New EU laws legitimise fintech challengers

The difficulty of competing with banks came home to the founders of French fintech company Bankin’ in 2013 when one of them received a surprising phone call.

The caller — a bank employee — asked if he used Bankin.com’s app, little realising that he was talking to someone at the company that had created the app. The bank employee warned the founder against using the Bankin’ service, saying it was not provided by their bank and that users would not be reimbursed in case of fraud.

It was not an isolated event: the bank had launched a mass telephone campaign to alert its customers to the supposed risks of using the app. When a bank customer uses a service such as Bankin’, they register their bank details in the app, which accesses the account data.

The app’s role is to provide simple, easy to understand information to the person on their spending patterns. For example, it can break down how much a person spends on rent, or on shopping. It can also warn users if they are close to being overdrawn. The app comes with built in security: for example Bankin’ encrypts users data and also allows users to set up a pin or fingerprint ID.

Joan Burkovic, one of the company’s four founders, says the campaign was just one example of the challenges that fintech companies face when they operate in areas that banks used to regard as their exclusive territory.

“Some users were typing on Twitter, saying they had just received a call from their bank saying they shouldn’t use Bankin’,” he says, adding that his company’s policy has been to try to collaborate with banks.

Fintech entrepreneurs such as Mr Burkovic are, however, about to receive an important boost from Brussels, establishing their right to be viewed as legitimate competitors to the banks.

That change takes the form of an overhaul of EU legislation that regulates the payment services market. The update, approved by member states and the European Parliament last year, is set to take effect in 2018.

The rule changes have been specifically designed to promote competition with banks when it comes to innovative online services. Specifically, the update defines the rights and responsibilities of “account information service providers,” such as Bankin’, whose app allows users to monitor and analyse their spending patterns.

According to Mr Burkovic, the updated legislation makes his company’s business model official.

“The law makes our business easier, it organises the market,” he says.

A key change is that non-bank service providers will have a clear legal right to access bank customers’ data, so long as they have the customer’s permission. In exchange, they will face more regulation, notably when it comes to data protection — a development that in turn should boost user confidence in the legitimacy and reliability of the services. The new rights would also apply to companies that compete with banks in the market for online payments.

According to Valdis Dombrovskis, vice-president of the European Commission, the updated legislation is aimed at “opening up the payment market to new technologies and more competition”, to the benefit of consumers and retailers.

This should, in theory, spell the end of the kinds of disputes seen in the Netherlands, where Dutch bank ING took successful legal action against a money-managing app, AFAS Personal, in 2014 for creating a direct software link between its service and the bank’s accounts.

For Karel Lannoo, chief executive of the Centre for European Policy Studies, the potential ramifications of the legal reform cannot be underestimated.

“It’s a big revolution because you can basically bypass the banking sector,” he says.

The implications for banks potentially go beyond competition in specific online services. Mr Burkovic notes that his app gives users clear information on what they are paying in bank fees, allowing them to compare with other banks.

“We opened the market, the client is not any more [a] captive of banks. In a sense we give back power to consumers,” he says.

Crucially, entrepreneurs believe the change should also stimulate innovation — encouraging app designers to branch out and add more functionality to their products.

Europe’s banks, however, have warned that the new freedoms could compromise security. They also complain that the changes could increase banks’ own legal responsibilities.

“It remains unclear to what extent security for both banks and consumers will be impacted by such access,” the European Banking Federation said when the law was agreed.

The question of exactly what security requirements fintech companies will face is one currently being debated by EU regulators as they work out the technical details of the law.

Lu Zurawski at ACI Worldwide, an electronic payments solutions provider, says: “The law is trying to deliberately open up a giant incubator space to get as many start-ups to come and compete with the banks, it is a deliberate act of public policy. I think banks are still struggling with the implications of it now.”

At the same time, he says, there is not a uniform picture. While “many established banks are grumpy about the need to provide this new connectivity”, he says, others “are seeing it as an opportunity to experiment with innovative new services”.