The European Fintech Association (EFA) was founded in Brussels on 16 June. As a lobby group representing the interests of European FinTechs, it aims to advance topics on the digital financial agenda in the EU. Marc Roberts, Chairman of the EFA Board, discusses the association’s orientation, goals and potential in an interview.
The chairman of the newly founded European Fintech Association on the lobby group’s plans for financial start-ups.
- Mr Roberts, the recently founded European Fintech Association is to become the mouthpiece of European FinTechs. Now eleven of the 21 founding members are from Germany, and the six-member board includes three German start-ups. Isn’t that an imbalance right from the start?
German FinTechs are still overrepresented in the association. We are in the process of balancing this out and acquiring FinTechs throughout Europe. Some will join in the near future. The initiative began in Germany, mainly as a result of a co-operation between Raisin, N26, Transferwise and Finleap. However, we try to create space within the board for a European perspective.
- Among the founding members are four UK-FinTechs. In light of Brexit, what do they hope to gain from participating in an association that operates primarily in the European Union?
In the case of the British FinTechs, there are, of course, some restricted to the domestic market. Still, there are also many, including our members, who want to continue operating in the European market. What is essential is that they have an interest in European issues. The focus is not on Brexit issues, but on services within the EU. And for British FinTechs operating in Europe, the same questions continue to arise.
- What requirements must members meet?
There are ultimately three prerequisites. First, it must be a European FinTech. This does not mean that it must have been established in Europe. It must have a genuine interest in focusing its activities in Europe and want to promote policy issues here. And it must operate across borders. In addition, it must have a tech background; in other words, it must provide technology-based services.
- Your lobbying work for FinTechs will be based on the digital finance strategy of the EU Commission. Where is there a need for action?
A key point is that digital financial services bring real benefits for customers, businesses and also for regulators. For example, by making services particularly transparent, saving costs or reflecting product innovation. Current regulation is still very much tailored towards manual, rather analogue processes. This is particularly evident in the identification of customers. It does not take into account the advantages of digital services – when opening business processes, but also in many other regulations that protect the consumer. Ultimately, this is still based on the fact that a lot of paper is made available to the customer. In digital processes, this cannot be meaningfully depicted. Of course, consumer protection is essential, but one should still evaluate what is really useful in a digital process.
- Could you illustrate this more clearly using the example of identification?
In this field, European regulation does provide uniform identification methods. It depends on whichever methods the respective Member State allows, which varies between each state. Basically, most Member States assume that a customer is identified face to face. This can be in a bank branch or in Germany, for example, through video identification or Postident procedures. These are not optimal processes for digital providers because the customer has to go out of the online offer and do something completely different. The normal course of business is interrupted and must then be restarted. Here, standardisation with a Europe-wide identification method would be desirable.
- Where do you still see an acute need for action?
Some regulations make cross-border services considerably more complicated; for example, IBAN discrimination. In practice, this means, by way of example, that a French electricity bill can only be paid with difficulty from a German account. Accordingly, to operate on the French market, a German FinTech must have a branch in France just to obtain a French IBAN. In addition, there are special regulations in consumer protection, which mean that the interest rate has to be displayed differently for straightforward and transparent products such as overnight and fixed-term deposits. Each country has to develop its concept of how to do this – with taxes, without taxes and so on.
- Fragmented regulations are often criticised when it comes to money laundering. What are your ideas here?
As already described, we have to deal on the one hand with varying regulatory specifications for digital identification. In addition, there is an area that is extremely important for co-operations, the so-called reliance on third parties. If a FinTech product is integrated into a bank, for example, the bank naturally does not want the customer to have to be identified again, since they are an existing customer. It should be possible to use the existing identification again for the integration of the new product. This is admittedly permitted within the European Union, including the provisions of the European Money Laundering Directive. But then there is so-called gold plating.
- What do you mean?
Gold plating means that one has national regulations that have additional requirements for this reliance on third parties. For example, a time limit where the first identification must not be older than two years, or the requirement of a written contract or that the first step must have been a face-to-face identification. The new services under PSD2, i.e. payment initiation and account information services, are also subject to very different regulations as to whether these providers are obligated under money laundering law or not. The rules vary from one Member State to another, in particular the obligations that apply to these providers. In other words, you must always look at the regulations applicable to the service in question in the country in question.
- How could this be solved?
The matter is primarily one of standardisation at the European level, which is a relatively lengthy process. It must first be decided, discussed with the Member States and ministries, and finally implemented. At the same time, however, certain areas could be regulated relatively quickly. One example would be to adapt the guidelines of the European Banking Authority (EBA) to allow certain areas to be regarded as low-risk and not subject to the corresponding obligations. There are also opportunities below the level of legislation to introduce significant simplifications for certain business models.
- Some FinTechs would like to have a sandbox like in the UK. Is this also a direction for you?
Sandboxes are an exciting topic and an especially great opportunity for newer FinTechs or start-ups to get in touch with the regulator. What’s more, from our point of view, is the exchange on a European level between regulators on new business models. Often each country has to deal with each business model anew, and you always start from scratch. There is no cross-border exchange. We believe a kind of FinTech hub at the European level would be practical. This is also a point which we discuss with the European Commission.
- Do you also see a need for change in the area of data protection?
Views on data protection, which is a concern for all our members, vary depending on the Member State. At the same time, GDPR provides uniform regulation at the European level, which is already a relatively far-reaching harmonisation. However, there are additional regulations at the national level, which are more or less strict. France, for example, is very strict compared with other countries. This is also the case in Germany. Especially in the financial sector, data protection plays a critical role. At the same time, however, we believe that the data protection issue should not be misused to discredit certain new developments.
- What do you mean?
For example, in the area of opening up account interfaces within the framework of PSD2, we believe that this data protection issue has already been brought to the forefront in order to protect certain business models. As a consequence, regulation emerged that does not help anyone, especially not customers, and certainly not FinTechs.
- It is often criticised that we do not have European Champions. How can Europe remain competitive? Where do you see disadvantages compared to other regions?
It is often said: If you cross the border by car, you have to obey the traffic regulations in the other country. The picture is a bit skewed when it comes to cross-border financial services. Because when you drive across the border, you don’t have to convert your car. But if, for example, you want to establish a platform across the border in another European country, then that is a project of six to eight months. You have to adapt the documentation and also the product, as well as design the conditions so that they comply with local law. There is no uniform regulation which would allow you to reach customers throughout Europe and use the full capacity of the market.
- Are there any other obstacles?
It is much more difficult for companies to recruit talent in Europe because of the difficulties of employee participation in option schemes, especially from a tax perspective. This is a problem that needs to be tackled. It is bad for innovation in Europe if you cannot recruit the best talent, even though offering incentives could be a possibility. I understand the logic behind this, but a European stock option scheme is needed. The existing employee stock option schemes only ever work in one country according to the law of that country. If you have an employee who would rather live in Barcelona, then you have to set up a new programme. And of course, it is already challenging to set up an entirely new programme to acquire someone just because he wants to work elsewhere in Europe.
- How do you assess the current situation for FinTechs in Germany and Europe affected by Corona?
The pandemic, of course, has a considerable influence on FinTechs. There is always a need for financing for rapidly growing companies, and we can see that the situation has not improved in the financing rounds as a result of this Covid-19 crisis. It hasn’t become impossible to get financing rounds underway, even large financing rounds, but the starting position is different from before the crisis. The same applies to recruiting.
- In what way?
There is now a hiring freeze for the time being. It is complicated to train new employees with remote procedures. And of course, FinTechs also reduced staff. At the same time, it can be seen that most FinTechs are well-positioned. Firstly, through their business model, because digital services can basically still be offered. Secondly, the employees have had fewer problems with the necessary changes, because many of the services or working methods are very agile and Internet and cloud-driven. Overall, it must be said that FinTechs have proven at this stage that their product offerings are relevant.
Source: Börsen-Zeitung, July 7, 2020, Franz Công Bùi, © All rights reserved
