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    Lessons from the European Fintech Revolution

    Lessons from the European Fintech Revolution

    By any measure, Europe has been the epicentre of the global fintech revolution, whether it’s by the level of investment ($58.1bn in 2019, according to KPMG) or the number of new E-money licences granted (394 Electronic Money Institutions currently operating). The UK itself is home to 72 unicorns, just behind the United States and China, and of this number, an incredible 1 in 4 are fintechs.

     

    Europe has led the way in fintech innovation, pioneering the provision of full banking facilities on a mobile app, the hyper-personalisation available to cardholders, and the development of agency banking capabilities. On the payments front, Europe spearheaded the adoption of Chip and PIN, multi-FX, contactless payments and Buy Now Pay Later.

     

    GPS has been the Issuer Processor at the heart of the European Fintech revolution, supporting major international success stories such as Revolut, Starling Bank, Curve, Monzo, Pockit, and many, many more. Which is why Joanne Dewar, CEO of GPS, recently delivered a virtual keynote speech at Seamless Middle East on what lessons can be drawn for banks, fintechs and regulators in the region.

     

    The Role of Regulators

     

    The environment for fintechs and challenger banks in Europe has been supported by governments and regulators on both a national and regional level. The European regulatory framework – built from the first Electronic Money Directive (EMD) in 2000 to the first and second European Payment Services Directives (PSD and PSD2) – has struck a balance between controlled support of innovation and reporting, safeguarding and audit, recognising the requirements that may be needed to flex according to service and scale. These regulations were all focused on creating a new, narrower type of bank, with a smaller capital requirement, safeguarded funds and simplified due diligence, in order to support institutions creating new and innovative financial products.

     

    In the UK, driven by the 2008 financial crisis and following the government bailout of many major banks, there was a desire to create competition in the marketplace, to bring new entrants in and understand what new things were possible. The appetite of the Financial Conduct Authority (previously the Financial Services Authority) and the Prudential Regulation Authority (PRA) to support this change was vociferous. There was a recognised need to consider issuing brand new banking licences (whether for retail banking or for clearing), a real openness to embracing new tools like digital Know Your Customer (eKYC), and the creation of the regulatory sandbox environment in 2016. Crucially, the FCA and PRA were keen to work with, and learn from, industry experts to collaboratively explore the art of the possible.

     

    The Value of SEPA

     

    The Single European Payments Area (SEPA) enables a single licence that an organisation can passport from one country to another in any of the 36 European member markets. A product launched in one of the SEPA countries can be passported throughout the others, giving access to a total of 520 million customers. And, because the UK has been such a supportive regulatory environment, SEPA has allowed innovators to flock here to build their products for European rollout. The founders of many of the most successful UK-based fintech startups – Revolut, Curve, Monese, TransferWise – were founded by non-British nationals who moved to the UK to utilise the support available here. The advantage of the UK being a first mover in this sense is that it effectively created a fintech hub in London - for capital, investment and talent – and built the ecosystem of supporting providers and professional services necessary to drive the growth of the fintech industry.

     

    The Rise of the Challenger Banks

     

    In essence, the emergence of the challengers evolved out of prepaid. Because the E-money environment was the first to truly innovate, it supported new capabilities and the underlying technologies and solutions that made them possible. Suddenly, third-party providers had created a whole ream of new capabilities, with spending controls that had never been seen before, real-time notifications, and the ability to let cardholders have controls via swiping on the first of the new mobile apps.

     

    So, when the FCA announced it was going to provide the first debit licences and the challenger bank race started in 2015, firms like Monzo and Starling Bank were able to leverage the abilities of third-party providers to provide rich features and functionalities to cardholders. Customers could have real-time visibility and controls via a mobile app, they could see their bank balance in real time, and eventually they could see a successful transaction notification before the paper receipt had even come off the POS terminal. This extended to viewing transaction history, being able to actively interact with the card via the app interface (for example, freezing and unfreezing a card), using geolocation to deny the ability for a card to work if out of range from the mobile phone, or revealing PINs. This was supported by innovations like eKYC that brought the length of application processes down from days to minutes.

     

    The Response of the Incumbents

     

    Initially, the incumbent banks reacted to the challengers with denial. There’s no way this will catch on! But then the incumbents noticed they were losing market share. Revenue from things like FX plummeted. And, crucially, incumbents were losing all knowledge of their customers – the ownership of that data was being snapped up by the challengers.

     

    The incumbents tried to figure out whether to build, buy or partner. But it was painful to consider cannibalising their own offerings and potentially taking a 90% reduction in profitability to offer something comparable to the challengers. And, because fintech moves so fast, by the time incumbents had built their own offerings, the challengers had already moved on to the next set of features and functionalities. The incumbents quickly recognised that they would need to partner with technology enablers like GPS to build competitive products.

     

    How MENA is different

     

    While we can speak to the European perspective, MENA is, of course, a vastly different landscape for fintech, especially as there is huge cultural and economic diversity across the region. There is wonderful government engagement happening in certain jurisdictions, for example with Fintech Saudi and the recently-announced regulation on Stored Value Facilities (SVF) in the UAE, which is a precursor to the equivalent of the E-money licences that spearheaded the fintech revolution in Europe.

     

    We also believe that the approach of the incumbents is very different in MENA. There seems to be a willingness to learn and adapt. Perhaps there is the benefit of seeing how the European incumbents reacted and realising the need to avoid the same phase of denial. In this regard, we can already see great examples of partnerships, like the relationship between the Commercial Bank of Dubai and Now Money.

     

    So, when we consider the lessons from the European Fintech revolution, we know that the MENA region is forging its own path. But we also know that every fintech is on a journey. There was no customer GPS worked with, from proof of concept to a fully scaled offering, that finished with the product they came to us to start with. The best approach is to go to market with a pilot or MVP, test it on friends and family, get feedback, iterate, and evolve the product. That’s why the partners you choose when launching a product are so important. Whether you’re a fintech, an e-wallet provider or a traditional bank, who you choose to work with is fundamental to your success, as this will provide you with the ability to draw on a partner’s invaluable expert guidance to innovate and evolve together.