The rise of Fintech across the UK and Europe has been impressive over the last few years. Start-ups and Fintech companies have massively disrupted the financial sector and made inroads in what used to be a tightly controlled market. Over in the US, growth has been slower, despite an enormous untapped market of consumers ready for change. This blog examines why this disparity exists, and the factors behind it.
If you’re unfamiliar with the term ‘Fintech’, think of it as an umbrella term for all kinds of tech solutions across financial services. It includes mobile payments and online banking, which are now part of daily life for many consumers across Europe. More specialised areas include crowdfunding, alternative finance, AI advisors, automated loans and peer-to-peer lending.
It’s an area I’m interested in as an entrepreneur and as an investor. In fact, the rapid development of Fintech over the last few years has been made possible by an enormous amount of investment, both from global banks and venture capitalists.
Fintech expansion across Europe due to investment
Fintech investment reached a record high in 2018 of $122 billion. According to data from KPMG, this more than doubled the spend in 2017, which reached $51 billion globally.
In Europe, funding raised by the Fintech sector also peaked in 2018 at $37.5 billion. This again more than doubles the amount in 2017, which stands at $12.2 billion. The UK reached $24.1 billion in 2018, up from just $5.6 billion the year before.
Banks and traditional financial institutions are facing considerable and enduring competition from Fintech companies, ranging from non-traditional lenders to personal finance apps. This had led to large businesses increasing their investment in Fintech companies by $13 billion to $23.1 billion.
Much of the meteoric development of these Fintech solutions has taken place in Europe. With the US offering such a massive untapped potential in terms of consumers ready to be swayed by new tech, it’s interesting to look at why there is a difference in dynamism in the US market.
Europe versus the US for Fintech growth
Europe has been ahead in terms of bridging the chasm between traditional banking practises and the rapidly changing technology available to consumers. Estimates say that these disruptive start-ups have amassed around 33% of the revenue in Europe. The same research shows that Fintechs in the United States have only taken 3% of the new revenue coming into the market over the last 12 years. This is a stark difference and suggests that Fintech in the US is in its earlier stages than in Europe.
Not only do US Fintech companies struggle to get hold of the market in the same way as those in Europe, the latter are proving slow to expand into the US. This is despite the fact that there is an undeniably huge opportunity for Fintech in the States, as millions of people are still using older technology.
It’s likely that this disparity is, at least in part, due to regulatory differences between the US and Europe. Financial services regulations in the US are extremely complex, which makes it difficult for a European start-up to make the move.
Regulatory changes in Europe expand the market
In addition, European Fintech companies have been able to benefit from two European Union (EU) regulatory changes. The first covers data privacy with the introduction of ‘GDPR’ (General Data Protection Regulation). In basic terms, this gives consumers in the EU better control of their data by implementing an opt-in system. Alongside this, the EU also released the Payment Services Directive (PSD2), which allows both businesses and consumers to use third party providers to deal with their finances.
PSD2 obliges banks to provide third party providers with access to the data in consumer’s accounts, which allows the new Fintechs to build tailor-made financial solutions. This has opened up the market and stopped the monopoly over financial services previously given to traditional banks.
Both of these regulatory changes have created an enormous opportunity for disruptive Fintech companies. Banks must now accept they are in competition with smaller, innovative, technologically expert companies, and look at new ways of servicing the new generation of tech-savvy consumers.
Open Banking in the UK drives Fintech growth
In the UK, Open Banking offers similar opportunities to Fintech firms, as it also provides third parties with access to consumer data held by banks. The success of Fintech companies since the industry has opened (63% of new Fintech companies have taken 14% of all payment and bank revenues in the UK), shows that they understand what consumers want.
It seems that the US must change its regulatory framework to catch up with Fintech development in Europe. There is no open banking model in the US yet, and no way for third party providers to utilise data held in the big institutions. This means it’s essentially up to the banks themselves as to whether they partner with any Fintech firms.
Despite this, there are many signs that Fintech is still doing well in the US, with multiple financial institutions utilising blockchain technology and artificial intelligence. As more US banks begin to see Fintech firms as an opportunity rather than a threat, we can expect to see the floodgates open there too.