Bridging the Transatlantic Banking Divide: The Promising Role of FinTech and AI

The banking landscape across between the United States and Europe exhibits a wide array of differences rooted in history, regulation, and other structural differences. These differences not only impact the collaborative avenues between European and US banks, but also pose hurdles for U.S. citizens attempting to navigate the European banking ecosystem.

Here, I investigate these challenges and explore how advancements in #fintech and #AI could serve as catalysts in bridging this transatlantic banking divide.

There are a couple of major factors that differentiate the two markets:

1. Payments System Dominance: European banks have made efforts to challenge the entrenched US dominance in the payments sector, albeit with limited success. A good example is the collapse of Project Monnet in 2011, which aimed at building a payments group to rival US giants.
2. Currency Dependency: The structural dependency of European banks on the U.S. Dollar, in contrast to the limited dependency of U.S. banks on the Euro, creates a disparity in bargaining power for currency swapping and other transactions, potentially putting European banks at a disadvantage.
3. Profitability Discrepancy: Structural factors contribute to a lower profitability of European banks as compared to their U.S. counterparts. Especially in more recent years, U.S. banks have exhibited much greater profitability and return on equity compared to their European counterparts.
4. Market Fragmentation: The fragmented market in Europe, stemming from differing regulatory regimes and supervisory frameworks across EU countries, restricts the competitiveness and profitability of European banks. In contrast, U.S. banks operate under a more unified regulatory framework.

Motivated by these differences in incentives that U.S. and European banks face, U.S. citizens looking to open European bank accounts face several challenges:

1. U.S. Reporting Requirements: U.S. regulatory requirements discourage European banks from offering services to US individuals due to the increased compliance burden. For example, the Corporate Transparency Act passed by the US Congress on January 1, 2021 imposes extensive reporting requirements on beneficial owners of most entities operating within the U.S. Similarly, the Bank Secrecy Act (BSA)/Anti-Money Laundering (AML) and sanctions, coupled with IRS reporting requirements, add further complexity.
2. Proof of Legal EU Residency: The requirement for legal EU residency proof creates a significant barrier for U.S. citizens and other non-residents attempting to open bank accounts in Europe. Given the sluggish process for obtaining visas and citizenship, it is harder than it sounds.
3. High-Risk Perception and Financial Thresholds: Non-residents are often viewed as high-risk, rightly or wrongly. Furthermore, there are often high financial thresholds for opening a European account.

Bridging the Gap with FinTech and AI: The advent of FinTech and AI technologies presents a promising avenue to address these transatlantic banking disparities.

1. Cross-Border Payments Innovation: Fintech firms (e.g., Wise) are pioneering solutions to streamline cross-border payments, reducing the dependency on dominant currencies and enabling more efficient currency swapping. These innovations could level the playing field in the payments sector.
2. Regulatory Compliance Automation: AI-driven regulatory compliance platforms can significantly ease the compliance burden by automating the interpretation and implementation of varying regulatory requirements across jurisdictions. This automation can foster a more conducive environment for transatlantic banking collaboration.
3. Risk Assessment and Customer Verification: AI can enhance risk assessment and customer verification processes, making it easier for banks to onboard non-resident customers while adhering to regulatory mandates.
4. Profitability Enhancement: Fintech software aimed at optimizing operational efficiencies, reducing costs, and diversifying revenue streams can help improve the profitability and competitiveness of European banks.
5. Market Unification: Digital platforms that enable seamless cross-border banking services, coupled with blockchain-based solutions for unified regulatory reporting, can harmonize fragmented markets.

The fusion of fintech and AI technologies could play a crucial role in bridging the existing transatlantic banking divide, fostering a more harmonized banking ecosystem. By embracing these technological advancements, banks on both sides of the Atlantic can explore collaborative opportunities, streamline cross-border operations, and provide better services to individuals and businesses alike.

Christos A. Makridis is the CEO/Founder of Dainamic, a software-as-a-service startup that offers market intelligence and regulatory compliance services. He also holds several academic appointments at leading institutions and dual doctorates in economics and engineering from Stanford University.