The European Fintech dream

Brexit Day - 31 January 2020 - has come and gone. But what does that mean for the European project and for European Fintechs?

Brexit - the vote and subsequent negotiations for the UK to leave the European Union - has been touted by critics as an important backlash against the ‘European project’, with the union of European nations beyond repair. But is that an accurate portrayal of the current state of the EU? If so, can anything be done to save the European dream and ensure it is fit for purpose in a rapidly-changing environment? And finally, what does Brexit mean for the future of European Fintech?

Depending on who you ask, the European Union is, by turns, an overweight federalist quasi-state, or a vital guarantor of safety and economic security which has brought prosperity to millions. To clarify before we begin, we are not interested in the subjective arguments for and against the existence of the EU. However, as a Fintech company operating across European borders, we are interested in the principles and regulations which underpin the union of European countries. We see an effective European market, which allows goods and services to be traded across borders with limited friction, as a natural facilitator of our mission to support businesses as they build, adapt and thrive. This blog will explore the current outlook for businesses in the European Union and how the EU must adapt to support growth and innovation, by boosting the single market and investing in the next generation of innovative companies, including Fintech.

Challenges facing the European economy

The European Union as it is now known was founded in 1993, but it traces its origins back to the 1950s, to the European Coal and Steel Community and the European Economic Area. The names of those organisations are indicative of the earliest aims of the European project - to promote trade and facilitate economic growth. However, another crucial element of those organisations was to prevent a repeat of the horrific wars of the first half of the 20th Century. Whatever the arguments against greater political unity and the ‘ever-closer union’, there is a lot to celebrate in the success of the EU in promoting unity and preventing military action between the major European powers.

The first key aim of the EU - to promote trade and economic growth - is arguably the most important mission for the EU in today’s global economic climate. Trade has been the main narrative in recent Brexit negotiations and negotiating a mutually attractive post-Brexit UK-EU trade deal should be a priority for both parties in 2020. However there are greater global challenges to contend with than Brexit. Specifically, the EU must challenge or defend against threats from the economic powerhouses of the USA and China. Indeed, the trade wars playing out ostensibly between China and the USA are already having a knock-on impact on the eurozone where growth rates remain stagnant.

This shift in the global economy has manifested itself more than anywhere in the banking sector. European banks which once set a course to compete with the big Wall Street banks are now retrenching back into their home countries and being left behind by their American and Asian counterparts. Before 2008, the largest German banks held two-thirds of their assets in foreign markets; by 2017 that had dropped to one-third. In the same period, the four largest Chinese banks quadrupled the share of foreign assets held and Russian, Brazilian and Indian banks also increased foreign investment. European banks are favouring low-risk, domestic retail banking over high-risk, profit-generating global investment banking. This may be prudent for the purpose of protecting consumers’ deposits, but it leaves European institutions trailing behind their more risk-taking American counterparts in terms of size and ambition and their Chinese rivals in growth. Even UBS, one of the most highly valued European banks, has recently pulled back its trading arms and focuses now on private banking.

Similarly, other big European businesses outside the financial services sector are struggling on a global stage. Only two of the world’s 40 largest listed firms measured by market value are European (ten years ago, there were ten). The biggest startups in the world are predominantly found in Silicon Valley, rather than the Silicon Roundabout or elsewhere in Europe’s fractured startup ecosystem. And, of course, thanks to Brexit, the Silicon Roundabout will shortly no longer be part of the EU. According to The Economist, Europe “risks becoming a business backwater”.

The fact that the European economy is struggling does not mean that things cannot change. In fact, in today’s global economy, the EU is more important than ever in facing up to the threat of competition from China and the USA. The way forward means a revision of protectionist stances on trade. The EU has started this journey, for example by forging closer trade links with powerful allies like Canada.

A way forward through the headwinds

First of all, the EU must recognise that it needs to change. Like a tech company, it must prioritise constant improvement and recognise its current iteration is not the finished article. To do that, the EU must renew its ambition in two key areas of the European project and also drive reform to facilitate cross-border trade.

In terms of existing areas of the project, the first important step for the EU will be to properly enforce the statutes of the single market. This starts with free movement of people and skills. Over-regulation of national labour markets prevents free movement of employment between European countries and contributes to high levels of unemployment in several EU member states. Along with single market reform, the EU must renew its focus on the euro, which would bring greater alignment between countries and integrate existing eurozone countries.

Second, and most importantly, the EU must remove structural barriers to cross-border trade. For example, standardisation of tax and regulation across EU borders would help to create a working single market. The complexity of navigating different local regulations across member states remains a barrier to growth. Happily, according to the OECD, services can already be traded in the EU internal market with just a quarter of the typical regulatory barriers. But a greatly improved, more open and better publicised single market for services would reinvigorate the EU project and boost other areas of the single market which have already proved successful. This will not be an easy reform - reworking tax laws across borders is notoriously difficult. But Britain’s exit is a clear chance for the EU to introduce meaningful reform and to show the UK what it is missing.

EU innovation facilitated by Fintech

With so few levers it can pull politically, including limited control over taxation and budgets, the EU must also rely on innovation to boost its economy. The structural reform required in the EU could be facilitated by a renewed focus on innovation, specifically in the field Fintech. Financial services play a vital part in boosting innovation, not least by providing banking services for young businesses. However, with bigger banks retrenching and facing serious competition on a global stage, European financial services will rely on new players to aid in breaking down barriers between member states. European Fintech needs to remove as many structural barriers as possible and the Fintechs that succeed will not only be profitable, but will also drive the resuscitation of the EU.

To do that, the EU must show its strong support for innovation and specifically for Fintech. The stance of the EU against the technology giants has been admirable, with flagship policies like GDPR and the right to be forgotten improving privacy for member states. However, the narrative can be easily skewed the other way, to suggest that the EU has a fundamental problem with technology. There is a big difference between tech giants like Google and startups or growth businesses delivering digital services to European consumers.

Moreover, the complexity of navigating different local regulations across member states remains a barrier to growth for Fintechs. As a result, customers’ experiences of using financial services products still differ fundamentally from one member state to another. In 2016, just 7% of European consumers used financial services based in another EU member state. That percentage is increasing, but it remains a fact that only a handful of players have managed to cut across into multiple European markets, and there are still no truly EU-wide providers. Many of the major Fintech players are London-based, with international growth teams tasked with expanding across borders - 39% of European Fintech funding going to the British capital in 2018. EU regulation such as the Payment Services Directives has had some success in promoting innovation and competition across member states but more could be done. In its 2018 "Fintech Action Plan", the European Commission announced its plans to improve the European Fintech landscape through a more consistent supervisory approach. With so much on its agenda, not least negotiating the best possible post-Brexit relationship with the UK, the EU must prioritise Fintech.

European bank account for businesses

At Intergiro, we are on a mission to make trading between countries inside and outside the EEA smoother and more straight-forward. 70% of online businesses sell outside their home markets and we designed our Intergiro business accounts with those businesses in mind. As a European business, we are concerned about the future of the single market for services and passionate advocates for a single market for Fintech which promotes innovation.

Post-Brexit bank account

If you are worried about the impact of Brexit to your business, contact us to discuss your post-Brexit banking needs. Or if you want to discuss any of the ideas in this blog, please feel free to connect with us here on our social media channels.