Fintech after Brexit

Brexit is happening: the UK left the EU on 31 January 2020. It has entered an implementation period which is due to operate until 31 December 2020. During the implementation period, EU law will continue to apply in the UK.

No one knows what Brexit will mean for financial technology companies and European business in general. There are the uncertainties of Brexit - either UK`s or European regulators do not have a clear vision and legislative guidelines for companies.

What does Brexit mean for EEA-authorised companies:

For EEA-licensed companies, passporting allows to conduct business within other EEA states. Their passporting to provide services in the UK will continue during the implementation period. After that period EEA-authorised companies (PI and EMI) will not be able to continue their services with existing passporting in the UK and need to establish an authorised or registered UK subsidiary to provide services in the UK. EEA firms may need to have authorisation in the UK to continue to access the UK market. Similarly, EEA investment funds may also need to seek UK recognition to continue to market in the UK. FCA, the UK`s regulator will inform on further steps.

London and the UK will continue to be a leading player on the global financial stage after Brexit, according to data, provided by the Freedom of Information request (FOI) by Bovill. To this date more than 1,400 EU-based companies have applied for permission to operate in the UK after Brexit. According to over 1,000 of these firms are planning to establish their first UK office.

What does Brexit mean for UK-authorised companies:

If the UK-authorised firm wants to provide financial services in an EEA state, it can apply for a passporting to do this. The company may also need a domestic authorisation in the EEA state. The UK-authorised firm focusing on providing financial services in an EEA state, may set up a branch in an EEA state (an ‘establishment’ or ‘branch’ passport) or to provide cross-border services or advice (a ‘services’ passport).

UK-based fintech companies are taking steps to prepare for the worst-case scenario of Brexit and continuing securing licenses for the EEA region. Many companies are already received their EEA-based licenses and some of them use transition period time to do these steps.

The UK fintech vs European fintech in figures:

The UK holds the leading position in investments into financial technology startups, drawing in over $4.9bn last year. Comparing with European fintechs, which raised $8.5bn., the UK contributed to over half of all the continent’s investment in this space, according to new research by Innovate Finance. Seven of the 10 biggest European fintech raises last year were by British companies.

The UK showed a 38% boost in fintech investments since last year. Its closest European peer was Germany, which raked in $1.3bn, followed by Sweden with $778m.

Opening a Safeguarding account

European Authorised Payment Institutions (PIs) and Electronic Money Institutions (EMIs) must comply with certain safeguarding requirements according to PDS2 Directive (Directive 2015/2336/EU) and the EMI Directive (Directive 2009/110/EC). The PI and EMI regulations impose certain safeguarding requirements to protect funds received from customers and in return provide payment services or issue e-money.

What's a safeguarding account

A safeguarding account – is a special account set up with a Bank in which PIs and EMIs hold customers' money. The main function of a safeguarding account is to separate client money from operational funds and to block the access to this money by third parties.

A safeguarding account is the mandatory requirement to obtain your payment license

Having a safeguarding account is one of the obligations in order to obtain your payment license in Europe and you cannot get your license before you have the safeguarding account. There are hundreds of Banks in the EU, but not many of them are ready to cooperate with fintechs. It can take more than half a year for the bank to make a decision about opening the account. Banks consider opening a safeguarding account too risky and can refuse at any time and without any explanations. All this makes the process of opening the safeguarding account very challenging.

Regulators have specific deadlines for making a decision about PSP licensing. For example, the UK`s FCA have 1-year deadline after an application submission – during this period they should either issue the license or refuse. In other words, in case the bank refuses to open the account 2 months before this deadline – you will not have enough time to open the safeguarding account in another bank. It means that you will lose at least 1 year of your time and all the money invested to prepare the application. No account – no license! What's more: some regulators require a statement letter from the bank, which is a mandatory too. And banks can refuse to sign such a statement. No proper form letter – no license too!

What to do? Choose only banks, which have positive records in opening safeguarding accounts and ask Advapay for assistance.

Fintech trends to watch out in 2020

The evolution of technologies in financial services is expected to accelerate, as the global fintech venture capital (VC) investment has reached $30.8 billion in 2018, up from $1.8 billion in 2011 with the US, UK, and Germany being the top investment countries.

On the one hand, fintech companies currently represent a small share of the industry, just 6% or $674,9 billion of the total annual revenue of financial services (Crunchbase & IMF-WB, 2019). On the other hand, fintech accelerates growth and innovations of the global economy and a quarter of the financial service industry's venture and start-up funding is directed to this area.

We believe the future is still clouded with uncertainty, while fintech continues to grow than ever before. To cut through all these fintech discussions and forecasts, we have identified current trends and drivers in financial services.

NEW REGULATIONS FOR CRYPTO

Bitcoin can be considered as a speculative gamble on a store of value. For example, in December 2018, Bitcoin and other cryptocurrency prices dropped to its lowest, and later experienced another collapse.

To support cryptocurrencies, new regulatory authorities are trying to make crypto more transparent and governed. Financial Action Task Force (FATF) has also started checking how countries implement Crypto Standards that were released in June during the G20 summit when all the leaders agreed to comply with international requirements for crypto-assets and related service providers. More strict regulations were introduced to avoid global risks and financial instability associated with the issuance of stablecoins. In October, Facebook’s Libra project hit regulatory roadblocks in Europe, and PayPal, eBay, Visa, Mastercard, and Stripe dropped out of this initiative. This case and a growing interest of cryptocurrency issuance may explain why the European Union recommended the European Central Bank (ECB) to look into issuing its own digital currency.

When it comes to Europe, Estonia still remains the most preferred destination for blockchain companies. The mild jurisdiction has issued around 2000 crypto licenses, because of its license terms in the industry. Meanwhile the Swiss Financial Market Supervisory Authority (FINMA) recently approved bitcoin banks and issued licenses to two blockchain service providers for the first time. Today, one of them - cryptocurrency bank SEBA - is now fully operational and offers Swiss clients to open an account. Later in December, the bank will onboard clients from abroad.

From all this, we can also say that cryptocurrencies have great potential, and governments and banks will continue to explore new ways to support crypto projects and reduce risks.

ALL-IN-ONE MOBILE APPS

The phrase super app was introduced by BlackBerry founder Mike Lazaridis. It is an all-in-one mobile app that includes multiple daily apps, including, social financial, insurance, and other services.

Super apps are still on the verge to enter the Europe market, but they have been actively used in the Asian-Pacific region. One of the mainstream apps in China is WeChat, an all-in-one messaging app, which offers games, online shopping, and financial services. Known as Weixin in China, it is a flagship product of gaming and social giant Tencent that was founded more than 20 years ago. Not so long ago, in 2017, WeChat Pay launched its services in Europe, offering its clients to link their account to international payment cards.

Another great example from Asia is Malaysian ride-hailing company Grab that has expanded in food delivery, medical advice, and financial services. In 2018, Grab acquired local Uber and UberEats.

Russia's Tinkoff is planning to implement a new super-app, which will combine traditional banking services with lifestyle and leisure features and a marketplace for third party API-based in-app options.

Taking into account the current trend of super apps, there is no surprise that Mark Zuckerberg is planning to shift the focus of Facebook from social media apps to a one-stop-shop messaging service worldwide.

OPEN BANKING OPEN API

The concept of Open banking means a shift from a very close model to a shared one, where different financial industry’s stakeholders can be authorised to access personal and other financial data. It means that control of data gets back into the hands of customers, while banks can embrace Open Banking and generate additional revenue by crowdsourcing the development of new services.

From now on, Open API will allow customers to connect to banks via different systems and apps. As a result, the competition will rise, and multinational companies will take advantage of implementing a payment functionality in their business processes or messenger apps. Next year, there will be definitely a surge of messenger apps that also offers financial services. Revolut is already operating in the market with an Open API solution that allows companies to automate payment processes by combining Revolut for Business account with their software or platform.

MERGER AND COOPERATION BETWEEN FINTECH AND BANKING

To deliver a comprehensive suite of solutions and enjoy the best of both worlds, banks need to establish a dialogue and cooperate with fintech companies. Otherwise, traditional financial institutions will only innovate under the circumstances, when the pressure from customers and competition rises.

What are the motives and benefits of banking and fintech cooperation? It is freedom and innovative services at customers’ fingertips because together fintechs and banks can work harder to introduce new technologies. To make it successful, groundwork related to compliance, regulations, and licensing requirements must be taken seriously.

SolarisBank is a benchmark in promoting cooperation and a new way of banking services. The fintech company offers Banking as a Platform (Baap) services with a German banking license, combining regulatory banking expertise and a start-up. In 2018, the company also partnered with Boerse Stuttgart Group (German Stock Exchange in English) to create a cryptocurrency exchange platform. But the most recent initiative is an agreement with Alipay.

Cooperation between banks and fintechs has extended to the UK. Santander Bank is one of the first banks in the UK to embrace blockchain based payments in cooperation with Ripple. The bank launched Santander One Pay FXa money transfer service that allows customers to client international transfers on the same or next day.

Another excellent example is synergy between Apple Pay and Goldman Sachs. Both giants are getting ready to launch a joint credit card that will incorporate the logo of Apple digital wallet. Everyone is on it, so does JPMorgan Chase & Co, which is also tapping the fintech industry and will invest $25 million to help start-ups targeting low-income Americans.

FINTECH MERGING WITH OTHER INDUSTRIES

Cross-industrial fintech is setting foot into other industries, as it becomes more and more accepted and replaces many former industry systems.

With so many fintech companies on the market, the cost of sale in back-office and new services lowers. It is expected to see more and more partnerships and ventures in a multitude of industries. For example, ZAKA is a digital ID solution for Sub Saharan Africa that verifies identity using biometrics and help people get the loan and health services faster. Another African fintech is Akiba Digital. It is a savings platform with a gamified interface to educate and nudge unbanked users.

Wajenzi is an Amsterdam based Equity-Crowdfunding platform to kick-start and raise funding for diaspora businesses and investors, whereas MigPort is an Istanbul-based start-up that anonymously connects refugees with volunteers to solve their financial, bureaucratic, and educational problems, using the website or app.

Tokyo-based investment bank MBK stands out from the rest of the fintech companies and examples. It disrupts the EU real estate market with tokenization of the sale of a property in Estonia. The company has partnered with Singapore-based real estate firm BitofProperty (BOP) to make it come true.

LEDGER TECHNOLOGIES

Fintech and blockchain are connected quite well. It turns out that cryptocurrencies were the first use case of the distributed ledgers. However, blockchain and distributed ledger technology (DLT) differ. With blockchain, everyone on the network can see all the transactions, whereas with DLT that is not the case.

Blockchain can be used for different purposes – money transfers, settling trades, and voting. Using this technology, customers no longer have to confirm with a central clearing authority.

Do you think the zenith of blockchain will ever come? Blockchain cannot be used for every single problem, but for many sectors, it is the perfect solution.

We can see that banks, brokerages, insurers, and regulators are actively putting to good use the blockchain technology and it has only just started. The effort to support and speed up global payments is one of the biggest advantages. For blockchain and distributed ledgers have a bright future, but it is important to educate key stakeholders within companies, because the value proposition isn’t clear for many of us.

With about 82 live patents in hand, the Bank of America is the world’s largest blockchain patent holder and beats out even IBM, Mastercard, and PayPal . But the bank has recently grown doubtful that blockchain will amount to anything in the near future. Similarly, Ripple replaces the SWIFT and offers blockchain-based payment transfers worldwide. Swiss multinational investment bank UBS, Royal Bank of Canada, and the National Bank of Abu Dhabi have already adopted Ripple's solutions to provide real-time payment transfers.

INDEPENDENT AND DECENTRALIZED FINANCE

Have you ever thought about making payments without being engaged with Visa and MasterCard? Actually, it is possible and in the long run, banks worldwide are thinking of replacing traditional payment networks with alternative payment systems.

When it is a question of Decentralized Finance, traditional financial services can be provided without any authority or intermediaries. A wave of crypto business, that has surged in the last few years, is moving really fast and bringing new payment platforms to life, including Google Pay, Apple Pay, AliPay, WeChat Pay, and blockchain-based Ripple.

One of the most recent development is the new Pan-European Payment System Initiative (PEPSI) that was created to manage all forms of cashless transactions. 20 European banks are setting up a payment system to challenge dominant Visa, Mastercard, Google, and PayPal. This is not the first-time banking institutions in Europe undertake a project of launching a European payment system. In 2012, they were working on the Monnet card project that actually never took off.

INNOVATION IN BANKING

Bricks and mortar banks are heavily investing in technologies and leveraging their brand awareness to put up a fight with fintechs and technology companies that are trying to take stakes in financial services.

Today’s customers want 24/7 access and simple apps that require a little human contact. We can expect financial services apps will offer a wider range of functionalities from your phone. Banking apps are about to roll out cardless ATMs that improve transaction security, as the cardless functionality usually requires biometrics and built-in passwords. For example, Bank of America has a mobile app that includes an option of withdrawing money with smartphones at cardless ATMs. To build digital offerings in Europe’s banking and asset management, Berlin-based fintech company has secured funding of €41.5 million from Ping An’s Global Voyager Investment Fund. Ping An is one of China’s biggest financial groups. It is renowned for investing and delivering cutting edge financial services.

In addition, tomorrow’s banking will be shaped by Artificial Intelligence (AI). Banks of Europe are planning to actively use AI to interact with their customers, according to Accenture. AI together with blockchain are seen as key technologies that will change the concept of banking in the years to come.

All things considered, we have come to the conclusion that many innovations are making banking more personal, secure, and easy to use. Nowadays, banks and other financial service providers are set out to redefine their processes, services and how they interact with customers because technologies and customer expectations continue to evolve. In fact, fee-free payments, personalized services, cryptocurrency exchange, and lending platforms have emerged as a must-have in financial services.

Even though many financial institutions have already built cutting-edge platforms that include all this, there are more innovations to come! Just keep an eye on our blog articles to be the first one to find out.

Fintech market wrap-up, crypto-companies

1) Finally, Crypto-companies and cryptocurrency exchanges are considered “obliged entities” to perform customer due diligence and submit suspicious activity reports.

On January 10th, 2020, the Fifth Money Laundering Directive (5MLD) came into force. One of the biggest changes in 5AMLD is that all European Crypto companies must be registered by the competent authorities in their domestic locations, for example, Germany’s BaFin or the UK’s Financial Conduct Authority (FCA).

It makes changes in the treatment of virtual currencies:

- It implies a legal definition of cryptocurrency as “a digital representation of value that can be digitally transferred, stored or traded and is accepted…as a medium of exchange.”

- Cryptocurrencies and cryptocurrency exchanges are considered “obliged entities” to perform customer due diligence and submit suspicious activity reports.

2) The Bank of Lithuania and the European Central Bank work on development of own cryptocurrency

The Bank of Lithuania published a new research paper highlighting CBDC (Central bank digital currency) design choices as well as monetary policy and financial stability implications.This report is one more step to urge peers joining digital currency goldrush. The in-depth analysis comes ahead of the central bank's launch of 24,000 digital collector coins created using a blockchain-based approach, and the establishment of a sandbox platform for testing digital ledger projects, LBChain.

The Board of the Bank of Lithuania has approved the sample of the physical version of the digital collector coin – an original silver coin bearing a denomination of €19.18 to commemorate the year of the Act of Independence of Lithuania. LBCOIN is dedicated to this prominent Act and its 20 signatories.

On December 17th, the European Central Bank published a new proof-of-concept project called EUROchain. The report states, “That proof of concept boasts several novel features developed by the ESCB’s EUROchain research network using distributed ledger technology (DLT).” The project is a study on how privacy can be balanced with compliance procedures

3) The Cryptocurrency hype has subsided and this shows great promise for Crypto and Blockchain Technologies

Saga, a global, democratic, stabilised, non-anonymous digital currency, launched in an effort to build towards "worldwide money". SGA (Saga token) wants to replicate the mechanics of central bank national currencies and apply them on a global scale. 

Morgan Stanley vets launch cryptocurrency derivatives trading platform Phemex. “Phemex is ten times faster than traditional crypto trading platforms with the ability to manage 300,000 TPS – the fastest matching engine online,” said Jack Tao, who served as a senior leader at Morgan Stanley's electronic trading desk.

PayPal invests in cryptocurrency compliance startup TRM. PayPal has joined a $4.2 million funding round for cryptocurrency compliance and risk management platform TRM Labs. PayPal Ventures was joined by Initialized Capital, Blockchain Capital, and Y Combinator as investors, bringing the total raised in TRM's seed round to $5.9 million.

Credit union-owned blockchain outfit CULedger is ready to launch its cross-border payments product, CUPay, next year. The firm has unveiled a viable proof-of-concept version of CUPay, which is built on R3's Corda platform, and is designed to facilitate connectivity between multiple payment networks, both traditional and blockchain-based.

Fintech market wrap-up, Banks vs BigTech vs Fintech

Banks are focused on being local, Tech giants – global

Banks are focused on making payments more transparent and at a lower cost, therefore they are looking for a local type of cooperation. They also see their strategy may compete with big fintechs and Tech companies. In turn, big fintechs and IT giants have global ambitions and are ready to spend a lot of money to conquer the world.

  1. 1) P27: Creating a pan-Nordic payment region

P27's initial goal is to enable real-time, domestic and cross-border payments to be carried out quickly, more efficient and transparent within the countries of Denmark, Finland and Sweden. For the moment, six Nordic banks have agreed to support and fund the development of a domestic real-time payment platform as part of the P27 initiative.

  1. 2) PEPSI: creating a pan-European payment system

Twenty European banks are working on creating a pan-European payment system in order to challenge the dominance of Visa and Mastercard as well as technology giants like Google, Apple, AliPay and WeChat Pay and to develop a home-grown cross-border payment scheme. The European Central Bank supports this alternative to Visa and Mastercard and the European Commission (EC) are considering implementing new regulations to support and accelerate the adoption of TARGET Instant Payments Settlement System (TIPS).

  1. 3) Tech giants conquer the world

On the other side of payment sector, tech giants like Apple, Facebook and Google are making steps into providing payments worldwide. Apple together with Goldman Sachs earlier this year launched a credit card for all US citizens, Facebook announced its libra cryptocurrency initiative and Google is set to offer its first-ever checking accounts next year.

Banks are stopping partnering with fintechs and starting to compete

Banks are ready to share their infrastructure with worldwide Tech giants and big merchants in order to compete with Fintechs

  1. 1) Citi and Stanford Federal Credit Union offers BaaS platform to Google

Google is partnering with Citi and Stanford Federal Credit Union (FCU) to launch checking accounts for Google’s digital wallet customers. Google will use the Citi’s banking-as-a-service platform, while Stanford FCU is likely to handle the deposits. The project, codenamed Cache, is scheduled to launch to the public next year.

  1. 2) JPMorgan has a plan to help Amazon and Airbnb look more like banks

The bank has spent the last year developing an e-wallet tailored for companies such as Airbnb, Lyft and Amazon. It will give tech companies the ability to provide millions of customers virtual bank accounts and other financial services like car loans or discounts on home rentals.