolution triggered the EU institutions’ response, the capitals only started to wake up.
And still only few member states are looking at how to deal with the digital wave. Arguably, the most advanced effort came from Britain. Last spring, the authorities established a regulatory sandbox, where innovators were able to test products without the normal regulatory constraints for two months.
This ‘sandbox approach’ has been advocated by companies and the IMF. In a panel discussion during the World Economic Forum in Davos, its Managing Director supported Paypal chief Dan Schulman’s idea of a sandbox, as this would help to experiment with new ideas while limiting any potential damage to consumers.
The banks get on board
While banks have embraced the opportunities brought by the new technologies, they are also calling for a level-playing field.
“Digitalisation cannot overcome the statutory obstacles alone” the European Banking Federation said in its opinion to the upcoming action plan on retail financial services.
“Banks willing to provide digital financial services across the EU still face the burden of having to comply with divergent consumer protection requirements in the 28 Member States. In most of the cases, even on-line banks have to set up a subsidiary in every country and adapt their products to local regulation and context,” the opinion said.
As the banking industry recalled, “far from blocking competitive initiatives, banks engage in Fintech partnerships, and finance innovative startups”.
Some firms like Citigroup set up entire divisions to surf the digital wave. The move came against the backdrop of a bank’s report for investors called “Digital Disruption”. According to the document, the newcomers got 9 billion in revenues today, but before the end of the decade they will multiply per 10 to get 100 billion. By 2023, FinTech could double again its business to reach 203 billion in North America, or 17% of retail banking.
In Europe, BBVA has been one of the biggest supporters of the digital revolution. CEO Francisco Gonzalez shared over the last months the digital transformation of Spain’s second largest bank across the planet, from Davos forum to Harvard.
As, “technology will be the driver of a dramatic improvement of productivity and efficiency in banking”, he aimed at turning its firm into the first Big Data driven bank.
Some fear that this technology disruption could led to even further concentration, in a winner-takes-all result seen, for example, in the Pharmaceutical world with nimble biotech startups, as Christophe Nijdam, secretary general of Finance Watch warned last June.
“The key question here is whether FinTech will help the financial sector to serve citizens better or worse than it does now,” he highlighted in his opening speech on a conference on this topic.