While Fintech growth has exploded across Europe, there is a slower uptake in the United States. This is despite an enormous potential market in the US, thanks to a large population of consumers ready to shift over into newer technology.
The rapid development of Fintech in Europe has been due to huge amounts if investment, from banks and from venture capitalists. It’s also been helped by regulatory changes within the European Union (EU) and the UK that have opened up the market to competition.
Global investment in Fintech increasing
Fintech is a broad term used for the merging of financial services and new technology. It’s the new banking apps that are proving popular with consumers, and online payment options. These are the two areas most consumers are familiar with in their daily lives, but it also covers more in-depth areas. These include alternative lending, robo-advisors powered by AI, peer-to-peer lending and automated loans.
Global investment in Fintech companies reached a high of $122 billion in 2018, according . This is more than double the amount spent in 2017, which peaked at $51 billion. Europe reached $37.5 billion worth of Fintech investment in 2018, more than tripling the $12.2 billion in 2017. The UK’s Fintech investment leapt from $5.6 billion 2017 to $24.1 billion in 2018, representing the biggest increase in Europe.
Banks have been forced to accept that Fintech start-ups present tangible and potentially damaging competition. This has led to more financial institutions partnering with start-ups to develop new consumer solutions. Many of these Fintech developments have taken place in Europe, with a slower growth in the US.
Europe embraces regulatory changes
Europe has shown itself to be more accepting of new technology, with the rise of Fintech bridging the gap between traditional banking and new services for tech-savvy consumers.
While European Fintech companies are thriving this side of the Atlantic, they are slow to expand into the US. This is at least partly down to the complexity of the regulations surrounding financial services in the US, and the lack of open banking.
The EU has introduced two major regulatory changes that have boosted the Fintech market in Europe. These are the General Data Protection Regulation (GDPR) and the Payment Services Directive (PSD2). The first allows consumers much more control over their data via an opt-in system, and the second allows third party providers to offer services to businesses and consumers.
PSD2 forces banks to provide consumer data in their records to third party providers. This enables Fintech firms to develop solutions to consumer’s financial needs, and to offer tailored services. This has opened up the financial services market in an unprecedented way.
These kinds of regulatory changes create a massive opportunity for small start-ups and Fintech firms to corner a market they didn’t have access to. Banks have had to play catch up, and partner with Fintech firms to try and stay ahead of the game.
Open Banking boost UK Fintech sector
The UK has also opened the market to Fintech through the Open Banking initiative. This also provides consumer data to third parties so that they can utilise it to create new financial services. Since the market opened, 63$ of start-up Fintechs have taken 14% of all bank and payment revenues in the country. This shows that the Fintech sector really does know what consumers will respond to, and how to deliver it.
Until the US alters its regulatory framework in a similar way, it’s unlikely that Fintech start-ups will be able to make the same kinds of inroads. It is up to the banks and financial institutions that hold consumer data as to whether they want to adopt Fintech into their services. This makes it a slower adoption of Fintech, but no less significant.
Fintech still has a foothold in the US, and it’s likely that this will catch up with European adoption of disruptive technology over the next few years. More US financial institutions and banks are seeing Fintech as a huge opportunity rather than a competitive threat and responding accordingly.