While the last three decades of financial innovation have already led to massive changes in financial services, we believe that a new wave of innovation will continue to transform the industry. Innovation, through what has been called FinTech, is already disrupting the ways financial services are being offered, promising to provide access to underserved markets in new ways1.
The Euro banking system is the largest financial market in the world, with consolidated assets three times of US and near four times that of Japan. Despite the many national differences across European countries, in terms of size of territory, population, GDP, legal system, as well as the significant differences in development between Western and Eastern Europe. The European banking sector today employs 3.2 million people, represents 6,5% of the EU28 GDP and 17% of the total corporate income tax. Two main factors that are fostering significant change in the European financial services market are digitalisation and regulation.
Digitalisation and dis-intermediation are speeding up
Digitalisation of financial services is a well-established phenomenon in Europe, with many younger people never experiencing face to face banking. Online digital platforms have brought about a disintermediation of many of the services that banks used to offer exclusively, including mortgage lending, saving, bill paying and insurance. The dual trends of digitalisation and disintermediation will continue into 2016 and beyond, as mobile payment systems become even more dominated by open cloud and host card emulation.
Payment services is a highly transactional business and in the past, the volumes involved have been quite predictable for the banks. Banks are coming under pressure by a range of new players, who have successfully disintermediated the conventional banking system, and undermining some areas of their profitability. While banks have had the upper hand in terms of stability, government regulatory protection and established credit rating systems, all of these areas are coming under increasing pressure. The established credit cards are stagnating to the benefit of debit card and prepaid card profitability.
A single EU financial market is needed
While digitalisation will continue to put pressure on the banks at the national level, new regulation is forging a path for a single financial market in Europe. Few industries are as heavily regulated as the financial services industry, so for FinTech to realize its full potential, coherent action by several players is required. Governments need to set the right incentives and provide direct support to help their national FinTech industries to blossom. Regulating bodies need to keep abreast of developments in the sector and create a positive and cooperative environment that promotes innovative solutions.
Some of the pre-requisites for an innovative environment for a thriving FinTech sector in the EU include:
- Establishing a single market for financial services
- Harmonisation of bank regulation and supervision across EU borders
- Putting the DSA (Digital Single Market) amongst top 10 priorities for the EU
- SEPA (Single Euro Payment Area)5 allows more than 500 million citizens, over 20 million businesses and European public authorities to make and receive payments in Euro under the same basic conditions, rights and obligations, regardless of their location.
- Removing the obligation for many retailers to accept cash for small purchases, as proposed in Denmark, where nearly half of the population uses MobilePay, a Smart phone payments app.
- Global anti-money-laundering (AML) initiatives such as Know- Your-Customer (KYC) and Counter Terrorism Financing rules.
Response by Financial Institutions and Payment Providers
Today’s retail and wholesale banks face unprecedented operational pressures that test the efficiency, effectiveness, and agility of their business processes. Since the global financial crisis, increased regulation combined with the zero cost of money has decreased interest rate spread and lowered margins, elevating the importance of fee-based and account-based income and forcing financial services players to look for new revenue streams.
The typical banking business process often struggles to adapt to shifting marketplace demands and regulatory requirements. Lending institutions of all types are looking to build a better banking business process, intelligent enough to successfully balance business objectives with customers’ needs, and agile enough to keep pace with a dynamic operational environment. In today’s market often banks concentrate on cost reduction, as opposed to value enhancement, thus leading to further erosion of their business.
Payment providers are now facing an increasing threat from new and simpler mobile payment systems. Banks’ interchange fees have a complex pricing structure based on the card brand, regions or jurisdictions, the type of credit or debit card, the type and size of the accepting merchant, and the type of transaction (e.g. online, in-store, phone order, whether the card is present for the transaction etc.). Further complicating the rate schedules. Interchange fees are typically a flat fee plus a percentage of the total purchase price (including taxes). Major branded card payment networks such as Visa and MasterCard are entering into the mobile payment community to address the competition to plastic cards from virtual cards. For example, Visa has co-invested with Samsung Pay to acquire LoopPay (which developed MST6 technology). But despite this increasing competition, main Payment Providers remain the biggest card holder community in the world.
Small banks are dying out, as a result of squeezed profit margins, declining fee income, the need to invest in ever improving technology, requirements for branch upgrades, and the need to comply with new regulations.
At the same time, consumer behaviour is rapidly changing. Whereas ten years ago consumers would enter a bank to deposit their funds, they now only need to venture into their bank to resolve an issue that they can’t do themselves online. Thirty percent of Europeans now use on-line banking. Trusted non-traditional entities, including OTT players and mobile operators, are now seen as viable providers of banking services. A recent study showed that 50% of consumers would consider banking with Square, 41% with PayPal and 31% with T-Mobile.
Online providers offer the consumer speed and ease of access, that the traditional providers cannot yet match. New lending companies, such as Kabbage, offer small business loans of up to $100,000 in minutes. Other offers are available through crowdfunding and crowd-lending providers, such as Crowdcube. Bitcoin and the blockchain protocol offer an entirely new type of decentralized, virtual financial system that has been called a renaissance for money.
Opportunities for Mobile Operators
The EU has over 400 Mobile Operators, 106 of these own network infrastructure (generally about 3 to 4 per country). There are also 309 Mobile Virtual Network Operators (MVNOs). Germany has more MVNOs than the USA! European Mobile Operators have approximately 667 Million subscribers at the beginning of 2016 (with market penetration of over 100% in most European markets) for a total population of 400 million European citizens.
Mobile operators around the world are working with retailers, loyalty providers, equipment vendors and various ecosystems to rollout mobile services designed to support retailers’ digital commerce activities. In many cases, mobile operators are providing a mobile wallet – a specialist application that can store digital versions of payment cards, loyalty cards, vouchers, tickets and other items normally found in a physical wallet. All Mobile Operators already have arrangements with several financial institutions: banks, credit cards and payment services for their revenue collection from their customers that is fully on-line and automated (with lower CAR rates than Banks).
Consumers are also keen to engage with retailers through their mobile phones. According to research firm Latitude, 60% of the UK and American smartphone owners are spurred on to shop or make a purchase at least once a week because they’ve received a mobile alert (such as an email, text message, or app notification) from a brand or retailer. Latitude found that these alerts work best when they are location-based and related to a product or service the consumer has professed an interest in.
FinTech opportunities for EU mobile operators
Mobile operators are recognizing the opportunities of FinTech, as commercial banking is a proximity business for them. Just as some banks are offering mobile telephone services, operators are proposing banking services to their customers. Here the telco or mobile operator may have an advantage, as they own the existing online relationship with their customers and can easily build on this relationship to offer financial services as well.
Incumbent operators could enter the banking business by making good use of their operational infrastructure and extensive branch networks, while also increasing their revenue sources. These cross-industry plays are not new in Europe. For example, in the 1990s electricity & water utilities and banks entered into telecommunications. It could also make sense, as mobile operators are concentrating their efforts on increasing ARPU not just per user but per household, by sharing their network infrastructure and adding layers to their services through IoT, Big Data, etc).
Since the GFC, banking as an industry is not well respected by consumers in Europe, as compared to Mobile operators. French Telecoms Group Orange is reportedly in talks for the acquisition of 65% of French financial group Groupama to open Orange Bank, a mobile only banking and insurance services provider to cover France, Belgium and Spain in 2017.
On the other hand, operators should carefully consider all of the obstacles and regulations which make financial services a difficult industry to enter in Europe.
In Europe, services must be offered in a number of languages, cultural differences and comply with various local regulatory requirements. Negotiations will be complex and long. It takes a strong plan of action, the right team with the right cultural sensitivity, together with detailed banking and telecommunications industry knowledge. There is also a reputational risk that needs to be considered when partnering locally, and what can happen if things go wrong (see YoUnique and PayPal scandal in Spain). These risks need to be factored into the cost of acquisition for each customer. The European banking industry is large, growing and it is profitable; on-line payments are set to explode. However, in many cases, for a mobile operator, a joint venture or an acquisition may be the best approach to the Fintech market.
2015 – Accenture Interactive – Point of view series – Banking on Digital – “A first enabling mindset – Digital Operating model”
2013 – Gartner Forecast: Mobile Payment
2014 – Gartner Hype Cycle for Digital Banking
2015 – PWC – “The New digital tipping point”
2014 October – ABA Banking journal – “7 trends impacting digital payments” by Mark Flamme and Kevin Grieve
1 See World Economic Forum report on FinTech and its impact on small business
2 http://www3.weforum.org/docs/IP/2015/FS/GAC15_The_Future_of_FinTech_ Paradigm_Shift_Small_Business_Finance_ report_2015.pdf
Victoria Hernandez is a highly recognized senior executive with more than 25 years’ experience in building, launching and managing multinational enterprises in the EU and globally, primarily in the TMT and more recently the Fintech services sector. She is a former Alliance Director, Mergers & Acquisitions Europe for BT (British Telecom), and implemented expansion strategies in Europe for both fixed and mobile operators through Joint Ventures with local partners. With Orange Spain (a JV with Financial Group Santander), she defined and implemented a successful full turn-around of the company which integrated the Spanish operation into the Group. At present, Victoria is advisor to several TMT and Fintech multinationals on strategy, change management, multi-country services launch and operational efficiency. Victoria has acted as a non-executive Board member of well-known Multinationals, including Orange, Wanadoo, StepStone, and others. She is a long standing member of the Global Telecommunications Women’s Network.