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The Tug of War Taking Place in European Fintech

The Tug of War Taking Place in European Fintech

The Tug of War Taking Place in European Fintech 3

By Lili Metodieva, Managing Director, Monneo

Fintech is a fertile hunting ground for players seeking bigger and bolder growth opportunities. The industry is enabling imaginative start-ups and traditional financial giants alike to simplify and streamline financial services, reach out to new customers, and test the limits of what technology can do.

But this transformation also brings with it increasingly difficult barriers to overcome. If only heightened regulatory scrutiny was translated into clear and comprehensive legislation. And while increased competition is lauded as being beneficial to everyone in the industry, it seems the “old guard” are not ready to embrace their newer, smaller upstarts in the spirit of collaboration just yet. That’s before we even get to Brexit…

UK Fintechs Are Feeling the After-Effects of Brexit

The drawn-out “deal or no deal” saga was just one of many complications thrown up by Brexit. Even as December 2020 heralded the unveiling of the final Brexit deal, this generated more questions than answers. A question mark was left hanging over financial services and fintech. No transition period was outlined, nor were any arrangements made to replace passporting of financial services to EU markets.

As a result, from 1 January 2021, UK fintech firms were no longer passported, which means they cannot actively market or advertise in the EU. However, Monneo has sought out expert legal advice to clarify this issue, because facilitating and simplifying access to European and international IBANs underpins the services we offer. According to all of the legal opinions we’ve obtained, there is no restriction or limitation, neither under UK regulations nor under EU regulations and PSD2, for UK payment institutions to provide services to EU clients if those clients seek these services.

Meanwhile, even though discriminating against IBANs of SEPA members is a violation of EU rules, EU-based firms, including payment service providers and acquirers, are now less willing to settle using UK bank accounts or IBANs, fearing that doing so will mean even more regulatory complexity and administrative burdens that they can ill-afford.

Lack of Clarity is Causing Ongoing Confusion

It’s too simplistic to attribute every complication to Brexit. What has muddied the waters is the lack of understanding around the changes, especially a lack of clarity from business compliance and legal teams, and regulators themselves. We now have a situation where ultra-cautious PSPs and acquirers are refusing to do business with each other, and losing out on opportunities altogether. If this regulatory minefield isn’t navigated correctly, it could have far-reaching and damaging implications for many fintechs, and by extension their customers.

It’s no exaggeration to say that fintechs offer much-needed services to many, such as the unbanked, underbanked and migrant populations who rely on the ability to open bank accounts in different countries and make remittances or money transfers to their home countries. All of these services feed into the wider economy, so it’s baffling that the fintech industry is not being treated as more of a priority by legal decision-makers.

A Protectionist Mindset Will Only Lead to Isolation

Lili Metodieva

Lili Metodieva

2021 got off to a turbulent start for fintech, which hit another bump when payment schemes gave the appearance of protecting their own assets by raising online payment fees for EU firms taking payments from UK-issued cards, meaning higher prices for consumers. Although the move would benefit banks issuing scheme-branded cards and not the networks themselves, it would later be reversed in the face of merchant concerns, and raised eyebrows from regulators.

While it’s obvious for any business to want to strengthen its revenue streams, at what cost to the wider industry? Larger companies with hundreds of corporate clients and millions of end users can somewhat insulate themselves from regulatory scrutiny, in a way that smaller fintech firms cannot.

As if the fintech industry didn’t have enough to contend with already, the collapse of Wirecard in 2020 cast a harsh spotlight on the industry as a whole. Wirecard is a unique case that will take some time to unravel, and the implications for the wider industry are yet to manifest, but regulators are already trying to tighten their grip for fear of being blindsided again. What Wirecard illustrates is that fintech still remains largely unchartered territory for regulators, and that calls into question the competence and understanding regulators have of the sector as a whole, with so many different companies classed as fintech, offering such widely different services.

All of these issues combined are pushing a seismic shift that’s being felt across the whole European fintech landscape.

Out of Chaos, Opportunities Arise

On the positive side, the many challenges arising from Covid-19 and the shift to remote working is actually encouraging many fintech players to embrace the spirit of collaboration. The pandemic has opened up resource pools, with industry leaders are calling each other to share experiences and discuss issues.

Although the pandemic has changed the way businesses engage with each other, the industry has adapted to the new reality very quickly. Many businesses, including our online merchant clients, have benefitted from the mass consumer switch to online buying. This is driving the use of innovative solutions for marketing and sales channels, and increasing deployment of automated solutions for client onboarding and process optimisation.

Pandemic-driven lockdowns meant in-person attendance at trade shows was not possible, and this was one of the main ways businesses interacted with potential clients. Even as the world comes out of lockdown and businesses embrace face-to-face interaction again, we can expect these cutting-edge and innovative solutions to be deployed more in client acquisition.

For New Players, Don’t Underestimate the Need for Contingency Planning

Inadvertently, the pandemic’s challenges have created opportunities across the fintech industry for us to navigate this new landscape – not just for businesses within it, but also helping us to play a part in aiding the recovery of many businesses who struggled through the pandemic.

The fintech industry is in a state of flux, especially for those linked with banking and payments. New fintech players should not be deterred from entering what is already becoming an intensely competitive field. Becoming a regulated entity in an EU country will give you a head start. By having strong contingency plans in place, by seeking comprehensive legal advice, and building a strong and knowledgeable network around your business, you will forge ahead, prepared for whatever happens in the future.


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