A wave of FinTech innovation is spurring a race to form ecosystems that deliver value to European consumers.
European consumers are big fans of FinTech, and their enthusiasm is inspiring new approaches to the way financial services are delivered. Use of FinTech applications has grown significantly over the past two years throughout Europe. FinTech adoption among digitally active consumers has reached 73% in the Netherlands, 71% in both Ireland and the UK, and 64% in Germany, Sweden and Switzerland — all of which are at or above the global average of 64%, according to the EY Global FinTech Adoption Index 2019.
One example of the pace of growth: in the UK, 14% of digitally active consumers were FinTech adopters in 2015, the first year of the survey. By the time of the second survey, in 2017, the rate had grown to 42%, and by 2019 it was 71% - five-fold increase in just four years. Other European markets have also shown strong growth since 2017, including Belgium and Luxembourg (from 13% to 42%) and France (from 27% to 35%).
Across the region, usage has broadened as well. In 2017, adopters were largely focused on payment applications; now they use a wide range of banking, insurance, asset management and personal finance apps.
The high adoption rates show that European consumers are increasingly weaving FinTech propositions into their everyday financial lives. The survey is designed to identify committed FinTech adopters. EY identified 19 FinTech services that are sufficiently mature to be seen in multiple regions. A FinTech adopter is defined as someone who has used two or more “buckets” of such services, since this indicates a habitual change in behavior. A bucket consists of one or more of the 19 FinTech services included in the study, with similar propositions, such as stockbroking and online investment advice, grouped together.
FinTechs are key players in Europe’s open-API economy
As FinTech adoption has grown throughout the region, FinTechs have expanded in size, scope and sophistication. No longer merely insurgents, FinTechs have become major competitors, often with a pan-European or global reach. Some European digital challenger banks have gained significant traction across regional and global markets, attracting millions of customers since they launched just a few years ago.
Incumbent European banks and insurers aren’t sitting still in the face of such competition. Recognizing the powerful role FinTechs can play in improving customer experiences, they have stepped up development of their own FinTech propositions. They have also partnered with FinTechs in ecosystems.
One of the key drivers behind the rapid growth of FinTech in Europe is the spread of open banking, as mandated by the European Union’s Revised Payment Service Directive, known as PSD2. Under the rule, banks are required to establish open application program interfaces (APIs) that allow customers to seamlessly share their data with third-party providers, including FinTechs, that might offer them better and more economical services. With the customer’s consent, FinTechs and other licensed players can access account data and initiate payments. In the survey, 46% of FinTech adopters said they would be willing to share their bank data with other organizations in exchange for better offers.
PSD2 has spurred innovation across the financial landscape in Europe, fueling the rise of so-called super apps, which can combine insurance, asset management and banking on one platform. FinTechs can play a critical behind-the-scenes role in helping this super apps function, by facilitating API integration and data aggregation between banks and third-party providers.
Financial companies are banding together in ecosystems
As FinTechs continue to influence the financial industry in Europe, EY expects to see providers of all sizes coalesce into ecosystems. The digital challenger banks, aggregators and financial management apps are increasingly offering a marketplace model, in which customers — both consumers and small and medium-sized enterprises (SMEs) — can access third party providers of credit, investment, insurance, mortgages, financing, pensions and more.
EY sees two major business models emerging for participants in European financial ecosystems:
- Product specialist: In this model, a bank, insurer or asset manager, leverages data and analytics, sometimes from other participants in the ecosystem, to market targeted products to consumers.
- Business-to-business (B2B) provider: Some FinTechs specialize in using digital techniques to develop and launch new products quickly, sometimes in a matter of weeks, but they don’t sell the products directly to consumers. They rely on other players in the ecosystem, often incumbent banks and insurers, to market their products. This is essentially banking-as-a-service and insurance-as-a-service.
When incumbents and FinTechs integrate these two business models into a thriving ecosystem, they can efficiently develop products that are geared to the specific needs of consumers and SMEs. In an open API environment, banks and insurers can use ecosystem platforms to seamlessly offer their clients access to services from other providers, expanding their ability to serve their customers while still maintaining primary control of the customer relationship. And the FinTechs that have been able to acquire a significant number of customers start leveraging these to attract other vendors to their ecosystems as well.
Big Tech players want a piece of the action
However, incumbent financial players and successful FinTechs aren’t the only ones interested in owning a piece of Europe’s burgeoning ecosystems. Online retail marketplaces, which have vast amounts of experience collecting and analyzing customer data, have entered the fray. For example, an online retail marketplace can provide not only a platform for online payments, but also financing for both merchants and consumers, as well as basic insurance products, such as warranties for appliances and other products.
The survey shows that European consumers are receptive to the idea of non-financial players offering financial products. For example, 47% of Irish consumers are willing to consider a non-financial services company partnering with a financial institution to provide services, such as banking, borrowing, payments, insurance, and investing.
The two-sided ecosystem is an approach increasingly emulated by financial firms in Europe. In retail, a two-sided ecosystem combines products and services for merchants and consumers. In banking, a two-sided system serves both the providers of capital and the users of capital.
In an open-API environment, other non-financial players will likely try to grab a piece of the action. As industries transform, they’ll want to include financial components in their own ecosystems. Automakers, for example, know their value proposition will look entirely different 10 years from now, thanks to developments, such as electric vehicles, self-driving cars, and ride sharing. These companies have begun creating ecosystems around the idea of mobility broadly defined. That including taxi booking services, car sharing, e-scooters and travel services.
All these activities need to be paid for, financed and insured. Banks, insurers and FinTechs will be able to provide some of these services as ecosystem participants if they have the relevant APIs, but they won’t have control of the customer interface; the automakers and retailers will.
The future will bring more FinTech disruption in Europe
Looking forward, EY expects FinTechs to continue to challenge and influence the European financial landscape. Few, however, are likely to achieve the mass of the largest players. In a fluid, open-API economy, acquiring and keeping large numbers of customers is a challenge. Some FinTechs will try to reach scale by forming partnerships or merging, a trend that has already begun. Many FinTechs that start out as business-to-consumer (B2C) insurgents will likely evolve into business-to-business (B2B) players, repositioning themselves as providers of services to larger participants in the ecosystem.
These B2B FinTechs will provide a critical role as agents of digital transformation by supplying cutting-edge services to slower-moving incumbents. In Germany alone, there are already more than 500 partnership arrangements in place between FinTechs and incumbents, with thousands more across Europe — numbers that are likely to grow. For established banks and insurers to stay relevant to their customers, they need to innovate rapidly and continuously. And to do that, they need FinTechs.