Europe’s Place in Global Technology Innovation
Over the past decade, the European Union (EU) has emerged as a leader in the financial services and financial technology sectors. Innovative companies have fundamentally transformed how consumers engage with finance, empowering them to take more control over their financial lives. For example, mobile banking applications have revolutionised personal finance management, making it accessible to a broader audience, while artificial intelligence-driven lending platforms have improved credit accessibility for entrepreneurs. The fintech sector holds substantial potential to drive economic growth in Europe and across the globe by increasing financial inclusion.
The EU’s regulatory approach, prioritising robust regulation (e.g. through targeted conduct and financial stability-focused interventions) while balancing this with innovation and competition-friendly approaches, has played a key role in facilitating this. As a result, the fintech landscape has undergone a remarkable transformation, evolving from a niche sector into a major force within the global financial industry. Initially composed of smaller start ups, the industry now includes multi-billion-euro enterprises.
According to a McKinsey report “as of July 2023, publicly traded fintech companies had a market capitalization of $550 billion, marking a twofold increase since 2019. Additionally, there were over 272 fintech unicorns with a combined valuation of $936 billion, a significant rise from 39 firms valued at $1 billion or more just five years ago.” McKinsey further reported that in 2022, fintech companies contributed approximately 5 percent, or between $150 and $205 billion to the global banking sector’s net revenue. This share could surpass $400 billion by 2028, reflecting an annual fintech revenue growth rate of 15 percent from 2022 to 2028.
The EU’s regulatory framework, including the revised Payment Services Directive (PSD2), have enabled fintechs to take viable, innovative and groundbreaking startup ideas and turn them into some of the world’s most successful companies. The EU legislature’s willingness to move quickly towards comprehensive regulatory regimes for emerging technologies and markets (currently exemplified by the AI Act and the Markets in Cryptoasset Regulation) has given these businesses the regulatory certainty needed to thrive. A key part of these regimes for emerging technologies has been in regulatory measures that have helped strengthen and expand the EU’s leadership position, when compared to other international financial markets. A key element of this has been the ability for businesses to ‘passport’ their services across all EU Member States, creating a significantly larger market, underpinned by the same, or highly similar, regulatory requirements.
Each EU Member State has unique local factors, which can include regulatory sovereignty in reserved matters and varying infrastructure, talent pools and socio-economic as well as cultural factors. That said, the balanced use of directly effective EU Regulations and Directives (often requiring implementation through national laws, with varying degrees of flexibility) has allowed legislators to strike a balance between Member State divergence and EU standardisation, where appropriate.
Fostering a successful EU fintech market, without creating false winners
To harness the potential of the fintech sector, the EU must create a policy and innovation environment that supports the establishment, expansion, and long-term success of fintech companies, ensuring they remain competitive with international markets including Asia and the United States. The EU has already initiated several measures aimed at promoting the growth and competitiveness of the fintech industry. Numerous laws have been introduced to enhance transparency, bolster consumer protection, foster innovation, and level the playing field for both established and new participants in the payment services sector.
Open strategic autonomy (OSA) is a concept aimed at enhancing Europe’s self-sufficiency and independence in critical areas while remaining open to global trade and cooperation. This approach seeks to make Europe more united, assertive, and resilient, prioritising the interests and values of its citizens. The ultimate objective is for the EU to act independently in strategically important areas without reliance on other countries. The concept’s broad scope is designed to accommodate the diverse priorities and concerns of EU Member States. At its core, this policy is designed to balance the dominance of non-EU companies, especially certain US businesses, and create EU champions to take their place.
While a more assertive, resilient and competitive EU financial services market is to be welcomed, the temptation to create protectionist policies has the potential to create false winners and harm competitive strength. That is to say, the concept of OSA must not be used to unduly disadvantage non-EU companies by comparison with EU competitors.
A European Central Bank article notes that “there is widespread consensus among economists on both the overall net benefits of trade openness and the need to cushion the negative impact it has had on certain groups in society. However, raising trade barriers is not the solution to the latter. Reversing trade integration may put at risk the net economic gains that it generated. By unravelling the long-term benefits of closer trade and investment links, retreating into protectionism also has the potential to unsettle global financial markets.” That is to say, through protectionist policies un-competitive, or less competitive, businesses may be artificially made more competitive. Simultaneously, a growing body of research shows that competition and healthy rivalry is proven to drive better performance – at personal, professional as well as organisational levels. In simple terms, free market rivalry drives more competition, which creates better outcomes for EU consumers and markets.
Therefore, an excessively protectionist OSA agenda could harm the international competitiveness of EU companies. Whereas European champions may be more prone to rise within such a market environment, we must ensure that they are able to measure up on the international stage and successfully empower the Union’s global competitiveness objectives.
While OSA is merited in certain critical industries (e.g., energy, defense, manufacturing) where the criticality of an industry merits more extensive State intervention, in financial services, consumers and markets benefit from open, competitive, and secure markets. EU Regulation must as such, focus on maintaining a level playing field for incumbents and innovators alike; whether they be EU companies or foreign companies. By creating a truly equal playing field that ensures appropriate protection for consumers and markets, the EU has a unique opportunity to turn EU champions into global champions. The EU fintech community, represented by the EFA, stands ready to help legislators create a fair, open and transparent legislative framework for financial services competition for the benefit of consumers.