The European Banking Association (EBA) has published a report titled “The Impact of Fintech on Payment Institutions’ and E-Money Institutions’ business models” (the Report). The Report acknowledges the significant changes that have taken place in the broader Fintech landscape over the last few years, focussing on the Payment Institution (PI) and E-Money Institution (EMI) space. The Report is based on information and data collected by the EBA through its broad engagement with the supervisory community and with the PI and EMI industry, and provides a useful status check for industry participants or those looking to enter. The Report is both contemporaneous to the present, and also forward looking, predicting how the market may appear in years to come.
The EBA confirms that it drew information from the following sources in order to produce the Report:
- industry feedback on the EBA’s Discussion Paper on FinTech;
- telephone interviews with a sample of payment institutions and e-money institutions;
- discussions with competent authorities; and
- desk based research.
Given that sources a) to c) above are only accessible for the EBA, the Report holds some value to firms looking to gain insights into the market. Some of the most interesting statistics are listed out at Annex A to this paper.
The state of play
The Report begins with a brief description of the current state of play in the payments and e-money markets. The fall in use of cash alongside the increase in use of mobile phones has seen an increase in global payments revenues of 11% between 2016 and 2017. Disappointingly, the Report does not contain data showing the change in payment revenues that may or may not have occurred following the advent of Payment Systems Directive 2 (PSD2), but the general upswing in the market will come as little surprise to most observers.
A key feature of payments growth has been the rise in the use of digital wallets, which the EBA calculates has added around USD 40 billion to global payments revenues.
But the Report identifies four major trends that the EBA believes are playing the greatest role in shaping the relevant markets. These are as follows:
- consumer expectations/behaviour: Customers are more likely to demand fast, cheap, easy, smooth and secure payments from anywhere. Business models are becoming more ‘customer-centric’ with a view to using customer data to tailor products to suit individual needs;
- competition: The influx of newly authorised entities into the market is prompting firms to seek to expand their existing service offering, as well as looking to move up the value chain by targeting customers and SMEs;
- technological developments: Around 60% of individuals in the EU use a mobile phone to access the internet, and internet banking is increasingly popular with younger consumers. Firms are more likely to leverage technological solutions to integrate different payment methods into their systems and offer consumers more choice; and
- regulatory changes: The introduction of the General Data Protection Regulation (GDPR) and also PSD2 have put the control of data into the hands of consumers. This has broken open the market to new entrants, who are now able utilise customer data that hitherto were covetously guarded by large banks and institutions.
The Report moves on to a brief overview of how institutions ‘generally approach and relate to Fintech’. This section of the Report is arguably the least revealing: the key takeaway being that there is little consistency or pattern in the way firms seek to ‘interact with Fintech’. Mention is made however, of the arrival of BigTech firms (like Amazon or Google) and the potentially game-changing impact that these firms are likely to have, particularly with respect to payments. According to the EBA’s own survey, more than 85% of institutions expect BigTech firms to participate more actively in the EU payments market and EMI sector by integrating these types of services onto their existing platforms. The arrival of BigTech firms is again likely to change the way PIs and EMIs approach their businesses: customer data will become ever more important as will the notion of fostering customer loyalty, something that the BigTech’s enjoy in abundance.
Threats and challenges
The Report closes with a section where the EBA identifies certain key threats and challenges facing the PI and EMI markets, based on its analysis of all the data collated as part of the study. The EBA highlights the following threats:
- impact of BigTech firms: The potential use of customer data, currently held by BigTech firms, may give them a huge competitive advantage over PIs and EMIs
- brexit: Large volumes of payments business is offered by UK-based institutions through their cross-border passporting activities. This sector of the market is likely to face disruption.
- dependency of PIs and EMIs on banks: Some PIs and EMIs reported a dependency on banks in providing services to business customers, with no immediate alternative in the offing.
In addition to the threats to the market outlined above, the EBA also listed out the following challenges that the market will need to overcome in order to ensure continued growth:
- operational resilience and ICT security;
- operational capacity to cope with increasing volumes;
- evolving regulatory frameworks;
- customer education (ensuring consumers are aware of innovative technology); and
- acquiring and retaining talent (particularly in regards to ICT and digital skills).
The Report can be accessed here.
Key Statistics from the EBA Survey used in the Report
The report draws on data sources that are uniquely available to the EBA. This included a wide ranging survey that has collated some interesting and useful numbers. Below is a summary of the most pertinent data:
11% increase in global payments revenues between 2016 and 2017;
68% of internet users purchase products online
Digital wallets are estimated to have added approximately USD 40 billion to global payments revenues in 2017
E-commerce cross-border revenues have increased by 13.2% in 2018.
Belgium has the highest turnover from web sales in the EU 29 (over 15% of total turnover)
961 Payment institutions were authorised within the EU and 297 E-money institutions were authorised within the EU as at 25 May 2019.
Only 13% of EMIs or PIs perform crypto-asset activities.
85% of EMIs and PIs expect Big Tech to arrive in a big way in the near future
58% of EMIs and PIs expect an increase in profitability over the next 12 months
PIs and EMIs are investing on average an amount equal to 7% of their revenues into unregulated fintech firms
PIs and EMIs are spending an amount on average equal to 13% of their 2018 revenues
More than 80% of institutions outsource activities to TPPs
77% of PIs are not providing the new services under PSD2 (e.g. AIS and PIS services)
12% of institutions provide both AIS and PIS
8% of institutions are both ASPSPs and TPPs
45% are planning to use or currently use the EU passport
1 in 2 PIs provide cross-border services
57% of EMIs expect a positive outlook over the next twelve months