Fintech companies are fundamentally changing how the financial services ecosystem operates, giving consumers powerful tools to help with savings, budgeting, investing, insurance, electronic payments and many other offerings. This industry is growing rapidly, filling gaps where traditional banks and financial institutions have failed to meet customer needs.
Yet progress has been uneven. Notably, consumer fintech adoption in the United States lags well behind much of Europe, where forward-thinking regulation has sparked an outpouring of innovation in digital banking services — as well as the backend infrastructure onto which products are built and operated.
That might seem counterintuitive, as regulation is often blamed for stifling innovation. Instead, European regulators have focused on reducing barriers to fintech growth rather than protecting the status quo. For example, the U.K.’s Open Banking regulation requires the country’s nine big high-street banks to share customer data with authorized fintech providers.
The EU’s PSD2 (Payment Services Directive 2) obliges banks to create application programming interfaces (APIs) and related tools that let customers share data with third parties. This creates standards that level the playing field and nurture fintech innovation. And the U.K.’s Financial Conduct Authority supports new fintech entrants by running a “sandbox” for software testing that helps speed new products into service.
Regulations, if implemented effectively as demonstrated by those in Europe, will lead to a net positive to consumers. While it is inevitable that regulations will come, if fintech entrepreneurs take the action to engage early and often with regulators, it will ensure that the regulations put in place support innovation and ultimately benefit the consumer.
More choices for consumers
In this environment, fintechs, in particular digital neobanks, have flourished across Europe. Public sentiment and government policy shifted following the global financial crisis of 2008, increasing the appetite for more choice and more consumer-friendly banking options. A 2016 investigation into the retail banking market concluded that more competition was needed and the U.K. took a fintech-friendly approach to reform.
In contrast, U.S. regulators and legislators have moved more slowly, which has in turn slowed fintech innovation. A fragmented regulatory structure is partly to blame, with authority spread across the Consumer Financial Protection Bureau (CFPB), the Treasury Department, Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC), along with industry groups.
The CFPB issued non-binding principles for customer-authorized data sharing and aggregation in 2017, the same year the National Automated Clearing House Association (NACHA) launched an API Standardization Industry Group to begin streamlining fintech-related APIs. In July 2018, the U.S. Treasury Department endorsed the concept of a regulatory sandbox, but legislative and regulatory efforts have since stalled well short of the EU’s progress.
Without standards and clear rules, disputes between smaller fintechs and big banks can end up harming customers. For instance, online lender Kabbage and Plaid, which makes developer tools that help consumers use apps like Venmo and Acorns and was just acquired by Visa, are locked in a dispute with big U.S. banks over proposed guidelines for sharing customer data. The banks favor rules that would give their own apps a leg up on the thousands of services from startups.
Some U.S. fintechs recently accused banks of blocking their customers from connecting their accounts to Venmo. For example, PNC Financial Services suggested customers use Zelle, a payment service owned by PNC and other big banks, blaming the roadblock on a security upgrade.
U.S. leads in investment, but not adoption
In terms of money invested, the U.S. is actually ahead of Europe, with $18.3 billion in new fintech deals struck in the first half of 2019, compared to $13.2 billion in the EU. But without stronger regulatory support, fintechs have made less headway in the U.S., where consumer adoption of fintech has reached just 46%, compared to 71% in the U.K. and 73% in the Netherlands. That ranks the U.S. 24th of 27 markets surveyed by EY. The gap is all the more striking considering the U.S. was actually ahead of the U.K. — 17% to 14% — as recently as 2015.
That said, plenty of big American tech companies have recognized the fintech market opportunity, launching multiple consumer services that encroach into retail banking. Just in the past six months, Amazon introduced a credit card for underbanked shoppers, Apple launched Apple Card and Facebook announced its Libra cryptocurrency and launched Facebook Pay. Meanwhile, Uber launched Uber Money for drivers and Google will start offering checking accounts in 2020.
Big tech versus fintech startups
These fintech services help increase consumer retention rates for the big tech companies, putting their platforms at the center of people’s lives, while also harvesting valuable data that improves ad targeting and product promotions. Digital wallets like Apple Pay and Google Pay are designed to make iPhones and Android devices even more indispensable to customers.
In contrast, most startup fintechs focus on meeting unmet customer needs, providing more convenient digital financial services that increase overall consumer financial health. For example, Chime, a no-fee online banking app and credit card, has more than 3 million accounts.
In Europe, the fintech wave has been spearheaded by fast-growing startups (versus big tech players), buoyed by friendly regulatory conditions and millions of eager customers. Major fintech companies that emerged in Europe include:
- N26: 3.5 million customers
- Revolut: 7 million customers
- Monzo: 3 million customers
- Starling Bank: 800,000 customers
Other innovative European fintechs include TransferWise (multi-country banking), OakNorth (small market business lending), Banking Circle (global banking and payments)*, Adyen (global payments platform) and Token (open banking API)*.
Investments in fintech are paying off handsomely in Europe. Fintech is Europe’s largest venture capital investment category, receiving 20% of all venture capital in Europe — a higher percentage than in Asia or the U.S. Since 2013, European fintech investments have returned more than twice as much value as any other tech category.
Following successes in their home markets, European fintechs are now turning to the U.S with Monzo, N26 and Revolut all making the leap across the Atlantic in 2019. Fintechs stand out as one group of startups that are readily thinking about their expansion plans, especially into the U.S.
All of that success has come during a period of increasing regulation, demonstrating that regulations, if used effectively, can promote rather than stifle innovation. Europe has proven out that a symbiotic relationship between regulators and innovators works much better than a fragmented, slow-moving system — especially in a field that moves as rapidly as fintech.
What does this mean for fintech founders in the U.S.? Taking example from EU fintechs, which engage with the EU and have had a part in the system’s success, founders in the U.S. must make it a point to engage early and often with regulators, ensuring that all parties are aligned on what ultimately is best for consumers.
Some U.S. fintechs are already doing this. For example, Varo Money is working with the OCC for a national bank charter and Acorns has met with policymakers to educate them on the app and similar micro-investing products. However, when fintech founders make decisions without consulting the appropriate government regulators, products can generate heightened scrutiny, such as around Betterment’s launch of checking and savings accounts, or fail to go to market, such as with Robinhood’s failed initial launch of checking and savings accounts. On the far end of the spectrum, fintechs trying to circumvent regulators altogether and mislead consumers find themselves slapped with enforcement actions.
The difference in fintech growth between the U.S. and Europe reveals fintech innovation in the U.S. will continue to lag as long as the U.S. fails to modernize and upgrade its regulatory oversight of the sector. To ensure the right regulations are put in place (and regulation will come eventually), fintech entrepreneurs must work in tandem with regulators to reform the system in a way that encourages growth and innovation, and ultimately moves the fintech industry forward.
*EQT Ventures is an investor in Token and Banking Circle.