The Future of Fintech in Europe

QUALITATIVE QUESTIONNAIRE – SIMON COLLEU

Could you please introduce yourself (name, position, past experiences)?

My name is Nida and I hold a doctorate in computer science, where the area of my PhD research dealt with the applications of blockchain in finance. I am currently engaged as a founder, in establishing a fintech consulting firm, headquartered in Luxembourg. I have worked previously as a doctoral researcher in the Interdisciplinary Center for Security, Reliability and Trust based in Luxembourg, where I worked on using blockchain for donation, decentralized finance, social finance, blockchain governance and data privacy in blockchain platforms. I also worked on developing a novel blockchain platform based on a new consensus I had proposed using MapReduce. I had a brief stint as the Chief Technology Officer in an e-commerce platform, where I developed their tech stack, gave a concrete architecture to their business model and proposed a novel mechanism using blockchain-based tokens to record the impact of their initiative.

General questions:

1.     The term “Fintech” sounds very general and its definition differs from one person to another. How would you define the term “Fintech” with your own words?

For me the definition is straightforward. Fintech implies financial technology or technology for providing financial products and services. This basically represents innovation in the financial domain whereby innovative technologies are being used to develop novel products and services.

2.     According to you, what are the main goals and objectives of Fintech? 

The main goals and objectives would be:

a)     Financial inclusion

b)    Ease of access to financial services like in this pandemic

c)     Enhanced revenue

d)    Increased user base

e)     Accumulation of data for further strategic decisions

f)      Novel financial products

g)     Compliance to ethics and SDG goals

3.     During my research, I noticed that some academics and professionals have highlighted financial education and inclusion as a wider objective for Fintech companies. Do you agree? Why or why not?

I agree somewhat. The only difference is the way I see it is. For me financial education is a prerequisite for using the utilities provided by fintech companies. In the absence of financial education, in the context of technological usage, we will see a lot of scams, illegal offerings and fraud taking place. Financial inclusion is defining a wider objective for fintech companies as using technologies like blockchain, we can empower the unbanked and underbanked people to have access to financial services.

4.     According to you, what Fintech have brought to the financial services industry?

a)     It has brought the power of innovation in the finance domain and distributed that power over all potential fintech initiatives, taking it away from the existing established financial organizations.

b)    It has brought the capability to develop and test the innovative models over a small user base/ conduct simulation before rolling out the product in the entire market.

c)     It has brought the tool to save user data and gather statistics over long periods of time to derive further insights from it and accomplish data-driven decision making.

d)    Apart from the above, it has also brought a couple of challenges for the existing finance professionals to educate and revamp their outlook on emerging technologies, hire tech experts and change their long-term strategy.

5.     According to you, what is the most promising field and principal innovations of Fintech?

For me the most promising field is AI driven predictive analytics. It will have applications in all the subsectors of the finance sector. The principal innovations are:

a)     Chatbots and virtual assistants

b)    AI for predictive analytics

c)     Blockchain

d)    IoT

e)     Cloud banking

6.     According to you, what are the main risks and opportunities facing Fintech today?

The risks can be summarized as:

a)     Need for fintech education.

b)    Restructuring of the financial sector to include tech experts in their strategy, implementation and planning.

c)     Lack of appropriate regulations to target the new stream of financial products and services.

d)    Cybersecurity needs to be more robust.

 The opportunities are:

a)     Use creativity to design and create novel products/ services using technological tools.

b)     Innovative ways to target and retain customers.

c)     Reduce transaction cost and time.

d)     Increase revenue.

e)     Opportunity for startups and SMEs to establish themselves.

f)      Novel ways of attracting investment.

g)     Verification of adherence to contractual terms/ greater transparency.

h)     Measure and record impact in case of impact investments.

7.     With the Covid-19 pandemic, we observed a boom in the use of technology to deliver products or services. According to you, what impact this crisis had and will have on the Fintech market?

The investor interest for fintech in Asia has reportedly been the lowest in the first and second quarter this year since the end of 2016 as per CB Insights. This is due to the pandemic as economic progress is uncertain in the near future. This will force many ventures to retreat from the market, leaving the domain for established and big players. There is a prediction that at least 3-4 quarters would be needed post the pandemic for recovery for fintech startups. A similar scenario prevails in Europe as per a new study from McKinsey & Company. Europe witnessed a 30% drop in fintech funding in the first half of the year with the rest of the world reporting a decline of 11%. The big and established players will also suffer but survival would be higher. Investing more capital into new areas would be restricted unless absolutely crucial for survival. The bright picture here is that COVID19 has proved that digital initiatives are the need of the hour and once people get used to them, they would still rely on them post the pandemic, going by the way humans generally behave as trust is a very important factor. Cashless payments are on the rise and the limits were raised in many European countries to cater to the need. New regulations governing fintech have been formed in some countries like Korea, where a cryptocurrency law was introduced. This is a very exhaustive topic and one that cannot be addressed in an answer to a question. Consider banks for example, who would be seeing a decrease in revenue amidst rise of unemployment and the economic upheaval. Banks would need to change the way they operate and perhaps simulate the working of fintech firms to tackle this change of circumstances.

New technologies:

1.     Do you think Blockchain technology is only linked with cryptocurrencies? If no, to what extent this technology can be used?

Cryptocurrencies are one application of blockchain technology. Smart contracts is another application. Smart contracts can be used to develop decentralized applications that work as indicated in the terms agreed upon between transacting entities. Tokens facilitating tokenization of financial assets is another. One can use tokens to measure impact in ventures catering to the accomplishment of SDG goals. They can be used to fulfill the capital requirements of SMEs as well as extend investment opportunities to medium income groups. The technology is a novel way to record information and the digital infrastructure, that limits the necessity of third parties, enhances transparency, reduces transaction time and cost, is a potential tool to serve as a workaround to tackle the border imposition post Brexit. Blockchain is a decentralized database and as such information that is recorded can be used to derive further insights for the concerned business. The immutable nature of the technology ensures that the data used for artificial intelligence enabled predictive analytics is non-repudiated and verifiable. One cannot define an extent to which a technology can be employed. Consider the evolution of the internet. Few would have thought that in future people would be conducting business using the same but for blockchain, the realization will come once the technology is post the research phase. It is still dealing with its own challenges like scalability, throughput and data privacy. Once these are accomplished, we would see a boom in the way it is used. Perhaps the technology would exist in a different form where we see some changes in the way it is functionally structured now for it to be feasible for mass usage. One can’t predict the future but, in my opinion, the technology would stay, may be in another form, and cause a radical change in the way the finance sector works.

2.     Do you think AI will have an important role in the Fintech revolution? How and why?

As I see the fintech landscape, it is the most important emerging technology for the fintech revolution. AI, concentrating on the finance sector, empowers chatbots, helps in predictive analytics and data-driven decision making, provides customized financial products and services, assists in recommendations for insurance products, guides in user behavior profiling and I can go on. Data is the most important tool in this age and AI is the instruction manual that provides ways and methods on how to use this tool to our best advantage.

3.     With the financial services turning digital, challenges related to cybersecurity are more important than ever. What solutions can Fintech or regulators propose to address the current threats? 

Fintech education for the users is very important as a preventive measure so users are aware of the threats that exist and how to best protect their digital credentials used to access their accounts. Regulators can frame laws dealing with the misuse of specific technologies to commit theft or fraud. More stringent laws should be framed for fintech firms to take responsibility for any loss of funds to increase trust in their products/ services as in the case of theft of cryptocurrency, where public blockchains absolve themselves of all responsibility. Small and medium-sized fintech firms are more vulnerable to cyberattacks and as such they need to have appropriate guidelines in place for employees to conduct themselves safely. Education on phishing, malware, social engineering attacks and ransomware should be done for every employee and periodically random mock attacks should be conducted internally by the firm to make the employees aware.

Competition:

1.     During my research I identified 2 potential competitors for Fintech companies: the Bigtech firms (Google, Amazon, Apple…) and the traditional actors or financial services companies. I observed that collaboration between Fintech and banks is essential to the success of both parties. However, Bigtech firms already engaged in the financial services industry but still at small scale. According to you, could Bigtech firms take the lead on digital financial services? Why? 

Money is an asset, unlike data, that people already value. They trust the traditional actors with their money and the traditional actors have already established that they are reliable and secure for keeping money, conducting transactions and financial dealings. People might not even be aware of all the norms governing these traditional actors but know they are in safe hands as appropriate regulations exist to protect them. Moreover, the traditional actors have a cautious approach while dealing with monetary transactions and the recklessness that we see in some of the financial innovations namely, cryptocurrency transfers, is a trait absent in banks and other traditional actors. As such I don’t see the Bigtech firms taking a lead on digital financial services unless they are supported by the banks and traditional actors. Credit cards became popular because the banks endorse them. Digital financial services, initiated by any, would also need endorsement by banks to gain the trust of the people.

Regulation:

1.     Defining a regulatory framework is essential for fintech future. According to you, what are the greatest challenges facing regulators and how might they respond?

I think the greatest challenges facing regulators is a lack of a clear picture as to what are the possible implications of a particular technology being employed, lack of knowledge of the possible ways fraud can be committed in a certain digital initiative and the possible ways the digital setup can be attacked. Technology experts on the other hand lack knowledge of the finance domain and as such their expertise does not assist them in helping the regulators see what is crucial for the stability and reliability of the fintech firm.

There needs to be an approach where a technical vulnerability framework is drawn up by the CTO of the firm indicating the possible ways the initiative can be exploited, vulnerabilities that exist and remedial measures, if possible, that should be in place. This framework should serve as a foundation for the regulators to lay down the requirements and guidelines fintech firms should adhere to. A number of such frameworks from different fintech firms deploying different emerging technologies will in time be able to cover all the possible scenarios and target most of the use cases for better stability and integrity of the financial system as a whole.

2.     What can regulators, supervisors and legislators do to facilitate the adoption of fintech in Europe? 

Regulators, supervisors and legislators need to work collaboratively to tackle this emerging, innovative financial domain. The technical vulnerability framework provided by the fintech firm should be used by the regulators to issue guidelines and requirements the fintech firms should comply with. Supervisors should maintain a record of any breaches to these guidelines and requirements, informing legislators to take action by forming the requisite laws needed to take appropriate action. The technical vulnerability framework and the regulations would help the legislators to take an informed decision on the necessity of framing laws to support the regulatory framework that protects the fintech firm, as per the elaborated vulnerabilities in the technical vulnerability framework.

3.     Some academics and professionals rose the question on developing whether a European or a national regulation for fintech? Which approach do you think is the best and why?

There should exist a European regulation for fintech to make way for cross-border expansions of the fintech firm without the necessity to adhere to new regulations in another country. This would also bring about standardization of the fintech landscape and encourage its progress.

4.     How can Europe benefit from financial technologies compared to other markets such as America or Asia? 

The European fintech landscape is different from the American or Asian. In America focus is on relieving people from debt whereas Asia focusses on the underbanked and unbanked.  The focus in Europe is on reducing the transaction cost for cross-border payments, digital payments and mobile banking.  The European market is diverse with different countries having different financial regulations. In this scenario technologies like blockchain, IoT, cloud banking etc. can function to provide an environment where usage statistics from one country is available in another, for taking actions or deriving analytics. The focus when using financial technologies in Europe, would thus be different and would need to adhere to stringent privacy laws as compared to American and Asian markets. In Europe the fintech firms are not really causing disruption as in Asia but they are enhancing the existing infrastructure. Financial technologies can be used to cause disruption in the market imitating the Silicon Valley, to bring about novel financial initiatives. Europe does not lead in technology like America and the same can be said for innovative fintech initiatives. Opportunities for disruption exist and customization according to the European landscape is crucial for legislation. Fintech firms should emerge to fill this need.

5.     Which approach from the governments would you recommend? Supportive or neutral? Why? 

I would recommend a supportive approach as the necessary regulatory infrastructure is vital for fintech to thrive and be sustainable in the long run. Capital requirements, ease of initiation and appropriate laws can spearhead the development and sound progress of fintech in Europe. All these need the support of the government.

6.     Have you ever heard about regulatory sandboxes and what do you think about that approach?

I’m sure all in the fintech domain have heard of regulatory sandboxes. The approach is very logical as it provides a safe environment to test a product in a live environment with the regulator overseeing the entire process. This enhances the understanding of the regulator into the technological venture, helps the fintech firm to function with adhering to less regulations and evaluate, facilitates innovation and enhances trust into the implementation. This in turn increases the potential investment into the fintech venture and assists policy makers by providing requisite data, insights and an assessment of probable risks.