Here’s an alternative title to this post: ‘Why the move by Xapo from Silicon Valley to Europe is a landmark event’. It’s exciting clickbait, but we’re getting ahead of ourselves. Here’s another: ‘We look at the regulation coming out of Brussels so that you don’t have to’. Guaranteed to avoid page views, right?
One of the biggest advantages for American banks and fintech ventures has been a big and fully integrated domestic market. Unless something changes, European fintech startups will be relegated to their historical role of being acquisition targets for American ventures on their globalization track.
Those much-maligned Brussels bureaucrats have been beavering away on this problem for some time. At this point, as we introduce the alphabet soup of regulatory initiatives – Basel III, SEPA, MiFID II, Solvency II, IFRS, AMLD – eyes glaze over and people click away to something more exciting. Don’t worry! There are two levels to understanding this regulatory stuff.
- Enough to run my business and understand where the puck is headed.
- The deep dive level that accountants, lawyers, regulators and domain experts in IT need.
My business, Daily Fintech, is firmly at Level 1. All you need to know is:
- Why: why was this regulation introduced?
- What: what does this regulation cover?
- When: when will it, or did it, become law?
- Where: what is the American or Asian equivalent?
- Elevator: only got 30 seconds, why should I care?
I’m writing this from the point of view of a fintech entrepreneur. CEOs of big banks have teams of expensive people advising them on this. Fintech entrepreneurs need to understand:
- If we choose to be a regulated entity, how will this influence our product?
- How will this trigger adoption for my product?
OK, get your stimulant of choice and read on.
Why: Make sure banks have adequate capital so that there isn’t a ‘run on the bank’ during any future financial crisis.
What: Tier 1 capital is increased from 4% to 6%. Plus, banks must maintain enough ‘Liquidity Coverage Ratio’ (a new concept in Basel III) for 30 days.
When: Gradual rollout from 2014 to 2019, with a lot happening in 2015. Banks need time to adjust, and their strategies are already aligned to this rollout.
Where: Basel III is global, but voluntary. It’s a ‘good housekeeping seal of approval’ that gives confidence to the bank’s investors. The US version of Liquidity Coverage Ratio is a bit tougher.
Elevator: Banks will be lending less. Plus, banks will be cross-selling more (to show they have an operational relationship as it relates to Liquidity Coverage Ratio).
Why: Reduce the cost of payments within Europe.
What: Single Euro Payments Area. Making bank-to-bank transfers cheap and quick within the Eurozone.
When: Completed by 2010. These are the IBAN numbers that still baffle some paying into Europe.
Where: Specific to Europe, which was playing catch-up with America on this front (now caught up).
Elevator: Payments within the Eurozone are quick and cheap (cross border to and from Eurozone is still a pain point).
Why: Protect investors from mis-selling and fraud.
What: Markets in Financial Instruments Directive. There is a lot in MiFID II and this FT video is a good six-minute explainer. In short, MiFID II will,
- reduce use of dark pools in equities
- push derivatives and fixed income trading away from Over The Counter (OTC) to centralized clearing
- curb abuse of high-frequency trading.
When: From summer 2015 to early 2016.
Where: This is a European initiative. The US equivalent is Dodd-Frank.
Elevator: Trading will become cheaper and more transparent. Wealth/asset managers will have to follow more rules in how they report to investors.
Why: Protect consumers from insolvency of an insurance company (ie they cannot pay on an insurance claim because they went bankrupt).
What: Specific to insurance. Defines how much capital they need. Like Basel III but specific to insurance rather than banks.
When: Rollout during 2015. January 2016 is final deadline.
Where: Specific to Europe.
Elevator: European insurers will be more conservative, which may make premiums go up but will lessen chances of them not being able to pay out due to insolvency.
Why: A global standard for accounting.
What: International Financial Reporting Standards.
Where: The de facto standard is GAAP (Generally Accepted Accounting Principles), although this tends to be viewed as an American standard.
Elevator: Use both GAAP and IFRS (using automated translation tools) until it’s clear which has become the global standard.
Why: Reduce money laundering.
What: The European standard for Anti Money Laundering (AML).
When: Still being defined.
Where: America led the way on this, rules are already clear.
Elevator: Follow American rules but have some flexibility in case European rules end up being tougher.
European fintech envy
Let’s move on to the story released over the weekend of Xapo moving its HQ from Silicon Valley to Zurich. This story crossed over from the bitcoin news sites to mainstream for good reason. To all those European fintech entrepreneurs with Silicon Valley envy who are considering relocating to Silicon Valley, this is huge news. To understand why, consider some different regulation that wasn’t intended to be specific to financial services: the General Data Protection Regulation (but which clearly has a big impact on financial services). Switzerland’s laws on data privacy are more stringent than the rest of Europe thanks to the Banking Law of 1934, which is why Xapo chose Switzerland as the base within Europe.
As I discovered at a bitcoin/blockchain Meetup in Geneva, Switzerland is officially a multi-currency country (thanks to the WIR), so it’s not a stretch to accommodate bitcoin as ‘just another currency’. With Ethereum choosing Switzerland as its HQ for the foundation, it’s not too much of a stretch to see Switzerland as a preferred location for bitcoin startups.
The consequences of all of this regulation in Europe include:
- More fintech innovation in Europe and more global winners out of Europe. A big home market is critical, as is being on the leading edge of new regulation.
- Countries in geographic Europe but not Eurozone (UK, Switzerland, Nordics, Baltics and Eastern Europeans) will tend to comply with European regulations so that their firms can operate within this huge market and may compete in other ways to attract fintech startups.
- The incumbents (banks, brokers and insurance) companies will become more conservative, leaving more room for aggressive fintech startups.
- Fintech ventures will need a clear regulatory strategy alongside their product and marketing strategy.
This subject sits at the intersection of finance, technology, domestic politics and geopolitics. In other words, nobody knows what the heck is happening
The meme since 2011 has been that Europe is a disaster because you can’t have single currency unless you also have a political union driving a single monetary and tax policy. According to this theory, Europe has to become the United States of Europe. This meme plays well in America, which is already the United States, with political union driving a single monetary and tax policy.
Meanwhile, in the UK, David Cameron is committed to a referendum on staying within Europe. It’s unlikely that the health of the fintech ecosystem will be a big part of this debate. It may not matter, as fintech ventures and banks will simply decide to comply with whatever regulations help them to compete in global markets.
The key takeaway for a fintech entrepreneur is that there is usually great opportunity at the intersection of regulation and technology. Where regulation will go in future is the subject for political discussions. In business, you simply need to know that regulation is often the trigger that turns inevitable change into imminent change.
Finally, a message to any European fintech founding teams planning to relocate to America: look before you leap.
– This article is reproduced with kind permission. Some minor changes have been made to reflect BankNXT style considerations. You can read the original article by Bernard Lunn of Daily Fintech here.