Commission services are launching a Task Force on FinTech, Financial Technology, that aims to assess and make the most of innovation in this area, while also developing strategies to address the potential challenges that FinTech poses.
The work of this Task Force, FTTF, builds on the Commission's goal to develop a comprehensive strategy on FinTech to exploit opportunities provided by technological development for existing financial institutions, alternative service providers and new business models, as long as any risks are carefully managed.
FTTF, co-chaired by DG FISMA and DG CONNECT, brings together services responsible for financial regulation and for the Digital Single Market aiming to take advantage of the expertise of Commission staff across several areas, such as financial and digital services, digital innovation and security, competition and consumer protection. According to the Commission, it will also engage with stakeholders and present policy suggestions and recommendations in the first half of 2017.
Valdis Dombrovskis, Vice-President responsible for Financial Stability, Financial Services and Capital Markets Union said: "We see technological innovation in finance as a development that we need to encourage and enable. It brings huge opportunities for consumers and for industry, both by established players and new Fintech firms. Our Task Force will help us make sure that our policy supports the pursuit of these opportunities, while addressing any risks that may emerge. Efficient financial markets need to make the best possible use of the opportunities that technology presents, while also preserving competition and making sure that new operating systems are safe.”
Günther H. Oettinger, Commissioner for Digital Economy and Society stated: "Digital innovation is transforming the entire economy and in particular the financial services sector. It disrupts business models and value chains, leads to the emergence of new players and services. The Digital Single Market strategy aims at laying down an appropriate framework and enabling solutions concerning for instance electronic authentication or cybersecurity. Our ambition is to foster financial innovation while preserving financial stability and protecting consumers and investors."
FinTech is often used to describe technology-enabled finance, such as payments, lending, raising capital and investment management, foreign exchange and money transfer, and robot-advisers. It also includes InsurTech, the application of digital technology to insurance, and RegTech, its application to regulatory compliance. The current Fintech revolution is the result of a confluence of technological developments in financial markets ranging from continuing increase in processing and storage capacity, cloud computing, social network and platform technologies, artificial intelligence, mobile technologies to distributed ledger technology or blockchain, which is high on the agenda of the whole sector according to the Digital Single Market staff.
Banks under siege
Beyond increased competition from non-banks, the banking sector faces competition from FinTech firms with other challenges relating to the low interest rate environment as well as regulatory measures still to come. New specialised FinTech start-up companies are taking advantage of digitalisation and big data techniques trying to disperse the activities of banks.
Payment services could become a subsector where banks may lose significant market share. Other activities at stake comprise: savings and investment management over the Internet, with robot-advisors that provide algorithm-based portfolio management services online at a fraction of the costs associated with traditional portfolio managers and investment advisors, crowdfunding or direct equity funding of projects by investors gathered mostly over the Internet, peer-to-peer lending, P2P, whereby online services match lenders and borrowers which can be individuals or small businesses, or online money management advice aggregating all bank and savings accounts of the clients.
Thousands of FinTech start-ups can be found in all of these subsectors although the Fintech sector is nevertheless still quite small in terms of comparisson with banks. According to a recent study by McKinsey, about EUR21 billion of venture capital and growth equity has been deployed to FinTechs in the five years to 2014, with around one-half of this total invested in 2014. A significant part of this investment was concentrated in the area of payment services, where banks are facing the biggest challenge from these new competitors. It is followed by P2P lending, which is the next most developed activity, funded by hedge funds, institutional investors and sometimes even banks. The first accidents with bad credits started to emerge recently as big data and smart algorithms can also fail. As the sector expands, many more cases will likely occur. Furthermore, if it starts to cater for regular retail funding it will gradually become regulated as a banking activity.
Intensified competition from FinTech companies represents a potential threat for banks, banks responsible for the last financial crisis, for the shortage of funding in Western financial markets and therefore, banks at the origin of the birth of this new industry.