by Alessandro Ferrari and Ludovica Mosci
Thanks to the implementation of the PSD2, we can say that 2018 has been the year of fintech in Europe, with new players finally hitting the market or old players proposing new services.
What to expect for 2019 then? Below our podium predictions on fintech for 2019.
1. In search of further regulation
As we know, the possibilities allowed by fintech are unlimited, with a variety of services, from investments, equity crowd funding, e-payments, trading and smart contracts. Whilst the rise of these new services has been characterised by non-regulation, which helped innovation and disruption in the finance world, it is now evident that all the above services will sooner or later fall within the path of new regulations.
E-Payments services have been already been brought within the scope of the PSD2, which has boosted transparency, innovation and security in the EU single market. Also the GDPR and the Anti-Money Laundering Directive – applicable to virtual currencies and wallet providers – added some pieces to the puzzle. However, most of the fintech services are still not within the lens of regulation. This is the case, for example, of crypto-currencies and ICOs, which – save for certain rules or guidelines still at an embryonic phase (e.g. the FINMA practical guide of February 16, 2018) – are not regulated notwithstanding their speculative nature like other financial instruments.
However, the need for regulation is evident: on the one hand fintech services can be subject to fraud, cyber-attacks, money laundering, while on the other hand customers demand transparency. Fintech potential may be hindered by lack of regulation. That’s why bitcoins and ICOs have difficulty to emerge in Italy. Last summer, for example, the Court of Brescia did not recognize a company capital increase with bitcoins, considering their volatile nature and the lack of a regulated market for them.
In light of the above, in 2019 we expect more rules and market best practices to come, in addition to the existing ones. What is difficult to be predicted again is how legislators and stakeholders will effectively tackle the challenge brought by the quick development of technology and its cross border expansion. The Fintech Action Plan 2018 of the EU Commission gives an overview of what to expect from regulators from the following year.
Regulators must go fast, internationalize and also be very careful maintaining a proportionate approach to encouraging innovation, avoiding overregulation. In this regard the so called “sandboxes” – encouraged by the EU Commission and the EBA – might help: sandboxes are in fact structured and controlled environments, where innovations can be tested by fintechs in cooperation with regulators.
In all the above scenario new regulations will come or will be proposed, regulators and stakeholders will build new cross-border networks, but technology will surely come first. Smart contracts, for example, will be the next big step in shape-shifting the financial industry, making it more efficient and transparent, with the development of automated and straightforward payment contracts.
2. New services, but old “good fellas”
Considering the above prediction in terms of new regulation and technology developments, big players will have the opportunity to invest money in order to ensure security and transparency.
The PSD2 already requires high responsibilities for payment services providers in terms of data security: the “open bank” system that forces banks to allow other payment service providers to access bank account information of their customers in order to provide them with payment services, is accompanied by significant burdens for such providers in terms of expenses for securing all systems.
In particular, on September 14, 2019 new standards based on the Regulation (EU) 2018/389 of November 27, 2017 will become applicable, with rules on how banks are expected to give access to the payment accounts to third parties and other technical rules on strong customer authentication (SCA) or two factor authentication.
Banks will then need to make sure that payment service providers accessing data will be the most diligent ones in adopting the highest market standard security measures, thus imposing strict obligations, liabilities and indemnities in contracting with them. Cloud and outsourcing contracts, as well as cyber security insurances will be of the utmost importance in the finance world. In this scenario, banks will be keen in contracting with tech and cloud giants, that can easily meet those standards and may also represent an interesting opportunity for profitable partnerships.
Considering all the above, 2019 will confirm that the big tech giants and the financial giants will continue to lead the market, being able to analyse the regulatory risk facing any given fintech. If start-ups favoured the rise of fintech, the need for regulation will ultimately favour the big old players. But maybe the rise of sandboxes, as encouraged by EU authorities, might give start-ups some peace.
In any case, accurate forecasting of the fintech regulatory scenario will be crucial in 2019 for both big and small companies.
3. Fintech closer to insurtech
With the above mentioned 14 September deadline, 2019 will also be the year boosting the potentials of the open banking and API related technology, encouraged by the PSD2. As anticipated, banks shall now provide all payment services provider, including AISP (account information service providers), with access to banks’ account information of their clients, to allow such providers to perform their activities (e.g. initiate payments, concluding payments, provide aggregated information on users’ financial situations).
AISPs can get the most out of the PSDs: young generations are in fact eager to find user-friendly services providing an overall view of their financial situation, their spending patterns and financial needs. Not only start-ups, but also banks, on top of the tools, will surely provide assistance and easy ways through which customers can improve their financial situation. These services will raise awareness on users and make them “saving money”. But as much “money saved” for a user, as much “lost data”…
It is crystal clear that big data analytics will be the core business of the majority of fintech. Artificial intelligence will be used to analyse customers’ payment transactions for potential cost savings, thus allowing fintech to provide suggestions on investments – as it is already the case for some fintechs – but also suggestion on other products, in particular insurance products. Open banking will not only increase competition but will also enhance interoperability and the exchange of data between the market players. Expect to see your bank telling you: “You’re paying X each month to Insurance company Z. You could save money by switching to Insurance A. Click here to change to A!”
The insurance sector is eager to acquire big data and the open banking system is favouring such big data analytics. That is why we believe 2019 is set to be a year defined by interaction between fintech and the insurance sectors, with fintech firms looking to collaborate with insurance firms to provide innovative products.