Fintech Europe 2019: key takeaways

Author: Lizzie Meager, Jimmie Franklin | Published: 24 May 2019
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Assessing the impact of recent regulation in Europe

During the second Payment Services Directive (PSD2) negotiation period, there was a 'them and us’ mentality between banks and fintechs;

Open banking should be viewed as an evolving revolution, boosting competition and innovation;

Across Europe, it is clear that the next step is open finance;

A collaborative approach between all players in the ecosystem is needed, with a focus on the customer;

Brexit has resulted in a lack of resources for new markets and customers for fintechs;

Corporates and banks are at "an internal point of no return" with Brexit relocation plans, and are now simply waiting to leave the UK regardless of whether the UK’s exit goes ahead.

Creating a win-win partnership: factors for success

Partnering with fintechs is a win-win situation for banks and are increasingly becoming a major strategy;

Regulatory scrutiny and high expectations of compliance affects decision-making in financial institutions, which can be frustrating for fintechs;

Both sides need to be bold enough to walk away from opportunities as opposed to wasting time and resources on unsuccessful collaborations;

There needs to be an end to "flirting for fun": both sides need to be clearer on their objectives by setting up the value of success and establishing timelines so that the process does not drag on;

It is clear both sides have to follow what the customer needs and wants;

Due to regulatory issues, banks have to take less risks and choose more wisely where they invest – so the risk element must be prioritised over innovation.

Managing IP protection on a shoestring

IP management is an increasingly important area of focus for fintechs – but many are not taking it seriously enough;

There will inevitably be IP issues at some point, especially if companies don’t deal with them straightaway;

IP problems can become more contentious if not dealt with efficiently;

In one panellist’s view, it is simply "too much to hope that fintechs can ever compete with large companies";

Customers and staff are both playing a role in proactively alerting companies to brand issues;

Adverse commentary from the media has a knock-on effect for all challenger banks and puts them off the name. It is easy to get things wrong, and everyone is still learning;

Many fintechs are now acknolwedging that investment in IP is needed, but the tension is that the technology itself is "moving at a million miles an hour", and IP isn’t top of the priority list.

Making use of blockchain in financial services

Blockchain technology still has a way to go in terms of resilience;

No blockchain can yet process payments as effectively or securely as traditional systems;

Customer experience can be improved by blockchain processes, but not every project needs it;

It is still too early to consider artificial intelligence (AI) and blockchain working effectively together;

The challenge for blockchain is that user experience is poor, and the technology is hard to work with;

Trade finance is one area where blockchain has become quite dominant, as there are large numbers of intermediaries which can hit efficiency – blockchain has the potential to reduce transaction times significantly.

Breakout: Investing in and acquiring fintechs

For a fintech to scale effectively they have to find a way to work with the incumbents;

As a fintech matures there’s an opportunity to bring a product to market without running out of human resource;

It’s clear legacy technology won’t work, but legacy culture can be another difficult issue.

Breakout: Exit strategies for investors

Formulate your exit strategy as early as possible and think about the different options carefully: M&A, IPO, start-up acquisition or even via trust, as UK company Richer Sounds has recently done;

Pre-planning is essential. Assess the different types of buyers: trade buyers can be grouped into different categories, plus private equity, which is a very different type of exit;

Balancing disclosure with commercially sensitive issues can be a challenge.

Breakout: Setting up for success

A track record in building successful companies means a lot – investors always want to see that;

Building a digital business straight out of university or college is becoming a well-trodden path for the younger generation;

Venture debt historically hasn’t performed well, so think carefully before incurring it;

The right time to begin incurring debt will be different for every company, but the short answer is that it should not happen until the start-up more closely resembles a real business.

Regtech: the future of compliance?

Regtech exists to save money and time, so it makes sense to invest in multiple companies;

Much of the focus has been on know-your-customer checks, but managing risk is also a huge area for regtech to assist in;

There’s a tension between having a micro issue that needs solving and a macro risk-averse attitude towards collaborating with new players;

Reliance on standards and security is an important factor to consider before collaborating;

Should AI be held to a higher standard than humans? This view comes down to a lack of understanding of AI, which threatens the future of the technology;

It’s difficult to codify outcomes and principles in a risk-based product in a way that satisfies regulators, which is a common problem for regtech;

Regulatory sandboxes are an incredibly positive, open approach that the market wants to see more of from regulatory authorities.

Unlocking the potential of AI for your business

Almost every job in the world could be impacted by artificial intelligence in some way;

The UK Information Commissioners Office (ICO) also has a regulatory sandbox for algorithms and AI and is taking applicants, but it is not as well-known as the FCA’s fintech sandbox;

Transparency is incredibly important to understand why AI makes the decisions it does, which can be difficult with some deep learning models;

Transparency also reduces the risk of the technology having biases that cause it to discriminate – there are various ethics issues at play here;

Regulators need to think through all the potential implications of AI before knee-jerk regulating, but this is easier said than done;

The UK government wants to become a leader in AI globally with various legislation including the Digital Economy Bill – tech providers should make the most of this.