The Fintech Tug of War: European Businesses Need Clarity on Regulation

The Fintech industry is driving a rapid transformation that even regulators are struggling to keep up with. In 2020, over 20,000 new Fintech start-ups launched globally, with this number only set to rise each year. As company’s become more imaginative, financial services are becoming more streamlined and simplified. While increased competition is lauded as being beneficial to the industry, it is also leading the ‘old guard’ of industry incumbents to tighten their defences. We are now witnessing a secret tug of war across the European Fintech landscape.

Complicating matters further, the long and drawn-out Brexit saga has led to a series of convoluted after-effects, with a heavy question mark left hanging over financial services and Fintech. No transition period was ever outlined, nor were any arrangements made to replace passporting of financial services to EU markets. This has caused numerous issues for UK Fintech firms as they can no longer actively market or advertise in the EU.

Legal advice that has been obtained on the issue states that there is no restriction under UK or EU regulations and PSD2, for UK payment institutions to provide services to EU clients if those clients seek these services. Discriminating against IBANs of SEPA members is a violation of EU rules, however EU-based payment service providers and acquirers are reluctant to settle using UK bank accounts or IBANs due to concerns around regulatory complexity and increased administrative burdens that they can ill-afford.

Regulatory clarity is needed for compliance

A lack of understanding and education around regulatory changes, even from regulators themselves, has created a situation where over-cautious PSPs and acquirers are hesitant to do business with each other. This will lead to highly damaging implications for many Fintech’s and their customers.

It is no exaggeration to say that Fintech’s offer vital services to the wider economy, helping those in financial need to open bank accounts and be financially sufficient. As migration numbers increase, the need to help those who rely on transferring capital across borders is becoming more prominent. These services are a lifeline for many communities, so it is baffling that the Fintech industry is not being treated with more respect from regulators.

At the beginning of 2021, the Fintech industry experienced a shock when payment schemes announced they would increase online payment fees for EU firms who take payments from UK-issued cards, resulting in higher prices for consumers. Although this move would benefit banks issuing scheme-branded cards more than the schemes themselves, it was later swiftly reversed and halted after objections from merchants and attention from regulators. 

It is obvious that any business would want to protect its revenue streams, but at what expense to the rest of the industry? 

The larger the size of a company, the easier it is for them to withstand interventions from regulators. This leads to unfair disadvantages for smaller Fintech’s who are far more exposed and was illustrated by Wirecard’s collapse in 2020, which drew intense regulatory spotlight on the industry. The Wirecard case is unique and will take time to develop, with implications on the wider industry yet to be manifested. However, it has exposed how the Fintech landscape remains largely unchartered by regulators, calling into question the understanding regulators have of the sector as a whole – especially when there are so many different Fintech companies offering an array of diverse services.

New challenges result in new opportunities

On the positive side, challenges that have occurred through the Covid-19 pandemic have resulted in new opportunities and innovation. The pandemic’s challenges have created opportunities for the Fintech industry to help everyone navigate this new landscape, including helping in the recovery of many businesses who struggled through the pandemic. 

While the Fintech industry is in a state of flux right now, new players should not be deterred from entering an increasingly competitive arena. Becoming a regulated entity in an EU country will give you a head start and by having resilient contingency plans in place, as well as building a knowledgeable network around your business, you will be in strong position to grow and succeed, no matter what the future holds.