Digital finance gaining ground – European Commission strategy to accelerate development
The European Commission published a Digital Finance package in autumn 2020. The package includes digital finance and retail payment strategies as well as legislative proposals on the digital operational resilience of the financial industry, crypto-assets and a pilot regime for market infrastructures based on distributed ledger technologies. The strategy steers the EU’s actions to promote digital transformation until 2024.
The Commission strategy was established against the backdrop of a continuous increase in the digital use of financial services by consumers and businesses. New technologies are being embraced and business models are being transformed. The coronavirus pandemic has accelerated these trends.
Digital finance has helped in the response to the challenges posed by the pandemic. Electronic identification has enabled the opening of accounts and the remote use of financial services. An increasing proportion of in-store payments take place as digital near-field communication payments, and more and more customers are using financial services online. During the pandemic, financial sector employees have also been teleworking extensively.
The purpose of the Digital Finance Strategy is to generate new responsible innovations, increase competition and promote the cross-border use of digital financial services in the member states.
The Commission strategy has four key priorities, geared towards highlighting the promotion of the opportunities provided by digital finance to consumers as well as consumer protection.
Expansion of financial markets across the EU
The first key priority of the strategy is to tackle fragmentation in the Digital Single Market for financial services, thereby enabling European consumers to access cross-border services and help European financial firms’ scale up their digital operations.
On-line services are costly to develop, and therefore their extensive deployment and utilisation enable companies to expand their operations at a lower price and higher quality. The expansion of markets across the borders of member states would help raise the funds required to develop the services.
Digital innovation made easier
The second priority is to ensure that digital innovation is facilitated in the interest of consumers and the retail payment market. For example, innovations based on or making use of artificial intelligence or distributed ledger technology have the potential to improve financial services for consumers and businesses.
The regulatory framework for financial services should ensure that innovations are used in a responsible way. Regular examination of and adjustments to EU financial services legislation and supervisory practices ensure that they support digital innovation and remain appropriate in evolving market environments.
Common European financial data space to promote innovation
The third priority is to promote data-driven innovation by creating a European financial data space. This will be based on the European data strategy1 and its purpose is to promote enhanced access to data and data sharing within the financial sector.
As part of the Payment Services Directive, the EU seeks to promote the sharing of data on payment accounts. The EU has also ensured through legislation that companies, including the financial sector, publish comprehensive financial and non-financial information on their operations and products. Further steps towards enhanced data sharing will enable the financial sector to fully embrace data-driven innovation. This will encourage the creation of innovative products for consumers and businesses, and facilitate access to data to channel funding in support of sustainable investment.
Challenges and risks of digital transformation
As financial services migrate to digital operating environments, ecosystems become increasingly fragmented. New technology companies are constantly entering the financial services space either directly or indirectly. The fourth priority of the strategy is, indeed, to address these new challenges and risks associated with the digital transformation and reinforce the principle that similar activities involving similar risks are subject to the same rules.
How will the initiative proceed?
The digital finance strategy includes several actions promoted by the Commission. European supervisory authorities are working on the reports requested by the Commission within expert groups to which national supervisors have appointed their experts. The European Banking Authority (EBA), the European Securities and Markets Authority (ESMA) and the European Insurance and Occupational Pensions Authority (EIOPA) are also working on the topic within their remit.
National legislative preparatory work will start when the draft regulations advance towards adoption. In addition to legislative amendments, they will necessitate amendments to the FIN-FSA’s set of regulations and guidelines.
The FIN-FSA wants to be active in the forefront of digital finance, to promote it and to monitor its impacts proactively from the outset. Finland has a solid reputation of being a bellwether in digitalisation, which is why it has a lot to offer to digital finance, too.
1 Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions (COM(2020) 66 final), 19 February 2020).