Europe sets out fintech stall to face economic headwinds

Ed comment: Brussels aims to lean on fintech as economic uncertainty destabilises markets

By Michael McCaw | 6 February 2019

Company leverage hit a ten-year high in January, with 48% of fund managers who took part in Bank of America Merrill Lynch’s market survey believing balance sheets are overleveraged. Normally bullish wealth managers remind investors that doing nothing can often be an effective strategy. At the beginning of February, the US Federal Reserve pointed to slowing global growth as it seemed to abandon plans for further rate hikes, and the European Central Bank has poured cold water on suggestions it might be in a position to start tightening later this year.

Tensions rise between the US, China, and Russia – which could lead to the reignition of a trade war. The Brexit juggernaut stumbles hazily toward March 29 and a no deal like a punch-drunk boxer, with equivalence in several areas kicking the can down the road.

In Europe, however, regulators and government bodies have been working early to isolate a resolution to any impending economic turmoil. This year, fintech market participants – with their ability to offer easy and affordable means to cut costs in what could be a challenging environment – are shaping up to be the last bastion of financial markets. At least that looks like the position Brussels has taken.

In January, the European Supervisory Authority (the ESA, which consists of the European Securities and Markets Authority, the European Banking Authority and the European Insurance and Occupational Pension Authority) put out a joint report on “innovation facilitators” – essentially fintech hubs and regulatory sandboxes – geared to elaborate on best practices and address any challenges that might stunt fintech growth. The report builds a framework for driving fintech growth, and aims to address challenges such as the talent shortfall and how propositions are tested in regulatory sandboxes.

In this and other policies however, the European Commission (EC) has recognised the need for greater supervisory convergence across the continent, with greater harmonisation of authorisation and licensing processes. In its 2018 Fintech Action Plan, the EC invited European Supervisory Authorities (ESAs) to map those processes, and assessments are expected to be made within the next few months. Given the clear desire to help the fintech market thrive, that could spell an easing of the current processes.

The EC has also been working with the European Committee for Standardization (CEN) to produce a gap analysis, to further coordinate the continent’s ecosystem.  

And individual national competent authorities have been pushing the fintech agenda. The UK’s Financial Conduct Authority (FCA), which recently stepped up its pressure on banks to follow the revised Payments Services Directive (PSD2) protocols by announcing a March 14 deadline for the implementation of testing facilities and technical specifications for third party providers.

So, while the economy looks like it could be in for a hit, regulators are attempting to create a bullish environment for fintechs to help plug any impending gaps and even free up some margin. Should banks and financial institutions move quickly enough and embrace what the fintech market offers, perhaps the outlook may be less onerous.

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