Many of the modern notions of finance that we hold today have their origin in Europe.
The concept of banknotes was born in 17th century London, where goldsmiths could take these precious lumps of metal from clients and store them safely. In exchange, the merchant would obtain a notarized receipt indicating the identity of the smith, and the quality and the quantity of gold kept.
Though the gold was an immobile asset, both the merchant and the smith could use their agreement to benefit. Methods of sending and recording transactional information, verifying their authenticity, and trading assets evolved, and the same city grew to be a financial powerhouse in the following centuries. The rest of the continent was no exception.
However, like the other half of the world, Europe also suffered the squeeze of the 2008 financial crisis. It had become too easy for bigger interests to concentrate at the top of the financial sector and obscure their collaborative behavior from the rest of the global market. An all-time low in transparency between institutions, regulators, and investors led to the same poor decisions being made everywhere, with everything coming crashing down. Just ten years later, and Europe has pulled out of its downward spiral, and arguably at a steeper angle than any other region, east or west.
Who gets the credit for such a turnaround? Much of it goes to the European Central Bank (ECB), which quickly founded new regulatory bodies like the European Securities Markets Authority (ESMA) and European Banking Authority (EBA) to enforce universal rules in the monetary union. To go alongside them, legislation like MiFID2 (Markets in Financial Instruments Directive) and PSD2 (Payment Services Directive) establish new standards for accessibility and transparency in financial data sharing while making it illegal for institutions to collude with one another. Though economic recovery is ongoing, the biggest transformation thus far has been the growth of the fintech community. It is sprouting up under the protection of these new rules and has shown the world what smart regulation can do.
High Fliers in Fintech
Fintech companies generally make use of technology to improve financial services. The laws that once allowed the crisis to occur also prohibited this technology from finding applications in finance, but this is no longer true. The status quo is now everyone’s to share. People have seen stellar advancements in entertainment, healthcare, and transportation thanks to technological progress, and now the fintech sector is eager to show them what kind of impact it can have on finance.
Consider the notion of getting a loan, and what it used to entail. Twenty years ago, a loan was something almost exclusively obtained through a bank or another institutional lender, and if you needed it, you were in for an arduous and laborious process. After you filled out a long application, gathered and submitted scores of documents to prove your identity, creditworthiness, and the existence of other collateral assets, you still had to wait for the bank to verify this information with other institutions. All in all, lucky (and overqualified) borrowers were likely to see their money within a month, alongside a strict repayment schedule.
Fintech companies like Ezbob have changed the notion for the better. This company entered a young fintech industry in the throes of the crisis and has capitalized on laws that require institutions to share customer and financial data. Borrowers who need a fast, fair loan for their business can access financing within a single day because the algorithms and other data technology behind Ezbob’s platform make the traditional process both autonomous and accurate.
This is a lifesaver for startups who are facing more vulnerable, cash-strapped positions. Ezbob can find the most suitable loan for any individual at any time, without requiring any paperwork or collateral. The bureaucracy that used to ensure a safe, suitable loan is completely reproduced within minutes, and with better results. While the old process also justified the presence of hefty fees, these are also significantly reduced in such a low-overhead environment.
The mobile payment sector is feeling the benefits of new legislation as well, which breaks up a monopoly that banks and credit card issuers used to hold on infrastructure. Though it’s hard to argue against the convenience of credit cards, gaps in their security have opened a need for something new. Companies like iZettle have created a range of payment and commerce solutions to give businesses a different, more convenient way to take and monitor payments. With an ecosystem that includes business funding, invoicing, mobile payments and more, possible via the company’s application, card readers, and point-of-sale (PoS) system, merchants gain greater control over their finances. These tools have helped merchants avoid the fees imposed by MasterCard and Visa, lower their costs, and reach new customers.
Fintech Breaks Free
Thanks to a unified effort in Europe to create the regulations that have been rolled out in recent years, even institutions are feeling the benefits of the rise of fintech. If faced with the same hypothetical shakeup ten years prior, banks and other big interests would have scorned the implications of such laws, intent on maintaining their edge in the status quo. They would have missed out.
Fintech is as much a partner to institutions as a rival, but while the former is a newer entrant into the industry, new regulations have forced both to stay competitive. What has resulted is a mutually beneficial financial ecosystem. It may have taken the financial crisis for such a change to occur, but now there can be no doubt that the rising tides of fintech and regulation raise all boats, from smallest to largest.
Jim Hoffer is founder and managing director at Hoffer Financial Consulting. Follow him on Twitter.
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