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The Evolution of Financial Technology (FINTECH)

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THE EVOLUTION OF FINANCIAL TECHNOLOGY
(FINTECH)
Sofia Anyfantaki*
Economic Analysis and Research Department

1 INTRODUCTION allow incumbent firms to survive and new-

comers to innovate, as hindering the entry of
The term “financial technology” (or FinTech) new firms would distort the market in favour
refers to the application of technology for the of established firms. Thus, given the above-
provision of financial services. As a sector, Fin- mentioned challenges, regulators should follow
Tech refers to technology startups that are some general principles in order to strike a bal-
emerging to compete with traditional banking ance. 2 First, they should keep a neutral stance
and financial market players, offering a number towards technological developments. Rules
of services, from mobile payment solutions (see should promote healthy competition among
Section 2.1) and crowdfunding platforms (see market players, irrespective of whether they
Section 2.2) to online portfolio management and offer traditional approaches or new techno-
international money transfers. FinTech compa- logical solutions. Second, a harmonised, non-
nies are attracting the interest of both financial discriminatory set of rules should apply estab-
services users and investment firms, which see lishing a level playing field for all participants,
them as the future of the financial sector. with a view to averting market fragmentation
and low competition. Finally, regulators should
The term FinTech can be traced back to the above all ensure the protection of users, as well
early 1990s and more specifically to a project of the financial system itself.
initiated by Citigroup.1 However, it was only in
2014 that the sector started to attract the This article is structured as follows: Section 2
increased attention of regulators, industry and examines the drivers of the evolution of the
consumers. Although FinTech is seen as a FinTech sector. These include supply-side fac-
recent close cooperation of financial services tors, related to the digital revolution, and
and information technology, the linkage of demand-side factors, related to the emergence
these two sectors has a long history. In fact, of new consumer patterns. A more detailed
financial and technological developments have analysis is provided regarding the development
been interconnected and mutually reinforcing of FinTech in payment services, lending and
over time. funding. Section 3 focuses on the role of banks
with respect to FinTech, i.e. how big traditional
The global financial crisis of 2008 was a turn- players react and what alternative strategies
ing point and one of the reasons that made Fin- they could adopt. Next, Section 4 explores the
Tech a new norm. This change has brought ensuing challenges for regulators, discusses dif-
about challenges both for regulators and mar- ferent approaches to the protection of finan-
ket participants, mainly in terms of striking a cial services users and outlines the existing reg-
balance between the potential benefits and risks ulatory framework of the European Union
of innovation. Increased activity raises ques-
tions like: What will the financial landscape be
* The author is grateful to Heather Gibson and Hiona Balfoussia for
like after digitisation? What will be the role of their very valuable guidance, comments and corrections. The
traditional banks? Will FinTech companies author is also grateful to Konstantia Tzortsou, Panagiotis Droukas
and Yannis Kanellopoulos for the fruitful discussion. The views
expand in tandem with the banking sector or expressed in this article are those of the author and do not
necessarily reflect those of the Bank of Greece. The author is
not? What are the new risks posed by these new responsible for any errors or omisions.
synergies to financial services users? 1 FinTech is the initial name for the Financial Services Technology
Consortium, a project initiated by Citicorp, former Citigroup. The
Financial Services Technology Consortium (FSTC) started in 1993
Regulators are faced by a difficult task in find- to facilitate technological cooperation efforts in the sector of
financial services.
ing the right balance that will at the same time 2 See Darolles (2016).

44
Economic Bulletin
December 2016 47
 Chart 1 Global investment in FinTech (2010-2014)

investment in USD millions (left-hand scale)

number of deals (right-hand scale)

6,000 250
5,589
214
5,000 194 200

190
4,000 159 180
154 151 173
141 161 150
128 127 117 142 3,090
3,000

90 92
87 100
79 82
2,000 1,687 1,678
65
1,306 1,300
923 50
1,000 737
612 676 722 597 625 597 677
447 481 434 538
284
0 0
2010 2011 2012 2013 2014

Source: BNY Mellon (2015).

(EU). In the last section, a brief overview of United States. London, San Francisco/Silicon
the landscape in Greece is provided. Valley and New York have already emerged as
major financial innovation hubs, while new
hubs have followed suit around the world,
2 THE EMERGENCE OF FINTECH namely Amsterdam, Paris, Berlin and Dublin,
which are the main centres of the European
Once the global economy exited the crisis, it FinTech ecosystem (see Chart 2).
became clear that many customers, especially
the younger generation, had lost their trust in These new opportunities have the strongest
banks. Apart from an increased mistrust of impact on emerging market economies, espe-
banks, young people have developed different cially those with a rapidly increasing middle-
consumer patterns from those of their elders. income population. More specifically, there is
They have grown up being used to having access now growing demand for financial services by
to personalised, tailor-made solutions, in stark people who previously had no access to the
contrast with the past “mass” approach of banks banking sector, as mobile device-based tech-
and other traditional financial institutions. nology enables access to financial solutions
Against this backdrop, if traditional players wish without the need of physical banking infra-
to attract profitable clients, they need to evolve structure.
and offer interactive solutions of the same level
as those of their FinTech competitors. In developing countries, FinTech includes
among other things the following features: (1)
This trend has been fuelled by a steady growth a young population with digital literacy and
in global investment in the FinTech sector (see equipped with mobile devices; (2) a fast-grow-
Chart 1), mainly by venture capital and private ing middle class, with 60% of the world’s mid-
equity. Between 2013 and 2014, in only one dle class being identified in Asia by 2030; (3)
year, FinTech investment almost tripled in the inefficient financial markets, which allow for

44

48 Economic Bulletin
December 2016
 Chart 2 FinTech hubs*

35 33.1% 35

30 29.1% 30
25.1%
25 25

20 20
15.5% 16.3%
14.7%
15 15

10 10

5 5

0 0
Singapore Average Sydney London Hong Kong New York

Source: EY FinTech Adoption Index.

* FinTech users as a percentage (%) of the digitally active population.

informal alternative solutions; (4) lack of phys- mobile financial services and mobile phone
ical banking infrastructure (1.2 billion people products are comparably more attractive.
have no bank account); and (7) underregulated
frameworks for data protection and competi- Although Africa shares many common features
tion. The above features are further fuelled by with Asia-Pacific in terms of financial innova-
the interplay between a dynamic private sector tion development, the nature and the direction
that seeks to expand to the provision of finan- of the determinants of this sector are quite dif-
cial services and a public sector that aspires ferent in Africa. According to G20, almost 2.5
after market reform in order to achieve eco- billion adults in the African continent (almost
nomic growth. half of the working age population) have no
access to the formal financial sector (see Table
In Asia and Africa, the recent growth of Fin- 1). In this context, telecommunication com-
Tech is primarily driven by economic develop- panies, instead of banks, have taken the lead
ment. Hong Kong and Singapore saw in less in the development of FinTech in the region.
than a year the creation of three FinΤech accel- Mobile money, which means basic payment
erators,3 thus featuring the greatest concentra- and saving services whereby money is trans-
tion of FinTech accelerators worldwide. The ferred electronically using a mobile device,
emergence of FinTech in Asia is not unprece- although initiated in the Philippines, achieved
dented in the wake of the crisis, but it is rather its greatest success in Kenya and more recently
the combination of a number of business and in Tanzania.
regulatory factors. More specifically, IT spend-
ing by traditional banks in Asia and Africa is 2.1 PAYMENT SERVICES
lower than in Europe and the United States.
This can be explained by a slightly less com- The past five years have witnessed a number
petitive market, which is still largely controlled of novelties, which, by making a wide use of
and subject to distortions by state-owned banks.
Public mistrust of the state-owned banking sys- 3 Business development programmes for innovative firms that act as
innovation “incubators”, providing space, support (tailored training
tem (because of corruption and inefficiency) programmes, mentorship, networking, etc.) and every possible
means that users are willing to adopt alterna- assistance to new researchers, entrepreneurs and startups, in order
to develop new ideas and technology-driven solutions in the area
tive solutions offered by non-banks. As a result, of financial services.

44
Economic Bulletin
December 2016 49
 Table 1 Commercial bank branches (per 100,000 adults)

Area 2004 2014

Euro area 33.6 28.0

East Asia and Pacific 13.9 10.8

Least developed countries 1.2 3.3

Sub-Saharan Africa 1.4 3.9

South Asia 7.2 8.9

Latin America and Caribbean 12.5 15.7

Middle East and North Africa 11.0 15.2

Source: The World Bank, http://data.worldbank.org/indicator/FB.CBK.BRCH.P5.

mobile devices and the internet, resulted in 2017. Furthermore, it should be noted that
simpler payment solutions. Innovation comes almost every bank account holder in the EU has
in different forms, depending on the payments a debit card and 40% of them also have a credit
sector and the market. Such novelties card. 34% of EU citizens already shop online
include, for instance, digital wallets, mobile and more than 50% have a smartphone, which
payments, contactless payments4 and real-time allows them to access mobile payment. Some
payments. economy sectors ―like the travel industry―
perform most of their sales online. Finally,
At the same time, over the past five years an small and medium-sized enterprises (SMEs) are
increasing number of FinTech startups and among the main beneficiaries of FinTech start-
non-bank payment providers have entered the ups. They are willing to experiment with new
payments industry (see Chart 3), taking advan- tools that will have a material impact on their
tage of an array of new technology conditions business activities. In fact, SMEs are the back-
prevailing in the market and using alternative bone of many economies (accounting for 80%
business models that could both disrupt and of global economic activity).
complement conventional payment practices.
This new paradigm of non-bank payment First, what are the benefits of mobile pay-
provider has led to the emergence of FinTech ments? Due to the fact that mobile phones are
startups (which seek to apply technological all the more powerful and connected, the inte-
advances in payment services) as well as of gration of payments into a mobile phone offers
incumbent firms in other non-payment indus- many potential advantages. The customer,
tries (like Facebook and Apple). using the computing and communication
power of a mobile phone, may perform several
A tangible proof of the potential market power other activities simultaneously. For instance, a
of technology-driven financial service providers consumer can compare retail prices, store the
is PayPal. Today, the company has more than payment record using a financial management
100 million active accounts and processes a software, download a warranty or instructional
daily average of USD 315 million in payments. video on how to use a product, etc.
The use of prepaid cards also follows an upward
trend. A report released in 2012 by Master- 4 Contactless payment allows consumers to pay for small purchases
by simply tapping their card (or their mobile device) near the point-
Card5 projected that the market for the so- of-sale terminal, while the intervention of third parties or signature
called e-money (cards pre-loaded with cash) or PIN verification are typically not required.
5 2012 Global Prepaid Sizing Study, commissioned by MasterCard:
would be worth around USD 822 billion by A look at the potential for global prepaid growth by 2017.

44

50 Economic Bulletin
December 2016
 Chart 3 Shares (per product and per customer segment) of FinTech in global banking revenue*

(%)

large corporate
commercial
retail

50 50
45 45
40 40
35 35
30 30
25 25
20 20
15 15
10 10
5 5
0 0
account management lending and financing payments financial assets and capital
markets
products

Source: McKinsey & Company, "Cutting through the noise around financial technology", February 2016.
* 350+ commercially well-known cases registered in the Panorama database of MacKinsey for 2015. Segments' share of global banking
revenue as a percentage of total. "Commercial" comprises small and medium-sized enterprises and "Large corporate" comprises large
corporations, public entities and non-banking financial institutions. Revenue share of "Account management" includes current/checking
account deposit revenue. Revenue share of "Financial assets and capital markets" includes sales and trading, securities services, retail
investment, asset management, etc.

The main common characteristics of payments and merchants will be better informed about
innovations are: (1) simplicity (they allow cus- their customers.
tomers to make payments in a single tap); (2)
interoperability of IT systems (they are not Furthermore, as transactions become all the
restricted to a single payment method, as the more virtual and automated, an increasing
digital wallet is linked to credit/debit cards or number of payment processes will become
a bank account); and (3) supply of value-added invisible to end users, changing in this way both
services (customers, merchants and financial their needs and their consuming behaviour. In
institutions interact more closely, which more detail, the successful deployment of dig-
enables them to offer additional services such ital wallets will free consumers from any lim-
as offers, rebates and reward points). itations on the number of payment cards they
can hold and use for their transactions. Con-
These innovations have led to a shift away from versely, customers may add multiple payment
cash towards electronic payments, as con- cards to digital wallets and choose a different
sumers now benefit from the use of payment card each time with a few additional clicks or
cards even in small value transactions. Given in just one click. On their part, to ensure faster,
that innovative solutions make use of the exist- simpler and more efficient payments, a grow-
ing infrastructure, which has very low variable ing number of merchants and payment solution
costs, the cost of electronic transactions is providers will offer an automated or one-click
expected to fall as the volume of electronic check-out in electronic payments, in which
payments increases. On the other hand, as a consumers will have set a default card for all
result of this shift towards electronic payments transactions unless a different payment
and hence the accumulation of more personal method is selected. As a result of the above,
data, financial institutions, service providers card issuers will have to differentiate in order

44
Economic Bulletin
December 2016 51
 Chart 4 Top seven reasons consumers are using FinTech*

Greater level of trust relative to traditional banking 1.8%

institutions

More innovative products 5.5%

Better quality of service 10.3%

Better online experience and functionality 11.2%

Access to different/new products and services 12.4%

More attractive rates/fees 15.4%

Easy to set up an account 43.4%

Source: EY FinTech Adoption Index.

* Total responses: 1,485.

to compete for the default card, by providing ily available to users. Financial institutions’
e.g. rebates or loyalty points. Moreover, lever- ability to partner with merchants will constitute
aging data in specific customer segments will a critical component of their strategies, either
become a key component of financial institu- by offering merchants with special terms and
tions’ strategies to gain a dominant share in conditions of use or by becoming the default
digital wallets. card for e-commerce platforms.

With banks increasingly aware of the fact that 2.2 LENDING AND FUNDING
FinTech and developments in payments
strongly affect the future path of payment serv- In the post-crisis period, lower risk appetite
ices, the payments industry is rapidly evolving, among retail banks has significantly limited
as traditional players and FinTech startups access to traditional bank lending. This mutual
have established collaborative partnerships to loss of trust created a lending gap, which
make the best of both parties and to provide means that a considerable part of borrowing
customers with optimal solutions. New tech- needs is not adequately met by financial insti-
nologies compromise the traditional role of tutions. Furthermore, customer preferences in
banks in the payments landscape. Conven- financial services are rapidly changing, which
tional payment solutions, such as credit and calls for increased transparency, effectiveness
debit cards, have been the main interest and control over savings and loans.
income source for many banks. Such fee rev-
enue is threatened by innovation, and banks Over the same period, alternative peer-to-peer
may see their share in the payment services (P2P) lending platforms have emerged to fill
market decline, since the adoption of a digital gaps in the traditional lending model. Such plat-
wallet is as simple as the installation of an forms use alternative methods for assessing cus-
application in a smartphone. New, innovative tomers’ creditworthiness (for example, files of
banking products and services are only avail- sales history from eBay, social media data, etc.)
able digitally (e.g. digital wallets for mobile and automated processes to offer loans to a
devices), user-friendly, tailor-made and read- broader base of customers, as well as a new class

44

52 Economic Bulletin
December 2016
of investment opportunities. P2P lending plat- internet users, who are invited to financially
forms are a new form of lending, without neces- back a new project or business often in
sitating financial intermediation. Acting mainly exchange for some sort of “reward” (e.g.
as online stock markets, lenders offer an rebates and small gifts), without the need of a
amount, which is usually shared among bor- financial intermediary. In recent years,
rowers to achieve risk diversification, while bor- “equity crowdfunding” has also emerged,
rowers pick the lowest interest rate, i.e. the low- under which backers receive equity shares of
est return among those offered by lenders. the company or buy part of the debt/lend
money in return for a future premium.
Emerging alternative lending models pose
competitive threats and create opportunities Although these alternative funding platforms
for financial institutions, which highlights the are not likely to replace the traditional fund-
importance of close partnerships and syner- ing ecosystem in the short or medium term,
gies with a view to mutually sharing capabili- their growth could change the role of incum-
ties and learning from each other’s lessons. In bent institutions. Against this backdrop, the
particular, P2P lending processes are flexible public, investors and regulators have largely
and automated, while P2P online platforms focused their attention on alternative financ-
can process requests from investors and bor- ing mechanisms. However, FinTech goes
rowers faster and more efficiently due to beyond this narrow scope to include financing
state-of-the-art infrastructure and absence of of technology itself (e.g. via venture capital,
regulatory obligations. As a result, online plat- private equity, public offerings, etc.). In addi-
forms entail lower operating costs than tra- tion to the continued development of alterna-
ditional financial institutions. In view of ris- tive financing mechanisms, FinTech is increas-
ing customer demand for flexible, smart and ingly involved in areas such as robo-advisory
tailored services, conventional financial insti- services.7 Robo-advisors are just one example
tutions are upgrading their financial products, of the way incumbent firms are innovating in
focusing on sophisticated or highly person- order to recast their customer relationships
alised products. and offer new banking approaches.

Typically, capital raising activities have been 2.3 DIGITISATION

facilitated by specialised financial institutions,
which on the back of their expertise are able to Digitisation is nothing new in the banking and
identify and support investment opportunities. financial sector. High-frequency trading and
In view of growing interest in startups and digi- related arbitrage strategies are good exam-
tisation, a number of alternative funding ples of the impact that new technologies
(crowdfunding) platforms have been launched, already have. The increased use of mobile
thereby increasing access to capital raising phone devices and smartphones (in 2014,
activities and providing funding to a greater active mobile devices outnumbered humans
number of companies and projects, where on the planet) has placed digital services in
potential funders meet project developers via the hands of consumers who previously could
an online platform. not be reached. Boasting access to cloud-
based technology, smartphones enable digital
Alternative funding platforms6 provide an services to be accessed by almost anyone, any-
opportunity for businesses to interact directly where and anytime.
with individual investors to widen their raising
capital options. Crowdfunding serves as an 6 The most popular platforms globally are kickstarter.com and
indiegogo.com, while groopio.com is the first Greek crowdfunding
alternative model to funding for projects and platform.
businesses that lack access to capital invest- 7 “Robo-advisors are a class of financial adviser that provide financial
advice or investment management online with moderate to minimal
ment. It rests upon the active participation of human intervention”, Wikipedia.

44
Economic Bulletin
December 2016 53
 Besides, new technology has considerably The outlook for digital currencies as a means
improved storage of, access to and interpreta- of payment is unclear. Some consider that the
tion of data, resulting in significant benefits, key role of digital currencies will be cross-bor-
yet also the need for greater data protection. der capital transfers, which are priced quite
For the banking industry, perhaps the biggest highly by banks. Virtual currencies have
potential comes from “big data”.8 In recent attracted great attention from the media and
years, thanks to the development of new tech- policymakers, while central banks are closely
nologies and applications ―such as the wide- monitoring this issue. Indeed, blockchain tech-
spread use of social media and smartphones― nology poses a number of challenges that have
the volume and the format of data have yet to be resolved. In particular, there is still
changed drastically, and data analytical and considerable uncertainty in many markets sur-
management capabilities are impressive. rounding the future regulatory framework for
Technology advancements have made it pos- bitcoins, with regulatory authorities puzzling
sible to effectively analyse and interpret vast, over whether digital currencies should be
complex sets of data. This “smarter” data man- treated as a fiat currency (and thus as a foreign
agement allows banks to create more effective, currency), as a commodity (and therefore as a
client centric solutions that are more in line good), as a form of money substitute (and
with customer needs. therefore not officially recognised by govern-
ments) or as something completely new.
For the largest part of the 20th century, pay-
ments meant the exchange of banknotes or
checks. Even credit card transactions required 3 THE ROLE OF BANKS
the submission of receipts and supporting doc-
uments between banks. Nonetheless, digitisa- The financial crisis of 2008 led to a series of
tion in payment services has taken place very major upheavals in the banking and more
early, making it hard to imagine the digitisation broadly the financial sector. First, it became
of other industries without a previous digiti- evident that the activities of large financial
sation of the payments industry (PayPal for institutions generate systemic risk. This in turn
instance). However, all these digital payment led to the compilation of different metrics
systems use a centralised network that designed to quantify systemic risk. Bank finan-
requires users’ trust in a central counterparty. cial regulation tightened (Basel III) and many
In 2009, a whitepaper proposed the creation of financial institutions had to respond by, among
a distributed ledger that facilitates transactions other things, adjusting their IT development
between parties without the need of an inter- methods to the new regulatory framework. At
mediary via a cryptographic process. Such a the same time, banks had to confront not only
distributed payment peer-to-peer protocol is an increasing number of competitors, but also
the Bitcoin network, with bitcoins as the digi-
tal currency of the ledger. Digital currencies 8 A 2012 definition by Gartner research company states that: “Big
belong to the class of cryptocurrencies, using data is high-volume, high-velocity and/or high-variety information
assets that demand cost-effective and innovative forms of
cryptography to control the creation of addi- information processing”. The three “Vs”, i.e. Volume, Velocity and
tional units and to secure transactions. As Variety, are usually referred to in the literature as the key features
of big data. Thus, the concept of big data is not merely about the
transactions are made, changes in the owner- size, the type or the source of data but rather reflects a number of
ship of cryptocurrencies are recorded in a pub- processes that require enhanced insight.
9 In particular, when users spend digital currencies, the respective
lic ledger which is known as the “blockchain”.9 network records the transaction in a list called block. Every block
is linked to the previous and the next one and thus a chain is
Since 2009 a range of networks have been created, i.e. the blockchain. In this way, the blockchain is essentially
developed, built on the same underlying prin- a public distributed ledger, since everyone on the network has a
copy, allowing for security and transparency.
ciples and concepts but employing different 10 There are more than 500 different alternative digital currencies
encryption technology or targetting on differ- (altcoins). Most of them build up on the same framework provided
by Bitcoin and die out shortly. Apart from Bitcoin, most popular
ent usage.10 distributed ledgers are Litecoin, Ripple and Νamecoin.

44

54 Economic Bulletin
December 2016
a new type of competitor, which is largely seen characterise a changing financial sector, not-
as better placed to respond to changing mar- ing that technology advances may increasingly
ket regulations and customer needs. This is affect traditional providers of financial serv-
about FinTech startups that can develop inno- ices and their revenues. The report states that
vative products at a faster rate, showing a clear FinTech’s development can also provide
competitive advantage relative to the more tra- opportunities, including wider access to finan-
ditional methods employed by banks.11 cial services for customers at lower costs,
increasing competition and efficiency,
2015 was the year when it became clear that the reduced systemic risk, as well as access to bet-
Digital Revolution had finally hit the banking ter and more customer-friendly products. On
sector. Global investment in FinTech tripled to the other hand though, concerns are expressed
USD 12 billion between 2013 and 2014,12 and as to the impacts on the banking sector. In
the British Bankers’ Association announced more detail, it is argued that FinTech could
that mobile banking has become the preferred affect banks’ future profit generation capac-
payment method for customers. The banking ity, promote the risk-taking behaviour of tra-
sector has a high IT spending-to-revenue ratio. ditional financial institutions and increase
However, between 2014 and 2015, total global operating risk as a result of outsourcing to
investment increased by only 4.6%, with the FinTech in an effort to reduce operating costs.
bulk referring to system maintenance. At the same time, the report expresses con-
cerns that FinTech may give rise to additional
Historically, banks have been responsible for risks, such as money laundering and reputa-
most financial innovations. The launch of tional and integrity risks, as in the long run
credit cards in the 1950s and of ATMs in the FinTech and digitisation could pose risks to
1970s revolutionised the way we access and financial stability and the orderly functioning
pay for goods and services. The financial sec- of markets. Finally, the Board of Directors of
tor has continued to witness many remarkable the Euro Banking Association decided to cre-
innovations and technological advances, such ate an open forum for banks, FinTechs and
as contactless technology, digital wallets and other stakeholders to exchange views and
cryptocurrencies. However, nowadays inno- experience on the various issues related to the
vation rarely comes from banks, but from implementation of the New Payment Services
small FinTechs. Despite their differences, Directive (PSD2) and the creation of an Open
both FinTechs and banks have a lot to gain Banking environment.
from working together. FinTechs can benefit
from the long history of banking operations Banks maintain their reputation for reliable
and banks’ institutional framework. On their and secure transactions and invest in high reg-
part, banks can gain value added, either ulatory standards, but they also recognise the
through synergies and partnerships with Fin- importance of being at the forefront of inno-
Techs or through the acquisition of their vation and seek to exploit the enormous
advanced technology offerings. potential offered by FinTech. This has led a
large portion of banks to explore different
The European Banking Authority (ΕBA), the approaches to leverage FinTech innovation
European Securities and Markets Authority (see Chart 5), including venture capital invest-
(ESMA) and the European Insurance and ments, accelerator/incubator programmes and
Occupational Pensions Authority (EIOPA), in
their joint report on risk and vulnerabilities in 11 In the financial sector, FinTech firms have a comparative
the EU financial system that was published in advantage, due to the technical debt that was accumulated by
traditional players, notably banks. See Darolles (2016).
March 2016,13 acknowledge that increasing 12 http://www.fintechinnovationlondon.net/media/730274/Accenture-
proliferation of financial technology and of The-Future-of-Fintech-and-Banking-digitallydisrupted-or-reima-.pdf.
13 Joint Committee Report on Risks and Vulnerabilities in the EU
FinTechs, digitisation and rapid innovation Financial System, https://esas-joint-committee.europe.eu.

44
Economic Bulletin
December 2016 55
 Chart 5 Dealing with technology and innovation*

Question: How are you currently dealing with FinTech companies?

35 35
32%
30 30
25%
25 25
22%
20 20
14% 14% 15%
15 15
11%
9% 9%
10 7% 10

5 5

0 0
Do not know Other We acquire We launch We set up We rebrand We establish We buy and We do not We engage
FinTech our own venture funds purchased start-up sell services to deal with in joint
companies FinTech to finance FinTech programmes FinTech FinTech partnerships with
subsidiaries FinTech services to incubate companies FinTech
services FinTech companies
companies

Source: PwC, The 19th Annual Global CEO Survey, 2016.

Ερώτηση: Με ποιο τρόπο αντιμετωπίζετε τις εταιρίες
* According to a PwC survey of 176 CEOs from the Banking and Capital Markets sector in 62 countries.

close collaboration with the FinTech com- As the rate of change is accelerating, banks
munity. There are also several other initia- engage with the FinTech community in order
tives such as the “hackathon-type” innovation to better understand future challenges and
programmes, with a limited impact on the opportunities. Against this background,
internal performance of the sponsoring banks should continue (a) developing and
organisations. publishing an internal “road map” outlining
how to identify and respond to market threats
According to a survey conducted by Pricewa- and opportunities; (b) conducting ongoing
terhouseCoopers (PwC 2016a) on 176 CEOs research to keep abreast of FinTech-driven
from the Banking and Capital Markets sector changes; (c) ensuring that key staff are edu-
in 62 countries, interviewed CEOs see cus- cated on developments, threats and opportu-
tomer relationship management systems nities; (d) developing an innovation pro-
(80% of respondents), data analytics (75%) gramme; and (e) optimising already available
and social media communication and engage- information and data.14
ment (56%) as the top three technologies that
would generate the greatest returns in terms Experience from several European FinTechs
of customer engagement. The ability to has shown that FinTechs and banks can work
analyse a larger volume of data with higher together at different levels. Notwithstanding
speed and more accurate predictions can the level at which they engage in a partnership,
ensure a faster, targeted and forward-looking both sides have potential valuable gains. Fin-
response to customer demands and capital Techs are technology-intensive companies that
market developments. Chart 6 also shows that seek to test new technologies and explore what
CEOs acknowledge the impact that customers is technically feasible without being bound by
have on their business strategy (for almost rigorous legal frameworks. By implementing
90% of respondents, meeting customers’
expectations is a top priority). 14 See BNY Mellon (2015).

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56 Economic Bulletin
December 2016
 Chart 6 Determinants of corporate strategy*

Question: What impact do the following stakeholder groups have on your organisation's strategy?

respondents who indicated "high or very high impact"

100 100
90%
90 90
80 80
69% 67%
70 70
60 60
51% 46%
50 50
41%
40 40
30 30
20 20
10 10
0 0
customers government and competitors employees partners/suppliers providers of
regulators capital/investors

Source: PwC, The 19th Annual Global CEO Survey, 2016.

* According to a PwC survey of 176 CEOs from the Banking and Capital Markets sector in 62 countries.

innovative approaches, they promote a large der its further development and halt the EU’s
number of new ideas in a very flexible way. On growth momentum (different cost of payments
the other hand, banks can add regulatory, legal for consumers and merchants, different tech-
and risk management expertise and can give nical infrastructures, lack of a common set of
FinTechs access to global payment systems as technical requirements among payment serv-
well as to their customer databases. Together, ice providers, high interchange fees that trans-
FinTechs and banks create an ecosystem that late into higher consumer prices).
allows them to better respond to customer
needs and bridge the gap between the services In this context and in order to adapt the Euro-
offered by traditional banks and those actually pean payments market to the opportunities of
demanded by customers. the single market and to support the growth
of the EU economy, the European Commis-
sion adopted a package of measures. The
4 THE ROLE OF REGULATORS revised Payment Services Directive (PSD2) 16
introduces some new elements and significant
In recent years, retail payments have seen sig- improvements in the EU payments market. In
nificant technical innovations with a rapid particular, it aims to facilitate and render
growth in the number of electronic and mobile more secure the use of internet payment serv-
payments, as well as with the emergence of new ices by including within its scope the new pay-
types of payment services, which has chal- ment initiation services. Such services operate
lenged the framework under the Payment Serv- between the merchant’s and the consumer’s
ices Directive (PSD).15 Many innovative prod- bank, allowing for low-cost and efficient elec-
ucts or services fall entirely or in large part out- tronic payments without the use of a credit
side the scope of the PSD. At the same time, card. These service providers will now be sub-
the EU market for card, internet and mobile
payments remains fragmented along national 15 Directive 2007/64/ΕC.
16 These measures become effective on 31 January 2018. Directive
borders and faces serious challenges that hin- 2015/2366/ΕU.

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Economic Bulletin
December 2016 57
 ject to the same high regulatory and supervi- ucts and services should be regulated. The digi-
sory standards as the other payment institu- tisation of processes and services of financial
tions. At the same time, banks and other pay- institutions is a completely understandable mar-
ment service providers should enhance ket trend with regulatory implications and obli-
online security by requesting strong customer gations related to the use of technology. On the
authentication. other hand, tech startups enter the financial
industry with little or no past regulatory expe-
Secure payment services are a prerequisite for rience. These companies tend to lack a culture
the smooth functioning of the payment service of compliance regarding their obligations for
market. Users should therefore be adequately customer protection in the provision of finan-
protected against potential risks.17 All online cial services. This is precisely where the current
payment services should be secured by adopt- debate around FinTech regulation lies.
ing technologies able to guarantee safe user
authentication and to mitigate the risk of fraud. The objective of the new rules set by the PSD2
In order to allow for user-friendly and easy to is to close the regulatory gaps, as well as to
access means of payment for low-risk payments, provide more legal clarity and ensure consis-
such as low value contactless payments at the tent application of the legislative framework
point of sale, mobile or not, security require- across the EU. In particular, a level playing
ment exemptions should be specified in regu- field is guaranteed for both incumbents and
latory technical standards. In this respect, the new market participants, enabling new means
user should be able to rely on measures that of payment to reach a broader market and
protect the confidentiality and integrity of per- ensuring a high level of consumer protection
sonalised security credentials (for example, by in the use of these payment services across the
SMS or email). EU. This will improve the efficiency of the
payment system as a whole and lead to more
Moreover, in recent years technological choice and more transparency of payment
advances have given rise to the emergence of services, while strengthening the trust of con-
a range of complementary services, such as sumers in a harmonised payments market. 18
account information services where the user is Moreover, the Directive states that the defi-
able to have an overall view of its financial sit- nition of payment services should be “tech-
uation immediately and at any given moment. nologically neutral” and should allow for the
development of new types of payment services,
The PSD2 also includes the above mentioned while ensuring equivalent operating conditions
services in order to provide consumers with for both existing and new payment service
adequate protection for their payment and providers.
account data. Finally, payment initiation serv-
ices enable the payment initiation service The European Supervisory Authorities (com-
provider to provide comfort to a payee that the prising the ESMA, the EBA and the EIOPA)
payment has been initiated in order to provide are monitoring the growing number of insti-
an incentive to the payee to release the goods tutions offering automated services as well as
or to deliver the service without undue delay. the use of Distributed Ledger Technology
Since payment initiation services were not (DLT). The EBA also encourages regulators to
included in the PSD, this raised a number of
legal issues, such as consumer protection, secu-
17 Directive 2015/2366/ΕU: “Consumers should be protected against
rity and data protection. The new rules under unfair and misleading practices...”.
the PSD2 therefore address these issues. 18 It should also be noted that low value payment instruments are an
inexpensive and easy-to-use alternative for goods and services of
low price and should thus not be overburdened. In order to enhance
From a regulatory point of view, a change of consumer confidence in a harmonised payments market, it is
important that the payment services user is aware of the actual costs
attitude was warranted as to how FinTech prod- and charges.

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58 Economic Bulletin
December 2016
closely monitor FinTech with a view to assess- In Greece, the most popular FinTech instru-
ing potential risks to investor protection, e.g. ment is the e-wallet, which allows users to
information technology risk. make payments and transfer amounts to third
parties or to bank accounts. Apart from wallet-
The banking and financial sector has under- to-wallet transfers (without transaction fees),
gone profound changes and regulators need to the e-wallet also enables the payment of util-
avoid two pitfalls. The first is overprotecting ity and other bills, the transfer of amounts to
incumbents by erecting barriers to entry for a mobile contact or a business VAT identifi-
newcomers. This would discourage financial cation number, as well as payments at a phys-
innovation and hinder competition in the sec- ical store without a POS terminal.
tor. Conversely, the second potential pitfall is
choosing to act in favour of newcomers, by In the Greek market, banks as well offer elec-
imposing on them less strict regulating rules tronic banking services through different com-
than on incumbents. Thus, they should provide munication channels, such as e-banking and
a level playing field to all participants, while at mobile banking. Furthermore, banks have
the same time fostering an innovative, secure shown a keen interest in the provision of up-
and competitive financial market. In addition to-date electronic services and are active sup-
to the rules per se, authorities look in general porters of FinTech. A number of banks have
at the incentives offered to market players and launched the electronic wallet linked to a bank
how these could make them change their account or a debit/credit/prepaid card, which
behaviour. In this vein, FinTech needs a frame- supports among other things contactless pay-
work that will be both harmonised and ments, transactions history, transfers of
dynamic and from which market players (e.g. amounts to mobile or social media contacts
institutional or newcomers) and regulators without the need to know the bank account
alike benefit. Regulators’ objectives include: number of the recipient, one-click buying on
(a) financial stability, (b) prudential regulation, electronic stores, payments of utility and other
(c) fairness and (d) competition and market bills, rebates and reward points.
development.19
The competent authorities for the authorisa-
tion and prudential supervision of credit insti-
5 THE GREEK FINTECH LANDSCAPE tutions, payment institutions and electronic
money institutions 20 are the Bank of Greece
In Greece, since the imposition of capital con- and the ECB. In particular, the authorisation
trols and the subsequent shock, an increasing requirements and the supervision rules gov-
number of individuals and businesses, follow- erning the operation of electronic money insti-
ing the global trend, have resorted to elec- tutions are laid down in Law 3862/2010, Law
tronic means of payment and banking. 4021/2011,21 and Bank of Greece Executive
Restrictions on cash withdrawals, corporate Committee Acts 33/19.12.2013 and
transactions and capital transfers abroad have 22/12.7.2013. Under Article 12(1) of Law
pushed many consumers and firms towards a
broader use of electronic payment methods.
19 See Arner et al. (2015).
On 26 September 2016, the European Central 20 Under Article 10 (1) of Law 4021/2011, “electronic money” means
Bank (ECB) published the 2015 statistics on “electronically, including magnetically, stored monetary value as
represented by a claim on the issuer which is issued on receipt of
non-cash payments in the EU. On the basis of funds for the purpose of making payment transactions .... and which
is accepted by a natural or legal person other than the electronic
these statistics, in Greece the total number of money issuer”.
non-cash payments, comprising cheques, card 21 Law 4021/2011 (Articles 9-30) transposes into Greek law the
provisions of Directive 2009/110/EC of the European Parliament
payments (excluding e-money payment trans- and of the Council of 16 September 2009 (OJ L267/10.10.2009) on
actions), credit transfers and direct debits, the taking up, pursuit and prudential supervision of the business
of electronic money institutions amending Directives 2005/60/EC
surged to 423 million in 2015. and 2006/48/EC and repealing Directive 2000/46/EC.

44
Economic Bulletin
December 2016 59
 4021/2011, the Bank of Greece is responsible point, playing a key role in the emergence of
for the authorisation and prudential supervi- the FinTech era.
sion of Electronic Money Institutions. In this
capacity, the Bank of Greece issued Executive FinTech covers digital innovations and tech-
Committee Act 33/19.12.2013. In order to be nology-enabled business innovation models in
granted authorisation, prospective electronic the financial sector. Such innovations may dis-
money institutions are required to hold initial rupt existing structures in the industry, revo-
capital of not less than EUR 350,000 (three lutionise the way existing businesses generate
hundred and fifty thousand). The above Law and distribute their products and services, and
also sets out the capital requirements and the open new avenues for entrepreneurship.
method of calculation of own funds require- Examples of innovations that are central to
ments for electronic money institutions, and FinTech today include mobile payment sys-
specifies the safeguarding requirements for tems, new digital advisory and trading systems,
funds received, the optional exemptions and peer-to-peer lending, equity crowdfunding,
the activities in which electronic money insti- cryptocurrencies and blockchain.
tutions are entitled to engage in addition to
issuing electronic money, either in Greece or Recent innovations might pose several chal-
on a cross-border basis. In accordance with lenges for incumbent providers of financial
Article 25(1) of Law 4021/2011, issues con- services. But they may also represent oppor-
cerning the provision of information, by elec- tunities for the financial sector, including wider
tronic money institutions, to electronic money access for consumers to financial advice and
holders on their rights, as well as the review of services at a lower cost and increased compe-
complaints from electronic money holders do tition and efficiency. The growing diversity of
not fall under the competence of the Bank of market participants and financial services
Greece, but under that of the Secretariat Gen- offered can also reduce systemic risk and lead
eral of Consumer Affairs. to better and more customer-friendly products.
The financial sector has benefited more com-
In the context of providing information to pared to other industries from the improve-
interested parties, the Bank of Greece pub- ments in the information technology sector.
lishes online lists (register tables) of all credit
or financial institutions authorised to provide In the banking sector, FinTech could impact
banking services. According to the register banks’ future revenue-generating capacity,
tables, only one electronic money institution with a negative impact on capital adequacy due
and nine payment institutions are operating in to loss of deposits. Financial institutions rely
2016. The tables also include those payment more heavily on non-interest income. FinTech
and electronic money institutions that have companies are often able to offer more effi-
notified of their intention to provide services cient services, while market entry barriers may
in Greece without establishment.22 be lower than for traditional financial service
providers, as digitisation further facilitates
their entry into the market.
6 CONCLUSIONS
Supervising authorities are closely monitoring
As already mentioned in the introduction, the evolution of financial technology in order
financial sector and technology have long to fully understand developments in FinTech
been intertwined concepts and these two sec- and innovation and be ready to respond effec-
tors are mutually reinforcing. Although it is tively to a rapidly changing financial sector.
difficult to determine how and where this shift
in financial services began, the global finan- 22 http://www.bankofgreece.gr/Pages/en/Supervision/SupervisedInsti-
cial crisis of 2008 was undeniably a turning tutions/default.aspx.

44

60 Economic Bulletin
December 2016
This includes assessing potential risks to tor needs in order to meet customer expecta-
investor protection. Digitisation offers huge tions. The aim of the regulatory framework is
growth potential for the financial sector. How- to promote financial stability and access to
ever, it is important that the necessary regu- services, while regulators aim to continue
latory changes do not stifle innovation and at exploring policies that promote innovation and
the same time ensure the stability that this sec- the entry of newcomers.

44
Economic Bulletin
December 2016 61
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62 Economic Bulletin
December 2016

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