Government support for the financial sector and financial technology (fintech) is huge, not only because of its size (global funding = $111.8 billion), but it is growing at an unprecedented rate, partially due to technology, and more specifically, an increase in access to mobile devices.
This article covers why fintech sectors are so prevalent, how to regulate them, and why it is a great case for corporate innovation. Read on to discover the goals of European policy focused on fintech, and the opportunities new policy presents. We uncover why fintech is such an important sector for corporate innovation, and how startups are helping corporations to enter the new digital age. You will also find a brief overview of European investment in this industry and a general review of the market.
THE BOOM IN FINTECH STARTUPS – WHY DID IT HAPPEN?
The actions taken by higher-ups after the European financial crisis in the 2000s created an incredibly fertile landscape for fintech startups. Those in control of setting the new standard were clear with their objectives and took actions to open up the market to more competition.
The result? A lot of competition, just as expected. And while many have failed, there are many successful cases of startups with scalable models.
In some markets in the EU, in particular, the United Kingdom (23 fintech startups), Germany (7) and France (7), fintech startups have found great success.
EUROPEAN POLICY IS CHANGING, BUT NOT FAST ENOUGH
In typical EU fashion (and the rest of the world for that matter), policymakers lag behind the fast-moving sectors as they continue to disrupt.
And no wonder. Creating an effective framework takes years. Especially in a culturally diverse landscape like the European Union where communication across borders is not the most straight forward. And add globalization into the mix, things start to get a lot more complicated.
In one respect it is positive as these newly formed businesses are able to bypass the established institutions and offer products and services to consumers that more established corporations cannot. They aren’t hindered by rigid regulations. But on the other hand, a lot of policy has become outdated.
The EU saves the day, or creates more problems?
So what has the EU done to mitigate some of these concerns? They have created an Action Plan that will increase innovation making it easier for scaleups and startups to expand abroad and increase competition while maintaining the integrity of the financial system.
But this Action Plan has a lot to unpack. It is filled with pages upon pages of directories listing how corporations should implement legislation to make sure they are in compliance.
And boy oh boy do these large companies have to spend a TREMENDOUS amount of time and resources to keep up with these legislative changes.
It’s a huge undertaking.
Companies spend hundreds of man-hours raking through legislation. And keep in mind, these legislative changes are translated in their own way across all 28 member states into local law (some stricter than others).
That is a lot of information to uncover. Especially so for large traditional banks who are often present in more than one country.
There are a few common “headaches” that pop up here. One being, “How on earth are we going to find the time to keep up with these changes?”, “How are we going to find the resources to make sure we comply with all these changes?”, and “How will uncover the impact on the marketplace as new market segments pop up?”
Young fintech companies have the upper hand here, they are not held back by the regulatory changes to the same extent. The changes that do apply are relatively quick to process, and they do not have to go through several levels of management or rigid internal structures.
A NEW FINTECH ACTION PLAN: THE OPPORTUNITIES
Fintech opens up new possibilities within consumer financial services that were not available a few years ago. It has opened up new competition, markets, and possibilities for the sector and regional economies.
It means more choice of financial services offered. And for businesses, it means the increased efficiency of operations. Yes, the technology is outpacing the legislation but the European Commission has taken action and created a FinTech Action Plan introduced in March of 2018.
The goals of the Action Plan in Europe:
- To increase competition and innovation,
- To maintain the integrity of the financial system, and
- To “harness the rapid advancement of technology for the benefit of the European economy, citizens, and industry.”
The 19 step plan addresses a number of issues, such as the protection and support of new technologies like artificial intelligence, cloud services, big data analytics and blockchain within fintech.
If you don’t want to get bored to death on the intricacies of European Legislation and its effect, skip to the next section on “The perfect industry for corporate innovation”.
But for those who are interested, you will find a few examples of what this Action Plan aims to create and some of the holes presented by the new plan.
LEGACY PRODUCTS AND STARTUPS
A large portion of fintech startup solutions are built from legacy products from established companies as startups seek to improve one or multiple elements of the financial process.
This means that the startup product itself is often a “front-end” customer-facing solution built on top of an already existing infrastructure of an established company.
In order for the product to work efficiently, the infrastructure of the established company must be properly updated and adaptive to the changing needs of digitally native consumers.
And while the larger corporations in the financial sector are quick to adapt to changing trends, their software is not always as adaptive.
While financial corporations struggle to create intuitive apps that meet the expectations of changing customers, startups can help. Don’t like the interface of a bank app? With PSD2, you can take the data you need and create a better digital experience.
UROPEAN INVESTMENT IN FINTECH
Globally, investment is on the rise. In 2014, the total investment in fintech hit $19.9 billion! Today, investment in fintech has risen exponentially to $111.8 billion.
That means a higher investment risk because of an increase in competition. The number of deals taking place is not increasing by a noticeable amount, but the total amount invested is going up exponentially!
This means that early-stage companies have a hard time securing funding. But it isn’t stopping corporations from partnering with startups and adopting the technology they have created.
Despite obvious concern over Brexit (will it ever happen…nobody knows?) the UK is still the market leader in Europe for fintech investment.
And as mentioned before, if you are an early-stage startup you will find it difficult to get funding as investors are looking to invest in safer and later-stage companies.
They are avoiding the more risky bets. And the younger businesses are struggling as a result. But the UK, despite the looming exit, they are working to build bridges across the pond in the fintech sector.
Because of the low operation costs of smaller and younger companies, they are able to react to consumer wants and needs at an unprecedented rate (now helped by PSD2), the likes of which established banks struggle.
Established institutions have a loyal customer base and strong institutional trust. This is the perfect opportunity for the increased partnership between startups and corporations. The problem then becomes, how do you make sure that the partnerships between the two entirely different entities are successful.
The collaboration between these new technologies, the established industry, and those regulating the industry (policymakers) will determine the overall health of the landscape in the future. The current landscape and digital experience will be very different from the one we see today. For example, a third of millennials believe that they will no longer need a bank in five years time. Instead, they will rely on the non-traditional tech startups to shape their “bankless” future.
The new generation of Europeans has become acutely aware of their financial position and security. And startups are arriving at the perfect time to cater to these needs.