Recently, the European Union, through a proposal, made its intention clear about injecting more competition into the fintech sector.
The package of European Commission reforms is looking to update the decade-old rules, which will open the payments market long dominated by banks and especially, American behemoths Visa and Mastercard.
Knowing The Proposal In Detail
The reforms, once approved by the EU member states and the European Parliament, will make it harder for banks to stop fintech from opening an account with them, and give fintech access to payments infrastructure in the same way as the legacy financial institutions.
The electronic payments market in Europe has grown from 184.2 trillion euros (USD 201.7 trillion) in 2017 to 240 trillion euros in 2021.
“The legal basis for banks and other payment firms to share information without falling foul of EU data protection rules is also being made clearer to reinforce the sector’s collective capacity to tackle scams,” an EU official said, while interacting with Reuters.
In 2021, reports emerged about the European Payments Initiative (EPI), which was looking to create a payments firm that can take on American payments companies like PayPal, Mastercard, Visa, Google and Apple.
Some 30-plus banks and credit card processors in Europe were reportedly teaming up to topple the US domination in Europe’s payment market.
EPI, which comprises 40 payment experts, from regional stakeholders like Deutsche Bank, BNP Paribas, ING, UniCredit and Santander, started its policy roadmap on developing a systematic plan for a pan-European payments service. The project got backing from the European Commission and other regional financial regulators, apart from receiving funding of over €30 million.
Fast forward to June 2023, came another policy push from the European Commission.
Understanding The American Domination
From 2018 to 2021, card payments accounted for 73% of transactions in the United Kingdom. Visa and Mastercard dominate this segment, not only in Europe but the overall global market, 75% to be precise, thus running a duopoly.
“As often happens with an effective duopoly, these two dominant forces’ market position has become so entrenched that they are able to set the terms of their relationships with merchants. This includes the fees they charge for processing transactions. Those terms play a large role in small businesses’ lack of competitively and higher prices being passed on to consumers. Merchants hand over $138 billion in transaction fees each year, the second-biggest cost after wages,” said a ‘Disruption Banking’ article.
Both companies have massive digital infrastructure, international reach, security, and the ability to process fast transactions (1700 in a second). Also, these companies continuously upgrade cards’ security features, resulting in consistently high customer satisfaction and acceptance rates.
However, the trust comes at a much higher cost. Visa and Mastercard have earned infamy due to their strict chargeback rules, legal controversies, unfair business practices and the acquisition of competitors.
Europe’s Fintech Ecosystem: Brimming With Possibilities
Pitchbook’s latest report on European VC valuations showed that median early-stage fintech pre-money valuations in Europe grew to €22.1 million in the first quarter of 2023. Around the same period in 2022, the value was at €13.8 million.
Europe is known for having a favourable regulatory environment for fintech firms. Measures like the revised Payment Services Directive (PSD2) and the European Banking Authority’s (EBA) guidelines on digital operational resilience have helped to level the playing field for fintech companies across all sizes.
The PSD2 has even allowed fintech ventures to access customer data held by banks, thus enabling the development of innovative financial services.
Also, Europe has been known for having world-class business and engineering courses, along with start-up hubs like Berlin, London, and Paris.
The continent also has accelerator programs and venture capital firms. Events like Money20/20 and Finovate also allow these start-ups to connect with potential investors and customers.
Add Europe’s large and mature financial services market, a diverse customer base, along with well-developed infrastructures and established tech players, these start-ups have the perfect formula to disrupt the market.
As per a report from the Boston Consulting Group (BCG) and QED Investors, the fintech sector will witness a six-fold revenue increase by 2030, from USD 245 billion to USD 1.5 trillion.
The United Kingdom and European Union together will constitute the world’s third-largest financial intermediary market by 2030, aided by a significant fintech expansion. The growth will be over five times that of the 2021 ratio.
A Minor Blip Is There
As per ‘CB Insights’, while the European fintech sector saw its funding rose by a staggering 168% to reach the USD 131.5 billion mark in 2021 from USD 49 billion in 2020, things changed in 2022, as rising interest rates, a cost-of-living crisis and the Ukraine war dominated the continent’s economic landscape, leading to the trillions in valuation being erased from public markets.
However, according to McKinsey, in each of the seven largest European economies, at least one fintech firm has occupied a rank in the list of top five domestic banking institutions.
So it shows that despite facing economic headwinds, Europe’s fintech sector has been resilient.
The Final Verdict
Europe’s financial sector is going through a transformation and the fintech sector has been at the forefront of the campaign. The continent has everything to make the ecosystem a grand success story. All these companies need is a steady flow of funding, along with regulatory help, to ensure that they produce substantial valuations on a yearly basis and keep Europe’s growth engine running by creating more jobs.
A healthy competition, not a duopoly of two American payment giants, is what the European fintech market needs right now. So the European Union’s latest proposal looks like the right step towards realising this goal.