Fintech in the single European market: is the single market a reality?

By Michael Stephan | 25 November 2016

The EU and its market of more than 500 million people is based on the principles of freedom of movement of people, goods, services, and capital across its 28 member states. Important elements that facilitate a free flow of capital have already been put into place.

The introduction of the euro as a common currency has eliminated the challenges and risks that come with dealing with payments in foreign currency for a large share of EU member states. The SEPA payment scheme has created the foundations for the transfer of money to different EU countries to share the same cost and ease as local transfers. Additionally, national deposit guarantee schemes have been harmonised at €100,000 ($106,000) per customer and bank across the EU based on EU directives 1994/19/EC, 2009/14/EC, and 2014/49/EU.

Thus, consumers are offered a similar level of protection across all EU countries; they can effectively invest in the same currency in most countries and cross-border transactions have the same price as local transactions. 

Significant advantages for consumers           

Consumers can gain significant advantages from moving their capital freely within the EU. Despite the fact that the European Central Bank (ECB) sets the reference interest rate for all Eurozone member countries and that this rate has been negative for the past few months, significant differences in interest rates still exist between countries. This is due to structural causes such as differences in the competitive environment, savings quotas and the demand for credit between markets.

While interest rates have come down significantly in Germany to approximately 0.33%, across the border in the Netherlands average interest rates are still a lot higher at 1.72% (see graph below). German savers with their €2tn ($2.1tn) in savings are losing out on €6bn ($6.3bn) interest every single year compared to the EU average of 0.53% and even more when looking at the most attractive offers available on a EU level (ECB, August 2016).

(Source: ECB data, as of October 2016)

Twenty-eight different regulatory regimes in one single market

So why do consumers and banks not take advantage of these differences?

Looking at banking markets these are still almost entirely local. On the one hand, one of the main problems is the fact that the 28 EU member states each have their own national laws and fiscal regimes. This means that consumer protection requirements, data privacy laws, and contract law differ. This stifles competition and keeps European financial markets fragmented. 

Only large banking groups are able to take advantage of existing interest rate differentials. And they usually do this by establishing local branches in the markets that are most relevant and attractive for them. However, for most smaller players it is too complex and costly to spend resources and money on understanding the differences in national fiscal and legal frameworks.

For consumers there are a number of practical barriers to opening a bank account in another country. Firstly, opening a bank account in another country usually requires speaking the local language. Moreover many banks only accept local residents either directly or indirectly e.g. by mandatorily requiring a local tax or social security number as part of the account opening process. Opening a bank account abroad also requires a proper understanding of local taxation requirements.

Until very recently it was also often mandatory to be physically present to open a bank account. Advancing digitalisation is steadily reducing this barrier. As remote identification is becoming more and more common there is now a real chance to link financial actors established all around Europe to consumers residing throughout Europe.

Fintechs are pioneers in the European single market

Financial technology start-ups, so-called fintechs, are disrupting the banking sector. Many of them are also trying to serve customers across the EU and build their business models on helping customers bypass existing barriers to a single capital market. Many fintechs are trying to disrupt the banking sector based on offering consumers a more convenient experience. They can do this, since they do not need to struggle with the legacy IT systems of incumbent banks and are thus a lot more agile. Moreover they are using technology and data which reduces costs significantly and share these savings with customers.

This has been particularly evident in the payments markets – in particular, there where foreign currency payments are concerned. Providers such as TransferWise or Azimo are enabling customers to send foreign currency payments at a significantly lower cost – and not just between EU countries but across the globe.

Peer-to-peer lending platforms such as Bondora allow investors across Europe to fund loans from different countries – independently of their own country of residence – effectively functioning like a mini-credit bank.

Deposit marketplaces such as Raisin allow customers to invest their money in savings accounts of different banks across the EU taking full advantage of deposit protection.

So how do these start-ups facilitate the freedom of movement of capital?

Case study Raisin – a truly pan-European marketplace

With the savings and deposits market Raisin addresses one of the most important financial products – virtually every person in the EU holds at least one savings product. In total European residents hold more than €10tn ($10.6tn) in current and savings accounts. Despite significant differences in interest rates and harmonised deposit guarantee schemes, consumers have so far not taken advantage of the interest rate differential between banks in different countries.

Raisin is a fintech that eliminates the most significant barriers, allowing customers to move their money across the EU via a smooth and transparent process.

The company is available in 31 European countries and has partnered with 22 banks from 14 countries, thus providing a truly European offering to its EU customers. In the past two and a half years Raisin’s 50,000 customers have invested more than €1.7bn ($1.8bn) across all of Europe.

This shows that there is indeed demand for pan-European financial services, wherever customers see clear advantages and are subject to a uniform and clear legal and regulatory framework.

European integration has facilitated the integration of European financial markets. Technological progress, and further deregulation at a local level can contribute to hasten the process for the benefit of Europeans. 

By Michael Stephan, Founder and COO, Raisin GmbH

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