The growth of digital platforms in the EU
Manoj Mistry, Managing Director, IBOS Association
This article was originally published in IBS Intelligence and can be accessed here.
Digitalised banking networks are proliferating as traditional banking services are replaced by high levels of process automation and web-based services. Although such technological innovation in finance is not new, investment in new technologies has substantially increased in recent years and the pace of innovation is exponential.
This rapid growth is prevalent across the EU, where a variety of national and supranational regulators are having to pay much closer attention to the financial sector in which this new technology is being deployed. Among the most notable areas of recent growth, there has been a significant rise in wealth management apps and platforms in Europe. Initially driven by younger users, who are more likely to be engaged with wealth apps, the enormous surge in interest has seen more than $4 billion raised this year. Simultaneously, Wealthtech platforms are also developing services for family wealth management as the profile of fintech users gets older.
Typically, these apps are regulated by the Financial Conduct Authority (FCA) in the UK, and their counterparts in different EU member states. They use Open Banking: the sharing of financial information electronically, securely, and only under conditions to which the customers agree and approve. But inevitably, this surge in fintech and digital platforms across the EU means that their future use will be driven as much by regulation as by technology.
In March 2018, the European Commission (EC) adopted an action plan on FinTech to “foster a more competitive and innovative European financial sector.” The action plan set out 19 steps that the EC intended to take to enable innovative business models to scale up at EU level, to support the uptake of new technologies such as blockchain, artificial intelligence and cloud services in the financial sector, and to increase cybersecurity and the integrity of the financial system.
This was followed by a digital finance package, which the EC adopted in September 2020. This includes a digital finance strategy, legislative proposals on crypto-assets and digital resilience, and a renewed retail payments strategy. Its overall goal is to create a competitive EU financial sector that “gives consumers access to innovative financial products, while ensuring consumer protection and financial stability.”
However, the digital finance strategy is only a staging post on the road to further regulation. In September 2021, the European Banking Authority (EBA) published a report on the use of digital platforms in the banking and payments sector in EU. Although the report outlined steps to enhance the monitoring of market developments, it stopped short of identifying any immediate need for specific legislative changes to be introduced.
But as EU regulators, such as the EBA, become far more active in identifying potential systemic risks posed to financial institutions and individual risks posed to their customers and clients, as well as to financial stability, they will have to regulate accordingly. In drafting legislation at an EU-wide level, and at a national level in each member state, consideration needs to go beyond affording consumers access and ensuring their protection, as well as maintaining financial stability. Regulators will also need to strike a careful balance between regulatory intervention and technological freedom.
In practice, this will of course necessitate creating regulations that are designed to increase transparency, mitigate risks and to guarantee sufficient protection. But while consumer protection must remain paramount, regulators must also ensure that new regulations do not frustrate or impede the pace of technological evolution.
The use of technology in financial services is highly competitive. Just as the EC’s proposed legislative initiatives to govern digital services and content in the EU, namely the Digital Services Act (DSA) and the Digital Markets Act (DMA), aim ‘to establish a level playing field to foster innovation, growth, and competitiveness, both in the European Single Market and globally’, the same must also apply in financial services regulation. The EBA must therefore ensure that new regulations do not hinder the capacity of digital platforms operating in the EU to compete effectively in global markets.