European fintechs are in for a lucky break

BI Intelligence

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The European Commission (EC) is developing legislation designed to remove the hurdles crowdfunding platforms and marketplace lenders face in operating and scaling across single market member states, Valdis Dombrovskis, the vice-president of the European Commission (EC) told the Financial Times this week.

Startups struggle to comply with additional rules that individual member states impose on businesses on top of pan-EU laws: The new legislation is designed to remove these add-ons and create "a digital single market", Dombrovskis said. It's designed to help European fintechs achieve the same scale as their Asian and US counterparts, he explained. Eventually, the laws could be extended to cover other fintech segments. Draft legislation is expected in early 2018.

When implemented, such legislation could have several major effects on Europe's fintech industry:

• Europe stands to gain more prominent fintech hubs. Since the Brexit vote in 2016, major European cities including Paris, Berlin, and Stockholm have been vying to lure fintech talent and divert funding away from super-hubs like London. These cities already offer attractive incentives for fintechs, including plentiful talent pools, new laws offering business tax breaks and expedited tech visas: If, on top of these benefits, fintechs also knew that by setting up shop in one European city they could easily expand into neighboring countries, London's rivals could see more companies establishing their headquarters on or moving them to EU turf. As this happens, the European fintech hub landscape would become far more diverse than it is now.
• European fintech funding could skyrocket. European fintech funding on both a quarterly and annual basis has long been much smaller than in Asia and the US. Further, it's seen far fewer mega-rounds ($50 million-plus) than those regions: In Q3 2017, for example, the whole of the EU amassed just $1.8 billion across 216 deals, compared to $5 billion across 316 deals in the US, and $5 billion across 203 deals in Asia. With new laws in place allowing fintechs to scale more easily across Europe, fintech funding volumes could move up into the billions league table, even without the UK driving up numbers.

This is promising news for European fintechs, but they could be in for a long wait to reap the rewards. The structure of the EU demands consensus from nearly thirty countries to pass most new legislation, and as such the introduction of new laws is often a very lengthy and convoluted process in the bloc. On top of this, EU legislators tend to proceed slowly with finalizing and implementing new rules.

The most recent example of this measured approach is the EU's decision to push back the deadline for a major data-sharing law, PSD2, by eighteen months. As such, even if draft legislation is delivered in early 2018, past precedent suggests that European fintechs will be in for a long wait until the legislation is finalized and implemented.

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