In the last 10 years of the eurozone’s history, it is probably easier to name the times without a major crisis than the times it faced one. The current wave of anti-EU populism sweeping through the continent is just the most recent result of a troubling sequence of banking crises and sovereign debt crises. On the other hand, these crises are both consequences and symptoms of a bigger problem in a very diverse eurozone. At the very core, this problem is the insufficiency of risk-sharing and insurance mechanisms between the eurozone countries. Despite being mostly neglected, the role of FinTech in Europe could be the key to solving the issue.
The Eurozone’s Systemic Fragility
By entering into Europe’s monetary union, countries have not just given up their national currency. They have equally given up their individual independent monetary policy. This means that each country has handed over a crucial tool to counter various shocks to their economy, leaving them only with fiscal policies to fight them.
As recent history has shown, however, governments’ single-handed attempts to prop up their badly-hit economies with fiscal measures has led to even higher debt ratios, followed by sovereign debt crises. Only with fiscal measures that are backed by the whole eurozone, as well as common understanding, could such asymmetric shocks to countries be countered.
As a result, the European Stability Mechanism (ESM) and the Single Resolution Mechanism (SRM) have been put in place. While these funds are only acting as emergency vehicles, other entities (like Eurobonds or a European deposit guarantee scheme), which could act as an insurance mechanism against economic shocks, are politically less feasible. Considerable resistance exists against a communitisation of all risks, which many argue leads to a permanent transfer of risk from mainly Northern European to Southern European countries.
Old Problems, New Solutions?
Only recently, has more attention been paid to a second insurance mechanism: private insurance through financial integration. Deeper financial integration would facilitate risk-sharing in the monetary union, since the average European would hold financial products from across the Eurozone through personal stock investments, membership of pension funds, and so on.
In theory, a temporary economic shock affecting French companies, for example, would therefore not lead to losses for the French alone, but also to German, Italian and Dutch citizens that would be equally invested in these companies. Additionally, a better functioning capital market would make it easier for businesses of all sizes to obtain financing through equity or debt. Being aware of the importance of these mechanisms, the European Commission has announced a proposal to build a capital markets union (CMU) to improve the so far very weak capital market integration.
What the Commission ignores, however, is that the European financial technology sector has quietly advanced a European capital markets union much further than any Commission initiative.
Fintech in Europe: Working Behind the Scenes
A recent report by PwC shows what trends have emerged from FinTech in Europe and elsewhere around the globe, and how firms they have made essential contributions towards a smoother, more inclusive financial integration.
Over the course of the last few years, FinTech startups have come up with innovative and alternative ways of financing for both bigger businesses and SMEs.
While the rise of peer-to-peer (P2P) lending platforms have played a key role, for example, equity crowdfunding start-ups like Indiegogo and Seedrs have gained wider popularity. Both sources allow individuals and businesses to lend and borrow between each other. The increase in non-bank lending and financing in Europe seems to be proof of this trend.
Not only do FinTech firms provide alternative sources of financing, they have also made these processes more efficient and more transparent, at a lower cost. Reducing the cost of due diligence through the smart use of data and increased transparency has improved access to finance overall, especially previously marginalised SMEs.
FinTech firms have not just improved funding opportunities. Innovations in lending and equity crowdfunding are also providing access to asset classes formerly unavailable to individual investors, such as in commercial real estate. Start-ups like Nutmeg and Moneybox as well as eToro and ayondo have made it incredibly simple for businesses and individuals to access a variety of asset classes or indexes for personal investments, which significantly deepens capital market integration.
Academics have long lamented that most individuals (especially the poor and unemployed) are hardly invested in domestic financial assets – let alone foreign assets. Various obstacles prevent them from holding assets originating in European countries, which weakens cross-country risk sharing among greater parts of the population – or so the argument goes. Technology might have provided a partial solution. Simple mobile phone applications allow everyone to easily invest any amount of money in any financial asset – be it domestic or foreign. What’s more, for those unsure what to invest in, automated investment advice (‘robo-advisors’) provide a cheap way to get financial help.
Limits Still Persist
Naturally, there are also limits to the impact of FinTech in Europe. While consumer banking, fund transfer, SME banking and investment management are fields heavily influenced by the rise of financial technology, it has so far had little effect on the wholesale market and interbank lending – both essential for complete financial integration.
In addition, EPICENTER, a think tank, claims that language and culture are inhibiting people from changing to alternative funding mechanisms, away from bank funding. Still, with the more globalised and culturally diverse Europe of the younger generations, it is only a matter of time for them to overcome these biases.
More importantly, however, financial technology startups are still subject to different regulations across Eurozone countries. In fact, most FinTech companies would agree that the regulatory environment poses serious challenges to their international scope and unlimited global access, which drives capital market integration. This is where the eurozone governments’ harmonisation efforts are essential to accelerating and facilitating FinTech’s impact on deeper financial integration.
The European Commission has promised to help “foster financial stability by facilitating access to market-based funding, creating deeper cross-border markets, and increasing the resilience of the financial system by creating alternative sources of funding to the economy.” This could solve the Eurozone’s systemic problems. What has been largely ignored, however, is that FinTech companies have quietly worked on these goals for the last few years. The Commission’s main objective should therefore be a regulatory harmonisation in these areas across Eurozone countries. The FinTech market can do the rest.