Article by Antti-Jussi Suominen, CEO of Holvi
My background is not in financial services. I have spent most of my professional life building online businesses in different unregulated businesses around the world. This experience has given me an outsider’s perspective on the European financial regulations framework. What I have learnt so far is that local regulations, laws and practices still dominate the European finance ecosystem, and this is stifling cross-border innovation for seemingly unknown reasons.
Of course, banking systems are the backbone of every economy, and the financial services industry must be regulated in order to ensure market safety. However, the goal of regulation must always be to increase competition for the benefit of consumers and businesses while making sure that it is done in a safe and responsible way that does not jeopardise economic stability.
Local vs European
The aim to create an EU single market for financial services has taken many steps forward: the EU’s original Payment Services Directive (PSD) has helped create more competition through the introduction of payment institutions and passporting, and more recently, PSD2 has made it possible for customers of existing financial institutions to share their data with new entrants, thus leveling the playing field a bit for the newcomers. In principle, these changes have helped increase competition in a safe and regulated way, but in practice, proper implementation of these directives has been stopped at the local member state level. Member states are still having their own local legislation and rules often contradicting at least the spirit and sometimes even the letter of EU directives.
At Holvi, we are able to offer services across the European Economic Area because our payment institution licence from FIN-FSA can easily be passported across the member states. However, in practice, this is not as easy as it sounds. The most illustrative example of a local blocker is that while we have the licence to offer services in multiple countries, we aren’t able to provide local IBANs to our customers, and we must instead rely on Finnish IBANs.
This seemingly small detail can make a big difference from the customers’ point of view. Starting from the psychological point of view of having a “foreign bank account” which may cause confusion for the customer, to not being able to pay bills because local service providers don’t accept a “foreign IBAN” (although from EU directive point of view they are obliged to do that). This so-called “IBAN discrimination” puts cross-border players like Holvi at a significant disadvantage to local players.
In order to receive a local IBAN, you need to set up a payment branch in that country, and then apply to the local regulatory framework. This extra burden of local regulatory compliance adds heavily to our overheads and does not add any value to our customers, since we are already being regulated by our home regulator. From an outsider’s point of view it looks like a barrier to entry designed to protect the local market from outside competition.
Jack of all trades, master of none
The European Commission (EC) is trying to create a European single market for financial services through its payment service directives, and the introduction of Single Euro Payments Area (SEPA) to replace what has been historically a very fragmented collection of local markets. Banks have operated in local markets limited by their licences, and cross border expansion has happened mainly through acquiring local banks in other markets, i.e. by becoming multi-local instead of operating truly across borders. This local regulatory framework has led to banks growing their business by adding more products and services to the same customer base, such as acting as supermarkets of financial services ranging from current accounts to mortgages, to wealth management to insurance.
Despite the lack of implementation on local level, the attempts by the EC to increase competition (safely) are already having a positive effect from the customers’ point of view. New entrants are already providing more choice and better usability, raising the bar for what customers are expecting from a financial service, and at the same time putting pressure on prices. These fintechs are providing superior service by focusing on a specific customer segment and/or a set of specific customer needs.
This increased competition is already forcing banks to adopt this approach and start focusing on services and customer segments that are core to their business. Especially medium-sized banks have to decide what parts of the current service portfolio they will continue to develop and where they will need to pull out.
However, this niche differentiation strategy requires that one can find a large enough customer base and the local markets aren’t necessarily big enough to cover the operational cost overhead imposed by regulation. A single Pan-European market is required to justify investment into a customer niche.
This is what companies like Holvi are trying to do. We focus on the growing microbusiness segment across different European countries and offer business banking that is tailored to their needs. The microbusiness segment in Finland, our initial home market, is not big enough to justify the required investment into all of the anti-money laundering (AML) and other back office requirements that a regulated payment institution has. Therefore we need to be able to serve, with the same team and infrastructure, microbusinesses in multiple markets, and we need to be able to do it from the same competitive position as the local players.
To solve this scaling problem, EU-wide directives should trump local regulations. This will enable greater competition, more choice for businesses and consumers, and drive real innovation, while still offering economic stability and security. Local regulators should work together and with the EU to agree rules that can apply across the EU and EEA. The FIN-FSA is just as trusted a regulator as the BaFin in Germany, for the AMF in France. Why can’t regulation from one of these bodies signal trust across all of Europe?
It is natural for local banks to want to continue to dominate their market. However, they should see an opportunity here as well. If we made it easier for banks to operate across borders, then there’s no reason why they couldn’t expand their offering too. Challenger banks aren’t coming in to the market to capture markets from local banks. On the whole, they are responding to underserved markets that these banks simply do not, or cannot cater to. I hope that in time, the EU is able to apply pressure to local regulators to free the industry from the local regulations that are currently shackling it in place, and move to a more open, safe and stable EU-wide market.
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