Europe’s Fintech Success Story: What is a Cheque?

It’s hard to follow any national or Brussels debate on tech policy without hearing politicians or regulators say, ‘We need to help grow more European unicorns,’ ‘City XY will be the new Silicon Valley,’ or ‘We need to do this to get our own Googles and Amazons.’

Following statements like this, very different approaches emerge on how to foster the emergence of larger home-grown tech giants in Europe. Ranging from proposals to tax foreign tech companies at higher rates, designating them as too large, ambitions to deepen and liberalize more aspects of the Single Market to incentivizing venture capital investments in the EU, one can find all sorts of suggestions. While ideologically very different, they tend to share the same perspective regarding Europe's lack of scalable tech companies.

Fortunately, at least one European tech company branch thrives, innovates, and often leads the way globally: Fintech. What is different about this sector compared to search engines, audiovisual platforms, social media, or e-commerce? 

Sending money from one place to another is much easier for European customers compared to their US or Canadian peers. One in two Americans wrote a cheque in 2023, while (with the exception of France) physical cheques are basically non-existent in Europe.

Europeans are more eager to adopt online banking and online payments compared to North Americans. Still, the success of these services cannot only be explained by consumer behavior but also smart regulation. While many banking and payment rules in the US consist of a patchwork of sometimes 50 differing state rules and federal laws on top of it, the EU managed to introduce successful and smart payment rules across the block.

Europeans exhibit a greater inclination toward adopting online banking and payments, a trend not solely attributed to consumer behavior but also to astute regulation. Unlike the US with its complex web of state and federal banking regulations, the EU has streamlined payment rules through directives like the Payment Services Directive (PSD2), which has facilitated the rise of Open Banking. Through open APIs, third-party entities can access data held by traditional banks, fostering innovation in fintech products and services

Without going too far into North American payment and banking regulation, standalone services like Venmo or legacy-bank-offered tools like Zelle show that US consumers are keen to send money more easily. Still, regulatory inertia often slows a fully integrated and easy payment system.

These are definitely competitive advantages that allow the European Fintech Ecosystem to thrive. More work needs to be done in the area of enforcement mechanisms to inhibit so-called IBAN discrimination (a practice in which companies do not accept EU-IBANs from other EU Member States). The third Payment Service Directive is an excellent opportunity to strengthen the rights of EU customers to practically bank with an IBAN from any EU country in their country of residence (e.g., using a Polish IBAN for direct debits of their French utility bill).

Furthermore, it will be interesting to see for how long no fintech companies are listed as one of the so-called Gatekeepers under the Digital Markets Act (DMA). Being included in this list might increase cost of doing business and stifle agility of fintech companies. The future will show if the Markets-in-Crypto-Assets framework (MiCA) will have positive or negative effects on the global competitiveness of fintech in Europe.

Europe’s fintech ecosystem does not end at the borders of the EU: Switzerland and the UK are some of the leading Fintech countries in Europe, and regulation should aim to include rather than exclude these markets moving forward. Consumers benefit from this kind of harmonization. 

The European Banking and Fintech sectors are reasonably open to competitors from other parts of the world. This open approach has not hindered local champions' emergence but allowed them to branch out to different continents and attract venture capital from the US.

The successful emergence of Fintech Unicorns offers valuable lessons for other ecosystems within European Tech. Integrating smart regulation across the EU, by embracing the internal market, can foster innovation and growth. Allowing as much competition as possible in the legacy sector encourages dynamism and drives progress. Passporting rights play a crucial role in enabling small startups to compete with incumbents, thereby increasing choice and competition. Furthermore, being more permissive than other parts of the world creates an environment where cutting-edge technologies can thrive and succeed.