Cashless transactions, open banking, and remote force management – digital finance solutions offered by fintech startups such as Stripe, Finix, and Revolut helped many consumers and businesses across Europe to overcome the challenges caused by the COVID-19 pandemic. During the months of lockdown, it was a matter of days for citizens to switch their financial habits, adapt to the new trends, and become more open to the use of fintech in their everyday lives. These developments, however, also pose new challenges and risks related to financial stability and security.
With the goal to tackle these emerging challenges, on the 24th of September 2020, the EU Commission announced its Digital Finance Strategy containing legislative proposals on crypto assets, digital operational resilience, and retail payments. It all sounds very promising but what do these changes really mean for the European fintech ecosystem?
A European financial data space and digital identity solutions
As explained by the director of the Bulgarian Fintech Association, Georgi Penev, the main goal of the Digital Financial Strategy is to provide better conditions for the development of data-driven businesses and to attract more investments for these startups which offer better financial solutions. Penev elaborates that the new strategy addresses four priority areas, the first one of which is aimed at the reduction of the differences in the EU’s Digital Single Market for financial services. In order for this to be accomplished, the strategy proposes the establishment of “Passporting” standards which will allow all companies, registered in the European Economic Area (EEA), to do business in all of the countries part of the EEA. The second objective of the Strategy is to introduce contemporary legislation that drives innovation and, at the same time, limits the risk for the consumers.
Another goal is the establishment of a European Financial Data Space in the form of a data-driven, open-access platform, which will stimulate competition and innovation while respecting all GDPR principles for personal information sharing. And the last priority of the Strategy is to provide a level-playing field for the development of both SMEs and banks. “The same anti-money laundering regulations, which are currently in place for banks, will be implemented for tech companies that offer similar financial services,” outlines Georgi Penev.
Breaking free from Visa and Mastercard?
The other part of the proposal, the Retail Payment Strategy aims to create a pan-European payment system, independent from foreign credit card companies such as Visa and Mastercard. “The European retail payments market is highly fragmented – in Sweden, they use Swish while in Spain – Bizum. Therefore, when EU citizens want to make an online payment, they have to use the services of big foreign companies and platforms which makes the EU very dependent on foreign factors and does not correspond to the needs of the European citizens and businesses,” concludes Penev. The Digital Operational Resilience Act will require all fintech startups to ensure that they can withstand all types of Information and Communication Technology disruptions and threats so that there is no risk of cyber-attacks.
Regulation of crypto assets – the pros and cons
Crypto-assets are the last area where legislative changes are proposed – “The Regulation on Markets in Crypto Assets” is aimed to boost innovation while protecting investors from risk. According to Georgi Penev, the Strategy implies that the EU envisions cryptocurrencies, and in particular stable-coins, Bitcoin, and Etherium, have great potential for future development. Because of that, the Commission is trying to take precautions in order to ensure the risk-free and safe development of the financial sector in Europe. “It will be required that every single cryptocurrency, created or used in the EU, has a white paper with the description of its basic postulates and history of development. These white papers will benefit two major stakeholders – the clients who will know exactly how this currency was developed and how it is used, and the regulators who will be able to make better decisions. Regulators will thus make well-informed decisions on whether to allow new currencies to continue operating and prevent future OneCoin scenarios from happening,” outlines Penev.
The director of the Bulgarian Bithope Foundation, Vladislav Dramarliev, does not completely share this opinion, as he explains that some kind of protection for crypto investors is indeed needed, but after the cryptocurrencies boom of 2017, investors have become way more cautious. “There is no tangible craze towards financial products with unclear capacity and unrealistic promises. Things have cooled down now,” concludes Dramarliev. He also explains that there is a possibility of another scenario in which the EU does something similar to what the USA did in 2015 with the introduction of the “bit licenses”, which were so difficult to obtain that many companies gave up in the process.
So where do all of these regulations leave European fintech startups, and aren’t they going to slow down the current momentum in fintech innovation? Penev outlines that at this point the EU has two choices: to simply observe the rise in financial innovations and risk another Ponzi fintech scheme to take place or to become involved in the process while there is still time and ensure the safety of millions of people using tech financial services. “After all, no matter how innovative one financial product is, it should in no way work against the interest of consumers whom it is devised to serve,” explains Penev. Therefore, by ensuring the financial sustainability of companies’ projects, the new proposal will also facilitate the overall development of the sector as more investors will be attracted.
What Does the New EU Digital Finance Strategy Mean For Bulgarian Fintech Ecosystem?
As of now, it is yet to become clear when exactly the new proposal will be adopted as legislation as the expectations of experts vary from one to four years. Georgi Penev shares a prediction that in the near future there will be an increase in the channeling of funds in the form of grants and loans for different EU programs and projects. “The majority of the available funding will be targeted towards the biggest players in the fintech industry, and namely the ones that offer retail payment solutions,” adds Penev.