The Great European FinTech Opportunity
In my years of working in banking in London, I was always amazed at the amount of time and effort that was spent, even by people who were experts in their field, at understanding regulations that were already in place across Europe.
Let alone understanding new regulations that were coming…
This complexity comes from the fact that you have high-level directives that are decided at the European level and then you have 28 member countries who are adding their own unique spin as they translate these directives into local law.
This is a massive headache for big banks who has a presence across most of these countries, as you have to constantly be assessing what any change will mean for your business there — and often, the big banks only have enough resources available to ensure they are doing the bare minimum to comply with regulations in these countries.
They are stretched too thin to realize what impact these changes will actually have on the competitive marketplace and the new profitable niches that will emerge.
This is where FinTechs have a huge opportunity to step in and fill these niches. And a recent directive that went into effect earlier this year is opening up the floodgates to even more opportunities.
What’s changed
In January 2018, a new EU directive went into effect called Payment Services Directive 2 (or PSD2 for short).
Essentially, this directive has put into European law that all banks will have to:
- Share their data with 3rd parties
- Allow 3rd parties to initiate transactions through the bank
In short, if a customer gives a FinTech company permission to access their banking data, then that FinTech can pull balance data and transaction history from the bank’s API and serve this back to the customer in any format they like.
A customer can give even further permission to a FinTech to instruct payments out of their bank account on their behalf.
Now, there are no shortage of reports out there on PSD2 from all of the big banks and consulting firms, and if you really want to be bored for a few hours, just do a quick google search for “PSD2 challenges and opportunities.”
If you did take the time to sift through the thousands of pages of reports from these consulting firms, you would see that most of the talk is about what big banks have to do to comply with this new regulation — and maybe a little bit about how big banks should change their strategy.
But the real story here is that you can exploit these changes to build something new and exciting.
And that was the whole idea of this regulation from the EU’s perspective, to increase competition and variety in banking, giving EU citizen’s more choice by opening up competition to smaller players and new FinTechs.
And the complex nature of the EU has multiplied the opportunities for FinTechs and the challenges for big banks even further.
Every country in the EU has to take the broad scope of PSD2 and write specific legislation for their country. This means that every country in the EU will have slightly different requirements that banks must ensure they comply with.
This makes it much more likely that banks will struggle just to do the bare minimum and will miss out on the opportunities to really take advantage of all of this new shared data.
Especially in smaller niches or countries where the banks don’t see a big enough market opportunity to justify deploying their limited resources. These niches will be wide open for start-ups to exploit.
Where are the opportunities?
Essentially, the opportunities that exist from PSD2 are functions of the new data that is available.
With access to balance information and transaction history, FinTechs can become the new and improved front-end for banks. It is no secret that banks struggle to develop the most intuitive mobile apps and lag behind the experience that people are used to getting from other online services.
But now that you have access to a bank’s API’s, if you don’t like your bank’s app, you can build a new one yourself with the bank’s data. And then you can sell it everyone else who doesn’t like your bank’s app.
And it doesn’t have to be limited to one bank, you can link all of your bank, credit card companies, and loan providers all together in one place.
This is already happening in some countries like the UK for example, where you are starting to see dashboards for aggregating multiple accounts. (even HSBC has done this by partnering with a FinTech called Bud)
But this is the most basic application of the new data that is available and the real opportunities will be going above and beyond basic aggregation.
For starters, these could look something like:
- Developing a dashboard for an individual country / niche segment that meets people’s needs better than a regional or global player can understand
- Taking the available data and extracting insights on spending / saving using machine learning / AI
- Integrating banking data into other services and marketplaces
And that’s just a few ideas of what could be done with even the most basic account data. Remember, FinTech’s will also be able to initiate transactions on the behalf of customer’s that give them permission.
This opens up a whole range of additional opportunities around payments and collections. One of the most common themes here is that credit cards could be replaced with bank API calls.
This would looks something like the following:
- You want to buy something online
- You go to the checkout, and rather than inputting your credit card details like you usually would, you click on a button that says pay with bank account
- If you have not already given permission to this retailer (or FinTech company who is handling the payment) to access your bank account via the bank’s API, you will have to sign up 1-time
- Then the merchant will send an API call to your bank account, instructing the funds to be paid into the merchant’s account
- Once the request is accepted by the bank (and even better if the country has an instant payments scheme, like Faster Payments in the UK, the funds can be transferred instantly) and the merchant can ship the goods to you
Banks love this idea because they can essentially replace credit card companies with bank transfers. Merchants love this idea because they can eliminate expensive credit card processing fees averaging 2–3% or even higher. (depending on the payment processor)
But how do you get customers to love this idea? With a credit card, you get 30 days free credit along with cash back / loyalty points. Why would you want to ever give that deal up?
That is where the opportunity is here — who can figure out the right way to give people the incentive to start paying with their bank account rather than a credit card.
Maybe it looks something like Klarna, where paying over time is a big selling point, or maybe it looks more like traditional credit card loyalty schemes. Or maybe it’s something that hasn’t been tried at all before…
Whatever it may be, one thing I’m sure of is that it will be different depending on the country and the target customer! Again, this is a great opportunity for FinTech’s to find the right niche and offer a specialized product that banks won’t be flexible enough to do.
Where to start
So how do you go about finding these niches and taking advantage of all of these new opportunities?
Here’s a few pointers to get you started:
- Pick one country that you would like to target to begin with — this should ideally be a place you live or have a lot of familiarity with, so you can take full advantage of your local knowledge!
- Read the local laws that your country has passed into law based on the EU Directive — index can be found on the EU website here.
- Find out which banks in your country have published API’s
- Start building something small to start understanding the different data available. (try a basic account dashboard to begin with and go from there)
- Look at the UK for inspiration. They have a great Open Banking ecosystem emerging with all of the major banks providing API’s already. If your country’s banks don’t have extensive API’s rolled out yet, the UK is a great sandbox to start building and experimenting with.
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