European regulatory environment acting as driver of fintech innovation 

Susan Friedman, Head of Public Policy, Ripple, discusses how European regulation acts as a driver for fintech innovation

The European fintech industry is on an unprecedented hot streak. You only need to look at the investment swirling around the sector to get a sense of the freneticism in the space. In the first half of 2021 alone, fintech investment in the region reached $39.1bn – and a number of established companies (such as Standard Chartered, Revolut and Paypal) have created dedicated strands of crypto activity.

This level of activity feels somewhat anomalous when you look at the bigger picture across the Eurozone. Just last month, the latest PMI (Purchasing Managers Index) survey, often seen as the bellwether of economic trends in the manufacturing and service sectors, found that growth in the region was slowing while inflationary pressures were on the rise – being impacted by lower manufacturing output and creaking supply chains. So what is behind this growth in fintech at a time when many other key markets and industries are still sluggishly recovering from the aftereffects of the pandemic and wider macroeconomic trends?

European regulation

It would be an oversight to not link the increased regulatory activity in the fintech sector and this recent explosion of activity. In the last few years, European regulators and local market authorities have introduced a range of new guidance and regulations in the finance and fintech sectors. These have been designed to help fuel innovation and enshrine customer protections as the industry develops, and include landmark initiatives such as Open Banking in the UK and PSD2 and the Markets in Crypto Assets Regulation (MiCA) (which is still being debated) in the EU.

In many ways, it’s this active regulatory environment that encourages growth and has acted as a catalyst to the space by providing legal clarity to market participants. The result? A booming European fintech scene, underpinned by regulatory frameworks that enables increased competition, leading to lower prices for consumers, better quality services and greater innovation from financial institutions.

Europe is a nurturing environment – but working in such a rapidly growing environment, it’s easy to conflate industry guidance and protections with attempts to curtail innovation. Regulation, traditionally seen as an impediment to growth and flourishing ideas, shouldn’t be viewed as the enemy. This is an outdated view that has been held onto by certain elements of the fintech sector and it’s one that needs updating. Tom Blomfield – founder of Monzo – encapsulated his frustration at the idea of intervention when he famously said that “positive innovation in Open Banking has been nil.” His words are emblematic of how many others feel in the industry.

In truth, this sort of mentality fails to acknowledge the ability of regulation to drive growth. Here are three reasons why it’s important that the European regulatory environment continues to act as a driver of fintech innovation over the coming years:

1. Regulation provides a framework for long-term innovation: As tech evolves and grows into the mainstream, regulatory oversight ensures long term growth and development. In turn, it also provides a framework within which we can continue to innovate, grow and drive lasting change. This is particularly evident in the FCA’s proposed ‘regulatory nursery’ – which is soon to go live and aims to give newly authorised UK fintechs additional support and guidance in their infancy while also promoting robust regulation in the sector. Additionally, UK fintechs now have the opportunity to participate year-round in the FCA sandbox, rather than on a cohort basis only.
2. Innovation and collaboration with the private sector encourages stakeholder buy-in: Innovation and collaboration with the private sector is an approach that has worked particularly well in the Asian fintech space. In Singapore, for instance, clear regulation and regulator collaboration with the private sector has led to the growth and development of the digital asset ecosystem, including Central Bank Digital Currency (CBDC) experimentation. A nurturing regulatory environment combined with industry engagement has created a strong ecosystem that is willing to collaborate to build better solutions, helping to push forward game-changing trials. The same approach has been taken with the Digital Euro Project, which the European Central Bank (ECB) launched an investigation into earlier this year.
3. Regulation is vital to winning consumer trust: With many consumers still unclear on the role that cryptocurrencies and blockchain have to play in improving their lives, it’s evident that tailored and flexible regulation has a role to play in winning over consumer trust. Open Banking, and its successor, Open Finance, will allow consumers to see first-hand the role that fintech innovation can have in improving how they manage certain services. These will enable truly game-changing technologies for citizens and have been created within a framework that people can trust.

These projects are just the tip of the iceberg in terms of regulation and guidance in the European fintech space.

With the direction they are giving the industry, they will undoubtedly help the continent achieve the mainstream adoption of crypto and blockchain, as part of a wider boom in the fintech sector. In turn, the impact of that on businesses and consumers will be truly transformative. Europe has a long history of supportive fintech regulation – let’s make sure that continues.