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EBA Report on the Impact of FinTech on Payment Institutions and E-Money Institutions (July 2019)

Core Content

This report from the European Banking Authority (EBA) analyzes the current trends, drivers, and challenges related to the impact of FinTech on the business models of Payment Institutions (PIs) and Electronic Money Institutions (EMIs). It also explores the interaction between these institutions and FinTech and BigTech firms, as well as the level of technology implementation and the future outlook for the sector.

Main Points

1. Background

• The EBA is tasked with promoting sound regulation and supervision, ensuring market integrity, transparency, and efficiency.
• Financial technology (FinTech) is defined as "technologically enabled financial innovation that could result in new business models, applications, processes or products."
• The report is part of the EBA’s ongoing monitoring of financial innovation, building on previous analysis of FinTech's impact on credit institutions.

2. Current Landscape

• Key Trends:

  • The payments sector is undergoing significant transformation due to the adoption of PSD2, the rise of new entrants, and the shift from cash to electronic/mobile payments.
  • Contactless payments using NFC, QR codes, and Bluetooth are growing, with a majority of in-store card transactions now contactless.
  • Digital wallets and mobile payments are among the fastest-growing technology markets.
  • E-commerce is expanding, with a notable increase in cross-border transactions and online shopping.
  • Marketplaces like Amazon and eBay are central to the e-commerce ecosystem.
  • The number of PIs and EMIs in the EU increased following the implementation of PSD2, including entities from outside the traditional financial sector.

• Key Drivers:

  • Customer expectations/behaviour: Demand for fast, secure, and seamless payment experiences.
  • Competition: New players, including BigTech firms, are entering the market, increasing competition.
  • Technological developments: Growth in mobile internet usage and digital ecosystems.
  • Regulatory changes: Implementation of PSD2 and GDPR has reshaped the regulatory environment, requiring secure data sharing and customer consent.

Institutions' Approach to FinTech

3.1 Interaction with FinTech Firms

• Most institutions develop FinTech-based products and services internally, using their own resources and skills.
• Internal development is preferred for agility and flexibility compared to external partnerships.
• Some institutions have established small cross-functional teams to test and explore FinTech applications.
• Partnerships with FinTech firms are common, especially for enhancing ICT security, data aggregation, and customer behavior monitoring.
• Some institutions strategically collaborate with both regulated and unregulated FinTech firms to engage with the broader ecosystem.

3.2 Interaction with BigTech Firms

• A number of BigTech firms have obtained PI/EMI licenses and are expected to play a more active role in the EU payments sector.
• Existing institutions are already using BigTech services for payment and e-money solutions.
• BigTech firms are seen as a potential threat to the sustainability of PIs and EMIs due to their scale and technological capabilities.
• Institutions are planning to focus on strengthening customer loyalty in response to increased BigTech participation.

3.3 Use of Technology-Based Innovations

• Institutions are increasingly adopting cloud services and digital/mobile wallets.
• Interest in AI, big data analytics, and biometrics is growing.
• Distributed Ledger Technology (DLT) is still in an early stage, except for crypto-assets, where it has potential applications in remittances and real-time payments.
• Some institutions find DLT not suitable for their current offerings.

Impact on Payment and E-Money Institutions

4.1 Overview

• The payments and e-money sectors are expected to grow in terms of revenues and profitability.
• Institutions anticipate an increase in customer base and the introduction of new or improved products.
• Internal FinTech developments and ICT spending are rising as a result of the need to enhance security and user experience.

4.2 Specific Observations

• PIs and EMIs are generally smaller and more agile than credit institutions, giving them a competitive advantage in adapting to changes.
• Some institutions have expanded into new markets by leveraging cross-border services or obtaining credit institution licenses.
• There is a growing trend of offering open-source software and supporting businesses through digital accounts and payment solutions.

Key Challenges

• Threats:

  • Increased involvement of BigTech firms in the payments sector.
  • Uncertainty caused by Brexit.
  • Reliance on banks and card processors for certain operations.

• Challenges:

  • Operational resilience and ICT security: Ensuring robust systems against cyber threats.
  • Regulatory changes: Compliance with GDPR and PSD2 is complex and resource-intensive.
  • Customer education: Helping users understand new payment technologies and services.
  • Skill and talent acquisition: Maintaining a competitive edge requires continuous investment in technology and expertise.

Conclusions

• The EBA continues to monitor the impact of FinTech on payment and e-money institutions.
• Institutions are adapting their business models to meet customer expectations and stay competitive.
• While some institutions are considered "regulated FinTech firms," many still rely on external partnerships and technology providers.
• The future outlook for the sector is positive, with growth in revenues and innovation expected.
• However, challenges such as regulatory compliance, security, and competition from BigTech firms remain significant.

Summary of Key Figures

• Global Payments Growth: 11% increase in global payments revenues from 2016 to 2017.
• Contactless Payments: Almost 50% of in-store card transactions in Europe are contactless.
• E-money Growth: Steady increase in e-money usage in the EU.
• Survey Data: 65 institutions responded to the EBA survey, with 13% involved in crypto-asset activities.
• PIs and EMIs in EU: As of May 2019, 961 PIs and 297 EMIs were authorized or registered in the EU.