Fintech regulation in Europe: How the lines are blurring between the payments players in Europe.

blog· 6min

August 2, 2022

Fintechs continue to challenge and influence the European financial landscape but how is the consistent regulatory change affecting the future of Fintechs in Europe? With the dust never seeming to settle in terms of regulatory frameworks not only is it hard to keep up with but it can end up costing a lot in the process. Is this resulting in customer relationships coming second to the continued task of keeping up with regulation?

Regulation of digital payments – How banks and fintechs differ

Where payments are concerned it is vital to understand that banks and fintechs are different in terms of regulation.

Fintechs are not allowed to hold a settlement account with TARGET2 or with TIPS for the purposes of instant payments and so are unable to participate in the payment space on an equal footing to banks. According to recent regulatory reports, there are demands for fintechs to be regulated more like banks providing a more level playing field in the payments ecosystem.

Within the European Commission’s Settlement Finality Directive (SFD) explicity talks about credit institutions but the wording of PSD2 refers to financial institutions. Such discrepancies need to be reworded but there is currently no timeline in place to do so. Regulators need to understand the need to address such issues to benefit both the industry and the consumer.

To overcome this barrier, fintechs must either get a banking license or work with a third party. The challenge with the latter approach is that where instant payments are concerned, fintechs risk losing out on the speed benefits of instant payments, as well as having less control over their liquidity. One solution is the access model provided by Form3 and our banking partner. Using this model, fintechs are able to access connectivity for SEPA Instant and SCT transactions, with the bank – as a dedicated liquidity service provider – enabling settlement and the flow of messages and information as if they were a direct participant.

“The payments landscape is undergoing so much change right now, especially in Europe. Alongside changes in market practices, relentless regulatory developments eat up a great deal of the budgets of new and existing players as they impact their payments processes.”

Changing image of Fintechs

Fintechs have made it clear that they are ‘not financial institutions’ priding themselves on customer connections and creating disruption. However, recent regulatory and industry developments have suggested that the lines between fintechs and banks may become blurred.

Banks originally treated fintechs like any other corporate customer but this does not consider the differences in what fintechs and corporations require from banks.

Instant payments are on the rise with the market predicted to continue to expand at a CAGR of 29.3% from 2019 to 2015. With such an increase fintechs have become aware that in many circumstances they need the same level of control as banks when it comes to the transaction they do on behalf of customers.

“The original perception of fintechs as another type of corporate customer no longer fits, as banks now realise what fintechs truly need from their banks.”

Regulatory challenges for fintechs

So, which regulatory changes do banks need to be aware of and are they prepared for the demand of the fintech revolution?

One notable question is whether the use of instant payments going to become mandatory in Europe? This would have a significant impact on the industry as instant payments could no longer be treated as a premium service. Currently the European Commission is set to introduce legislation covering a digital euro and full EU-wide coverage of instant payments through Sepa Instant early next year.

Another significant change is the consolidation of TARGET2 and TIPS onto a single platform. This is a positive change as it means the consolidation of three systems so participants would have a single entry point for all three systems, however, users will have the added complication of having to work with different user interfaces (UIs) for each system.

A further point of interest is the significance of PSD2 and Open Banking. While Open Banking is an official term in the UK, it’s also used to describe developments that are happening elsewhere as a result of PSD2. This area continues to develop: while collaboration between banks and fintechs has improved in recent years, banks are also increasingly waking up to the opportunities the regulation brings for them.

What does the future hold

Banks are becoming more aware of the opportunities that fintechs bring them for improving the collaboration between banks and fintechs. It is important that firms consider the changing financial landscape including regulation to maximise the potential fintech has to revolutionise the way financial services operate.

Access our ‘Future of Fintech Disruption in Europe’ report, where we dive into regulation, technology and how the current economic climate are all shaping the future outlook for fintechs and the payments ecosystem in Europe.