The digital revolution is irreversibly changing the way we live, but also the way we interact with political and financial institutions which, in turn, have a huge level of control over our lives. Political institutions shape the laws that we need to follow, while financial institutions control the credit and the money without which we are stuck. At VoteWatch Europe we use information technology to empower citizens politically, by providing the tools to scrutinise how our representatives make EU policies on our behalf. Financial Technologies (FinTechs), on the other hand, empower citizens economically, by providing us easy access to credit and international money markets. This brings a revolution on the credit market, a revolution in which everything is at stake. The big question is: how are our political institutions planning to regulate FinTechs now that the UK, the main FinTechs hub, will leave the Union?
Internet banking, mobile payments, crowdfunding and many other applications show that new technologies lead to substantial changes in our daily lives. These changes have clearly been welcomed by the European Parliament: the resolution in which EU politicians take stock of the development of FinTechs was adopted by a comfortable majority. This seems to indicate that the EU aims at boosting the FinTech sector upon Brexit, although it does not have a clear idea how to do that. Cora van Nieuwenhuizen, the Member of the European Parliament in charge of supervising this emerging industry admits to VoteWatch that “we simply don’t know what will happen after the UK leaves the Union”.
Fierce lobby battles at the horizon between emerging and traditional players
The resolution on FinTech focuses on six areas: data, Cybersecurity, blockchains, interoperability, financial stability as well as financial and IT skills, and was adopted by 544 votes in favour, 107 against and 14 abstentions. The vote was consensual as only fringe groups opposed it. The large consensus obtained by the report also stems from the general tone of the resolution: it is not yet clear how the sector should be regulated and what the mandate of the Commission is. Once the details will be spelled out, disagreements between countries (favoring more or less regulation) and different sectors (regulated sectors against deregulated sectors) will be more evident. It is highly likely that fierce lobby battles between new players and the traditional ones will emerge soon.
An example of such a lobby battle took place amidst the discussion on open banking, an element of the second payment directive. Open banking forces banks to allow third parties, such as FinTech companies, to access the data of customers who authorize it. New market entrants hope to use this information to enhance the competition with mainstream companies. At the same time, these mainstream banks are urging the regulators to tighten privacy and data protection rules to prevent customers’ financial data being abused or stolen by cyber criminals. This has fuelled FinTech industry’s fears that the banks will, in fact, be given too much control over the channel through which their competitors will access the data.
In the meantime, EU Parliamentarians called on the Commission to draw up a comprehensive FinTech action plan in the framework of its Capital Markets Union (CMU) and Digital Single Market (DSM) strategies in order to create a favorable environment for European FinTech hubs and firms to scale up. They also supported the Commission’s efforts to address how the EU can help improve choice, transparency and competition in retail financial services to the benefit of European consumers, and emphasized that this goal should be complementary to the objective of improving the efficiency of the financial system.
While the European Parliament repeated that FinTech companies contribute positively to the development of financial intermediation, MEPs stressed that these companies also pose risks to financial stability: automation may disrupt existing patterns of employment, clear rules on data ownership should be established in order to guarantee the protection of the consumers and crowdfunding and peer-to-peer lending provide less information about their balance sheets than the banking sector.
Facilitate, not frustrate FinTechs
Cora van Nieuwenhuizen (VVD, ALDE) was elected MEP in 2014. She serves, until recently alongside Sylvie Goulard – as deputy coordinator of the Committee on Economic and Monetary Affairs on behalf of the ALDE group in the European Parliament. “We will find ourselves out of the game if we do not jump aboard the FinTech train soon” says rapporteur van Nieuwenhuizen, “Europe needs to facilitate, not frustrate FinTech.”
A lot of positives from the Parliament
Irish MEP Brian Hayes (Fine Gael, EPP) is an experienced politician in the field of financial services. He became Irish Finance Minister of State responsible for Public Service Reform and the Office of Public Works in 2011 and got elected to the European Parliament in 2014. Hayes held the shadow rapporteurship on the FinTech report on behalf of the EPP. “All over the EU, we can take a lot of positives from the Parliament’s work on FinTech. It will help the Union develop a complete FinTech ecosystem with consistency of regulatory approach and harmonization where needed”, says Hayes.
The FinTech priorities
Cybersecurity was named the number one priority in the FinTech action plan. MEP Hayes told us he thinks much more can be done on cyber security. Cora van Nieuwenhuizen says “there is much at stake here for entrepreneurs, governments and consumers” and she therefore pleads for stress tests combined with the proper exchange of knowledge and experience between companies and governments.
Van Nieuwenhuizen argues that “the future financial sector will be more in need of technical staff. Not just to develop algorithms, but also to protect the enormous amount of data coming our way. Regulators too need to better understand what is going on in the area of FinTech.” Financial education and IT skills is one out of six FinTech priorities.
Interoperability, i.e. the development of technology-neutral standards throughout the EU is another priority in the FinTech resolution. As mentioned before, there is tension between new entrants and traditional actors in the financial sector at the moment. Van Nieuwenhuizen states that “the principle of ‘same services, same risks, same rules’ must apply. Only by giving all the parties involved equal opportunities we will enhance innovation.”
Maneuvers to get in pole position
“The cooperation within the Parliament and with the Commission, as well as with the financial actors themselves has been very pleasant. Everyone is slowly but surely getting the importance of innovation in this sector” according to van Nieuwenhuizen. When asked if she thinks the EU will be able to increasingly attract FinTech companies, van Nieuwenhuizen says that “Europe is not in pole position, so we will need to perform maneuvers to overtake the competition. We still have to do a lot when it comes to creating a favorable regulatory environment with room to experiment and better means of financing.” MEP Hayes believes in introducing regulatory sandboxes which would allow small FinTech firms to test their products in a safe and controlled regulatory environment before going to the market.
Brian Hayes: “the US, China and Israel dominate on FinTech and host the biggest FinTech firms. Europe hasn’t fostered the same kind of innovation, but there is certainly an opportunity to allow new players to bring their products to market in an easier way and to give bigger players the opportunity to grow their business more and more. It’s all about competition. This sense of innovation and competition is vital if we are to create our own types of Silicon Valley’s in Europe.”
What about Brexit? According to MEP Brian Hayes “Brexit will have an effect but it is too early to tell how significant that will be. But the single market has so many incentives and benefits that FinTech will still be a huge part of the EU’s financial services industry.” “At this moment the majority of FinTech companies are based in the UK. We simply don’t know what will happen after the UK will leave the Union”, van Nieuwenhuizen concludes.