Receive our newsletter - data, analysis and deep insights on FDI delivered to you
Business Activities / Financial services

Europe is losing the fintech race. Here’s why.

Asia and its super apps are changing lives and revolutionising financial technology, while Europe is missing out, writes FDI specialist Martin Kaspar.

Fintech, a neologism created from the terms ‘financial services’ and ‘technology’, describes companies that seek to compete with traditional financial service providers through new methods of service delivery. The most talked about services in this field are the use of payment apps on mobile phones allowing transactions, always and anywhere, as well as cryptocurrencies.

However, the field is much wider than that. There are fintech solutions in insurance (insur-tech), lending and crowdfunding, to name but a few. An even more complex picture emerges when we look at fintech locations or individual players. Ant Financial from China – which emerged out of Alipay – is currently the world’s largest third-party payment service provider. Klarna from Sweden is one of the leading European players for payment handling and risk protection for e-commerce stores, while Transferwise (from the UK, but originally Estonian) is leading in international payment and funds transfer across borders.

Beyond ‘mere’ payment solutions there is, however, a whole range of other applications of this technology. These include Habito of the UK, which is an online mortgage broker,  and Taxdoo from Germany, an automated interface for online markets dealing with VAT declarations in a whole range of countries, facilitating the otherwise highly complex cross-border VAT handling.

Maybe the biggest tangible effect fintechs have, however, is in emerging markets, where they allow a large number of underbanked or even previously unbanked people to have access to a bank account, often for the first time. Examples here are payment platforms such as M-pesa in Kenya, Interswitch in Nigeria or the pan-African e-commerce platform Jumia, which is based in Nigeria. There are, of course, many others. All of these arbitrary examples merely illustrate the point of a divergent and dynamic ecosystem emerging.

White papers from our partners

The revolution in banking hasn’t come yet because Western fintechs aren’t touching the lives of ordinary people. At least, not in the way they do in Asia.

As with many emerging fields, there are many myths and misconceptions surrounding fintechs. They are, for instance, not necessarily cheaper than conventional financial service providers, nor are they (yet) the revolutionary game changer that will bring banking as we know it to an immediate end. The keyword in this sentence is ‘immediate’. Fintechs are undoubtedly changing the banking industry, and even if they signal the death knell for High Street banks (or Wall Street) in their entirety, massive dislocations are to be expected. How seriously the industry is taking the new kids on the block can be seen by their eagerness to buy into these firms, or at least partner with them (as happened in recent moves by Goldman Sachs, JPMorgan and Citi).

Why Asia is at the forefront of the fintech revolution

If you asked people in the streets of Berlin, Barcelona or Bratislava, the majority of them would see fintechs as the toys of tech geeks, and completely irrelevant to their own lives. Arguably the revolution in banking hasn’t come yet because Western fintechs aren’t touching the lives of ordinary people. At least, not in the way they do in Asia. It is time for the West to wake up to the fact that we are trailing behind Asia in this sector, particularly when we think about ‘super apps’, which is where the real utility of fintechs for end users comes into play.

Super apps are platforms that play a significant role in the lives of people, every day, all day long, from booking a taxi (or a motorcycle ride in Indonesia), to restaurant reservations, or ordering a take-out delivery and making the payments for all of these. Two of the best-known super apps are Grab and GoJek.

Grab, which is based in Singapore, started as an Uber-like taxi app that expanded into food delivery, movie ticket ordering, payment services, microloans and much more. Similarly, GoJek, from Indonesia, started out as a motorcycle-hailing service, expanded into taxi ordering, and – much like Grab – then into food and medicine deliveries. By adding a payment functionality, the two services gradually morphed into apps that increasingly dealt with more and more aspects of daily life. Compared with this, Uber and Didi Chuxing (which is the world’s largest ride-hailing app) appear to be not quite as avant garde.

This is especially true in food shopping. From handing over cash in store to paying via e-wallets, these super apps are now responsible for a significant share of payment transactions. Certainly, in large parts of Asia, where most payment transactions are now conducted via e-wallets, fintechs are on their way to threatening the business models of traditional banks. Take, for instance, China, where WeChat Pay and Alipay are now responsible for more than half of all payment processes in the country (and significantly more in the coastal regions), turning China effectively into a cashless society.

How the West got lost

Let’s face it, the West is behind the curve, and Silicon Valley is not (or not any more) the undisputed epicentre of fintech. The West is increasingly losing its leadership status in terms of the application of technology. Admittedly, the jury is still out on whether all of these developments are unreservedly good for society or the individual.

It is undoubtedly true that the West and Asia started from totally different points, with the former not having large sections of the population underbanked. However, with regulatory processes traditionally moving at glacial speed, and fintechs being largely absent from the lives of most Europeans, being leapfrogged by Asia leaves Western Europe in particular looking somewhat technophobic, and a slightly fuddy-duddy relic. While Europe is witnessing a fast-growing fintech scene, albeit in a more traditional sense of fintech usage, with the UK, Sweden, Germany and Lithuania all being highly dynamic fintech locations, these companies tend to be run by and targeted at the trendy, privileged few, rather than the general public, in whose hands their future ultimately lies.

While in the West we are debating the merits of e-wallets, Asia is pushing the boat out even further. The Fusang Group, for example, wants to turn shares – which typically exist in back offices, and are still cumbersome, paper-based documents – into digital assets. So rather than having to have safekeeping accounts and unwieldy back end processes for buying and selling shares, digital securities can be moved via a mobile phone, much like funds from an e-wallet. This will allow more employees or suppliers to become shareholders, making them part of the business and therefore far more engaged in a company.

In the case of underbanked people in emerging markets, fintechs aren’t only delivering transactional advantages, they are potentially changing the game altogether, and with it the lives of ordinary people. There is great potential in fintechs and Europe would be well advised not to miss the boat. So, what should Europe do?

The European fightback starts here

A key area is the regulatory field. Fintech is moving at lightning speed, and regulatory processes tend to be a lot slower. Europe should, however, make sure that it is not too far behind the lived reality everywhere else on the planet. The world isn’t waiting for Europe’s regulators to get their act together. And while P2D2 – which regulates payment services throughout the EU – is a positive initial move, there is a need for harmonised rules across Europe that aren’t subjugating everything to maximum regulatory demands.

Being leapfrogged by Asia leaves Western Europe in particular looking somewhat technophobic, and a slightly fuddy-duddy relic.

While Europe obsesses about its own startling incompetence in Covid vaccinations and the UK is still busy with post-Brexit navel-gazing, everything else has seemingly disappeared from our newspapers. The population needs to understand what fintechs are, and what they can and can’t do. Rather than whipping dead horses of past mistakes we must look forward and facilitate a debate about future technologies and whether and how we want to use them.

Lastly, but most importantly, a question to us all: how ready are we to engage with new technologies? The Swedes are technologically curious and willing to try everything. Is that true of us all? Or is it merely the millennials who dare to do so? If that is the case, new technologies will never attain a critical mass in an ageing Europe. It simply might not happen here. So, at the end of the day, it is our regulatory system and the decisions that we make that will determine Europe’s destiny.

Home page image by Roslan Rahman/AFP via Getty Images

Dr Martin G Kaspar is head of corporate development at a German Mittelstands company.