European supervisor identifies bigtech as a threat to the payments market

Fintech has led to new products and services, new entrants, and new regulation in the EU payments market. The European Banking Authority, which is responsible for monitoring financial innovation in the sector, has surveyed the impact of fintech on payment and e-money firms. We summarise seven key findings from their report.

The EBA has published a report on the fintech trends shaping the business models of payment institutions and e-money institutions. It follows a similar paper which focused on fintech’s impact on the banking sector.

The latest report summarises the EBA’s view on key market trends and threats. The research included a survey of 65 market participants. Notably, none the firms surveyed were UK institutions.

We have summarised below seven findings from the EBA report.

  • We are fintech: Unsurprisingly, many payment and e-money institutions see themselves as fintech firms. The most popular technologies that have been adopted are cloud computing and digital/mobile wallets, followed by big data analytics and biometrics. The interest in biometrics such as fingerprint and voice recognition may be a result of new incoming security standards.
  • The bigtech threat: Many bigtech firms offer payments services to facilitate their core business (e.g. e-commerce or advertising) but the EBA note that there is considerable diversity in how they conduct payment services. Nearly all the institutions surveyed expect bigtech firms to participate more actively in the EU payments and e-money sector. Some payment institutions suggested they would be open to partnering with bigtech firms or exploring M&A opportunities.
  • Growth in the B2B sector: The EBA found that providing payment services to businesses has seen significant growth as corporates and SMEs have turned to payment and e-money institutions as an alternative to banks for some services. This is consistent with the findings from last year’s report on the banking sector. 
  • Payment rails relatively untouched: Technological innovation has largely focused on improving customer experience rather than changing the underlying payments infrastructure. In Europe, at least, the EBA found that bigtech firms currently rely on existing payment rails.
  • A broadening of services: Firms are investing significantly in the development of APIs and digital and mobile wallets. A third of firms surveyed expect to add new services to their business models but only a few firms plan to seek a banking licence. 13% of payment and e-money institutions offer services related to cryptoassets, such as processing payments and/or opening payment accounts for crypto firms and exchanges.
  • Outsourcing is on the up: More than 80% of institutions outsource activities to third parties and many have seen an increased dependency on external providers in the last couple of years. These third parties are likely to include bigtech firms as well as smaller fintech providers. The potential for over-reliance on these service providers is an area of ongoing concern for regulators.
  • Resilience warning: The EBA warns that institutions are increasingly vulnerable to cyberattacks and that a targeted attack on a significant participant in the payment chain could pose a material risk to the economy. Firms are encouraged to focus on building strong operational resilience. Data sharing and the interaction between PSD2 and GDPR are also highlighted as challenges that may need to be addressed.