In July 2019, the EBA published its "Report on the Impact of FinTech on Payment Institutions' and E-Money Institutions' Business Models". Compiled from surveys and discussions with Payment Institutions and Electronic Money Institutions (in addition to feedback from local regulators), the Report takes a look at the current FinTech landscape for PIs and EMIs, before moving onto the impact, opportunities and challenges FinTech has for their business models.
We've summarised some of the EBA's findings below.
The global payments business has grown significantly in the past few years, stimulated in part by an accelerating transition from cash to digital payments. Changes in the sector and new EU regulations (such as PSD2) have also seen a number of new regulated institutions enter the market.
Unsurprisingly, the EBA found steady growth in the use of e-money and contactless payments in the EU, which now account for one in two in-store payments. Digital and mobile wallets have become amongst the fast growing tech markets.
There has also been an increase in the financial services activities of BigTech, particularly through payments and lending services.
The key drivers for change and adoption of FinTech in PI and EMI business models have been:
- Customer behaviour: Payments customers are demanding fast, cheap, easy, smooth and secure payments. Alongside this, institutions themselves are moving towards customer-centric models and recognise that customer intelligence is of the utmost importance for growing revenue.
- Competition: Telecommunication companies, technology companies, FinTech firms and newly authorised PIs/EMIs are all seeking to expand their existing services and move up the value chain.
- Technology: The growth in mobile usage, as well as internet banking and digital payments, has created a financial technology infrastructure that has contributed to a fast evolving tech-driven environment.
- Regulation: The introduction of the GDPR, inter-change fee regulation and PSD2 has required firms to adopt new technology to meet regulatory requirements and has also created opportunities for new market entrants.
How PIs and EMIs interact with and use FinTech
The EBA found that the majority of EMIs and PIs choose to develop products or services using FinTech developed in-house, although a significant number do prefer to partner with FinTech firms in order to share resources and leverage external expertise.
Large institutions tend to engage with FinTech in all possible ways (they invest, acquire, partner and also develop in-house) in order to position themselves strategically as key players in the ecosystem and improve customer experience.
In respect of technology trends, EMIs and PIs are increasingly launching digital wallet based services and most are now using cloud based services. Newer entrants often operate entirely in the cloud. Other trends include the use of big data analytics (particularly in the context of RegTech) and biometrics, such as fingerprints and voice recognition.
Many EMIs and PIs were already using APIs in their businesses prior to PSD2's data sharing rules, but PSD2 rules on sharing account data via dedicated interfaces are predicted to lead to ecosystem improvement and the development of more innovative products.
The story is not as promising for distributed ledger technology. A lack of interoperable infrastructure and the need for international collaboration between market participants has meant that most applications of distributed ledger technology have remained at a proof-of-concept level.
There has been some expansion by major tech corporations into payments, though this has mainly been overlaid onto the existing payment infrastructure. Indeed, many tech firms have been happy to collaborate with EMIs and PIs in order to be able to provide the full value chain. In turn, EMIs and PIs have integrated the services (such as mobile wallets) provided by some of the tech corporations into their own product offerings and are using them as a platform to build new products.
Nonetheless, the EMIs and PIs surveyed saw BigTech as a threat to their business models and expect major tech players to participate more actively in the payments and e-money sector. Given their significant investment capacity, customer data, technological knowledge and expertise, some feared that competitive advantages developed by tech corporations could lead to a concentration risk (although the EBA was more ambivalent).
Impact of FinTech and the challenges ahead
The EBA found that FinTech provides opportunities to all firms – opportunities for new players to enter the market and opportunities for existing institutions to extend their range of products and services. The majority of institutions surveyed expected an increase in their profitability over the next 6-12 months: the view being that an adoption of technology would enable them to expand their customer bases and launch new products, whilst investment in digitisation was thought to be overall cost-reducing or neutral.
On the other hand, there are significant challenges ahead. Firms surveyed identified the main threats to their business models as being increased competition from BigTech, the disruption from Brexit and key dependencies on banks and card schemes. Firms also face a number of challenges including operational and ICT security risk arising from increased digitisation, issues relating to the operational and infrastructure capacity to deliver new products, and growing regulatory burden that could stifle innovation.
Osborne Clarke comment
The EBA's report shows that the EU's payments landscape is undergoing significant transformation as firms embrace FinTech to remain competitive and respond to customer demands. The report indicates that tech-based firms with in-house expertise may be best placed to manage these technological changes to their business models.
Long term, FinTech's impact will likely depend on how open banking initiatives develop, the level of adoption of innovative technologies by firms and customers, and the role that BigTech will play in the sector. However, FinTech also presents new risks to the sustainability of firms' business models, and the EBA warns EMIs and PIs to identify, assess and manage key threats and challenges carefully.