Lisa Edström
Is European FinTech Being Left Behind? Or Is Better Regulation the Key to More Sustainable and Impactful Innovation?
When it comes to fintech and innovation, Europe finds itself situated in a precarious position when comparing its global positioning. While leading European tech hubs like London attracted $6.8 billion (£5.2 billion) in venture capital tech funds in the first half of 2024 and is currently home to 111 tech unicorns valued above $1 billion, European businesses as a whole are falling behind some US and APAC markets. If new approaches are not actioned to address this economic shift, the union risks solidifying its place as a perennial runner-up in the tech race.
However, Europe has a path to bounce back as a global tech leader, but it requires a multifaceted strategy. This involves addressing the tension between regulation and innovation, and more effective collaboration across EU member states, including identifying and prioritizing key sectors to fund. Additionally, Europe should look at boosting its fintech sector by reducing dependence on US payment systems.
Walking the Tightrope Between Regulation and Innovation
European tech functions within a fractious ecosystem. Businesses, and the framework in which they operate, are bound to stringent regulations with an emphasis on consumer protection. The General Data Protection Regulation (GDPR) is a prime example of this. Research shows that 70% of online shoppers in Europe were concerned with how companies use their data. GDPR grants individuals greater protection over their personal data, as well as stating a strict use case in how that data can be stored and used. Whilst GDPR plays a vital role in safeguarding data privacy, it can also challenge the agility of European businesses to grow.
Read More on Fintech : Omnichain Smart Contracts: Design Patterns and Implementation Challenges
Europe only has to look to the East, specifically Singapore’s fintech sector, for a prime example of a market that finely balances innovation with compliance. There, regulators such as the Monetary Authority of Singapore launched the Fintech Regulatory Sandbox, enabling startups to experiment with technologies to increase efficiency and better manage risks. In Singapore, this light-touch approach to fintech regulation allows for a more dynamic strategy for risks and opportunities and gives room for businesses to thrive.
The Role of Regulation in Driving Sustainable Growth
Thoughtful regulation with more flexible and carefully crafted policies has the potential to drive sustainable and meaningful change in the EU. This, in turn, would ensure that technological advancements align with societal values and long-term economic health. The implementation of the Revised Payment Services Directive (PSD2) and the upcoming PSD3 exemplify this, having introduced increased competition within the fintech space. Just four years after PSD2 was introduced, the payments sector has seen more than 2,700 new payment institutions and electronic money institutions registered.
PSD2 has boosted competition and improved payment efficiency by mandating secure, consent-based sharing of customer data with third-party providers, such as Payment Initiation Service Providers (PISPs) including digital wallets like PayPal or neobanks such as Monzo. This has spurred innovation, enhanced consumer benefits, and laid the groundwork for open banking and instant payments in the EU.
Open banking, enabled by PSD2, has not only given customers greater control over their finances and data, but it has also expanded financial services access to consumers who have been traditionally underserved by incumbents, such as those with irregular income or limited credit history.
The Growing Importance of a Sovereign Payments System
In order for Europe to increase economic resilience and firmly establish its position as a leader in the tech sector, it must look to shore up its payment infrastructure. European retail payments remain overly reliant on two U.S.-based titans – Visa and Mastercard. This duopoly poses a risk to the EU’s ability to accommodate European perspectives and habits on how payments should be carried out. In addition, transaction fees associated with card payments lead to financial flows leaving Europe. An alternative could be to utilise homegrown payments infrastructure, which could see these flows reinvested back into European businesses.
As it stands, European merchants are left relying largely on non-European providers for online card transactions. To address this imbalance, projects like the European Payments Initiative (EPI) have been created with the aim of bringing about a unified, pan-European payment solution potentially streamlining payments across EU member states. In the same vein, Third Party Providers such as Brite Payments are leveraging open banking to develop a European-grown A2A payments system. Underscoring the keen interest between public and private entities to move towards an innovative sovereign payments system.
Reaping the Benefits of Realigned Resources
Sandwiched between the dominance of US financial and technological advancement, and China’s industrial complex, Europe should improve upon collaboration by unanimously agreeing on sectors to fund. Frontier technologies such as quantum computing and artificial intelligence would be prime for investment when considering only seven percent of global funding is funnelled into European ventures in these sectors. This stands in stark contrast to US and Chinese businesses which received 80% of global AI funding.
A more effective pooling and distribution of government resources would close the economic bridge between Europe and its competing markets. Not only this, but it would also serve to position Europe higher for consideration from global venture capital funds which would further catalyse development and innovation.
Creating Strategic Partnerships for a More Resilient Europe
That said, Europe must also look beyond member-state collaboration and towards fostering strategic international partnerships. By doing so, the EU can look to share information pertinent to the transformation of businesses and infrastructure and regain an economic advantage over competing markets.
Europe has already made great strides in this area, having secured partnerships with Singapore, the Republic of Korea, Japan and Canada all with a focus on co-operation around high-tech developments in areas such as AI, quantum computing, and cybersecurity. These advancements can all be positively applied to the payments sector – especially with regard to advanced fraud detection systems in payments.
To fully capitalize on international partnerships, Europe must also look to foster a deeper synergy across key stakeholders. This would involve a two-pronged approach, shifting a sole focus from international agreements, and identifying the internal challenges to help catalyze cooperation between EU member states. Namely, greater cooperative efforts between regulators, financial institutions and tech innovators, which in turn lead to a more resilient and competitive tech ecosystem. By combining public and private collaboration, both internally and externally, Europe can overcome its current challenges and build a better technological future defined by sound strategy.
Europe stands at a crossroads where the interplay between regulation and innovation will define its technological future. But by taking a broad approach and embracing open banking, striving for payment sovereignty and fostering a regulatory environment that encourages sustainable innovation, Europe can not only keep pace with global competitors but also set new standards for impactful technological advancement. As global competition intensifies, this approach will establish and solidify its position as a global tech leader, and foster long-term growth and resilience.
Catch more Fintech Insights : Can Blockchain Address the Critical Pain Points of Modern Fintech?
[To share your insights with us, please write to psen@itechseries.com ]
