Within the framework of its general mandate to monitor new financial activities,¹⁾ the EBA had previously taken several initiatives in relation to the fintech sector. Back in 2014 and 2015, for example, it published opinions on virtual currencies and lending-based crowdfunding. The EBA carried out further relevant work within the framework of its specific mandate to ensure consistent harmonisation.²⁾ In February, for example, it published draft regulatory technical standards on strong customer authentication and secure communication for payment service providers, pursuant to its mandate under Article 98 of Payment Services Directive 2 (see BaFinJournal March 2017 – only available in German). While earlier initiatives mostly focused on specific fintech aspects, the recently published discussion paper tries to present a holistic approach to the topic.

Market overview and information on individual companies

The EBA found that there are altogether more than 1,500 fintech firms across the 24 countries of the European Economic Area that responded to the survey. The total number, however, is likely to be significantly higher as not all fintech firms are subject to supervision by the competent financial supervisory authorities – which, consequently, do not have a complete overview of the market. Most respondent supervisory authorities anticipate that the European fintech sector will continue to grow over the coming years.

Apart from general market information, the EBA also collected specific information on individual fintech firms. The national competent authorities were requested to provide information on at least five fintech firms for each of four pre-defined clusters. The aim was to cover a broad range of entity types. For each of the selected fintech firms, information was to be given on, among other things, the financial services provided, the underlying financial innovations, the business volume, the regulatory status as well as the business and marketing strategies. In this way, the EBA obtained detailed information on a total of 282 fintech firms. Although the sample was not statistically representative, it revealed interesting insights into the European fintech sector.

The evaluation yielded the following picture: a large proportion of the fintech firms that make up the sample can be categorised under “payments, clearing and settlement services”. “Other financial-related activities” and “credit, deposit, and capital raising services” are also significant categories. Overall, the evaluation shows a wide range of services, which was to be expected, given that the EBA had requested a broad spectrum.

To some extent, the broad range of activities is reflected in the diversity of regulation: many fintech firms are licensed as payment institutions under the Payment Services Directive or as investment firms under the Markets in Financial Instruments Directive (18 and 11 percent respectively). Nine percent of the sample are licensed as credit institutions under the Capital Requirements Directive. Nine percent of the firms are subject to a national registration regime only, while a purely national authorisation regime applies to five percent. But the 31 percent that are subject neither to an authorisation nor a registration regime form the largest category of fintech firms.

Regulatory status of the fintech firms in the sample

Figure: Regulatory status of the fintech firms in the sample; Source: EBA discussion paper

The fact that many fintech firms are either subject to national authorisation or registration regimes or to no regulatory regime in the broader sense at all leads the EBA to conclude that there may be divergences between the regulatory approaches towards fintech firms among the EU Member States. From BaFin’s point of view, it would, however, be premature to infer that regulatory arbitrage is being practised and attendant risks exist. A closer look ought to be taken at the various fintech business models first. A different regulatory treatment may be perfectly justified upon closer examination of the activities and services.

Further Steps

On the basis of its findings, the EBA identified the licensing and registration requirements for fintech firms, including regulatory “sandboxing approaches”, as an area to focus on for further analysis. The EBA intends to uncover possible differences in regulatory approaches and, where necessary, take measures for EU-wide harmonisation. In addition, the EBA plans to identify prudential risks and opportunities for credit institutions and other established businesses stemming from the use of new technologies. In this context, it is contemplating providing guidance to national authorities to enable them to understand and evaluate prudential risks and to develop consistent supervisory approaches on this basis.

Furthermore, the EBA intends to continue working on better understanding the impact of fintech on the business models of credit institutions, and to explore, for example, changes in customer relationships and distribution channels. It describes in particular detail potential issues deserving closer attention in the area of customer protection – which has been dealt with in numerous EBA publications in the past. According to the EBA, one potential problem is that, in many cases, consumer protection requirements only apply at domestic level, while fintech firms increasingly provide their financial services on a cross-border basis. The EBA concludes its discussion paper by identifying recovery and resolution as well as combating money laundering and terrorist financing as areas to be considered in follow-up work.

Further European and global initiatives

The EBA is not working in isolation; its planned measures are embedded in a whole range of other fintech initiatives at a European and global level. From March to June of this year, for example, the European Commission conducted a comprehensive consultation on the subject. Among other things, this considered the question of how fintech can foster access to financial services for consumers and businesses. Another aspect of the consultation was the question of how a balance can be struck between intensified data sharing by businesses and users’ increased need for data security and protection. The European Commission is in the process of evaluating the 226 responses it received. Following this, it will publish a summary and its conclusions.

In line with its financial stability mandate, the FSB has also thrown light on the topic of fintech and identified potential regulatory and supervisory issues. In a recently published report (see BaFinJournal July 2017 – only available in German), the Financial Stability Board reaches the conclusion that cyber and other operational risks in particular merit increased attention from international supervisory bodies and national supervisory authorities. The FSB also recommends continued monitoring of the fintech industry for possible financial stability risks due to its dynamic structure.

The Basel Committee on Banking Supervision (BCBS) has also looked into the topic of fintech. Its analysis concentrated on the impact on banks, their business models and on banking supervision. The BCBS published a consultative document on the matter at the end of August.

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