The EU government, realizing the promise and relevance of the FinTech industry, is making serious efforts to regulate the financial technology market. It is noteworthy that the pandemic has not become any serious factor of negative impact on fintech, and in some industries, there has been a noticeable growth. Businessmen are coming to the decision to open fintech companies in the EU, assessing the prospects of the fintech market as attractive.
FinTech ecosystem in the EU
In Europe, fintech includes such areas as:
– InsurTechs (insurance technologies);
– DLT (Distributed Ledger Technology), Blockchain and cryptocurrency;
– Capitalmarket and trading;
– Automated financial advisory platforms (Robo-Advisers), personal finance and wealth management;
– BigData systems and analytics;
– Open Banking and API services;
– PropTechs (digital technologies in the real estate market);
– Alternative financial systems;
– Accounting & Finance;
– RegTechs (regulatory technologies);
– Digital Banks;
– Payment systems, mobile wallets and money transfers;
– Developers and suppliers of banking software;
– Credit and trading platforms.
Key FinTech trends in the European Union
– The decline in mergers and acquisitions (M&A) activity was the main reason for a noticeable decrease in investment in fintech in the first half of this year. Meanwhile, the volume of venture capital investment during this period remained very serious. Thus, in the second quarter there was a noticeable increase in venture capital investment as compared to the first months of 2020.
– In the first half of the year the banks attracted five of the 10 largest deals in Europe: N26 (Germany), Revolut (UK), Klarna (Sweden), StarlingBank (UK) and Qonto (France). Also in the first half of the year Revolut and N26 banks joined Klarnain in the US market. These processes reflect the growing importance of FinTech banks both in the European Union and elsewhere.
– The European Commission has consulted on a digital financing strategy and outlined an action plan for the FinTech sector. As a result, a number of decisions have been made and their implementation planned for the next four years.
The negative effects of coronavirus-related restrictive measures on fintechs in Europe have mostly affected small, young companies. In contrast, companies with a strong position and good capitalization have shown significant growth.
EU DirectiveOn January 10, the 5th EU Anti-Money Laundering Directive (5AMLD) came into force, which, of course, also had an impact on the FinTech sector, in particular, 5AMLD obliged market participants to adhere to KYC principles.
Let us briefly note other changes related to the entry into force of 5AMLD.
Cryptocurrencies – controls on platforms will become much stricter under 5AMLD. This will also affect providers of Bitcoin, Etherium, and other cryptocurrencies. Exchanges will be required to register with supervisory authorities, conduct customer due diligence (CDD) and prepare Suspicious Activity Reports (SARs). The names and other data of all customers conducting transactions with virtual currency will be recorded by special units.
Prepaid cards – Prepaid cards can now only be used within the European Union and in countries where AML (AntiMoneyLaundering) standards apply. In addition, new purchase limits have been set: € 250, including € 50 online. It will only be possible to receive the payment if it is sent from a country where AML requirements are met.
Disclosure – 5AMLD obliges EU countries:
– Open access and seamless exchange of information between the beneficiary registries of the European Union member states. Public authorities in each country will have full access to the registries of trusts and accounts, as well as to all information they need about cryptocurrency users.
– Take measures to strengthen the fight against terrorist financing, including in cryptocurrency, from anonymous sources.
Failure to comply with 5AMLD requirements by cryptocurrency exchanges and exchangers will lead to serious fines, the amount of which depends on the laws in force in the country. For example, in Austria, failure to disclose client information will cost exchangers €200,000.
As a result, some cryptocurrency players (CryptoBridge, Chopcoin, Simplecoin, Deribit) curtailed their activities in the EU and changed their location.
Key tasks
The EU’s new digital strategy identifies four key FinTechEC objectives to be achieved by 2024:
- opening access to international services to European consumers, for which it is necessary to find ways to solve the problem of market fragmentation.The development of online services requires considerable financial expenses, while their distribution is cheap. Therefore, the issue of cross-border expansion becomes a priority for many companies;
- The development of a legal and regulatory framework. New regulations will encourage the growth of innovation in the field of digital;
- Creation of the European financial data space. This should help promote innovation projects; develop a European strategy for accessing and exchanging financial data. FinTech companies in the European Union are required to publish both financial and non-financial information about their activities, products and operations. It is expected that further solutions, aimed at increasing access to data and openness between and within sectors, consistent with data protection and competition rules, will stimulate the emergence and implementation of innovative products and solutions that will be data-driven. In addition, it will help facilitate access to the data needed to direct funding in support of sustainable investments.
- Address the problems and challenges that will accompany the growth of the FinTech market. The introduction and expansion of fintech services will require a more advanced regulatory framework that can ensure financial stability, consumer protection, security at all levels and fair competition.
Legislative perspectives
Thus, over the next four years in the EU countries should be expected:
- – The emergence of a regulatory framework for digital identity that opens consumers up to FinTech services. New regulations will be based on anti-terrorism and anti-money laundering rules. A new framework will be developed, a software platform for electronic identification and trust-based non-cash transaction services. The platform will include the ability to reuse customer data, subject to informing the customer about it and obtaining their consent;
- – All FinTech sectors will apply the principles of passporting and licensing using Single-window system. This will result in consumers having real access to cross-border services of companies located in any country of the European Union;
- – A new structure will be created that will allow the implementation of blockchain technology and crypto-assets in the FinTech sector;
- – Increased cooperation and infrastructure development in the field of cloud computing. The deadline for the launch of the European cloud services market is 2022;
- – Existing regulations and laws concerning intangible assets will be streamlined and simplified, which will provide an additional incentive for the growth of investment in software;
– Regulatory framework governing cryptocurrency transactions will be created in the EU within the next year; - – All financial data required by EU law will be disclosed in standardized and machine-readable formats;
- – There will be favorable conditions for the use of RegTech and SupTech tools to analyze the reporting of regulated companies and oversight by government agencies, as well as for the exchange of financial data between supervisory bodies;
- – Facilitating the exchange of data between FinTech participants and other companies both within and outside the EU financial sector;
- – Creating a new European financial ecosystem with a level playing field between FinTech companies and traditional financial institutions.