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Over the last few years, European fintechs have evolved significantly and built a place for themselves in the payments market. In our first article we looked at how regulation played its part in shaping the changing landscape for these new players. In this latest blog we take a look at the role of technology and how the urgency of change is fast tracking the adoption of cloud-native processing for critical payment services.
Fintechs are by nature heavily focused on technology and innovation – which means they tend to be comfortable operating on the cloud, or integrating APIs into their user interfaces. As such, fintechs are typically, very strong when it comes to providing a user-friendly front-end.
But behind the scenes, most of their payment activities will still be based on traditional rails. For example, fintechs will typically make use of correspondent banking services for cross-border payments. As such, the relationship between banks and fintechs continues to play an important part in shaping innovation.
While fintechs have much to offer, many are also facing a number of challenges and growing pains that will need to be addressed in the coming years:
- Diversifying the business model
Many fintechs have started off with a monoline business model – such as making payments into Australia – which they have executed very effectively. At this stage, however, those same fintechs may now be seeking to expand, which requires them to shift to a more diversified business model.
- Handling client monies
Fintechs which are involved with payments and e-wallets face a significant challenge when it comes to deciding how best to handle client monies. Without access to the deposit facility at the ECB, fintechs need to leave those funds with commercial banks, which can be problematic in the current liquidity environment. If fintechs are able to lend out money in the same way as fully serviced banks, they may be able to mitigate this issue – but again, this is a question of business model diversification.
- Aftermath of Brexit
Until now, fintechs have been able to create a single entity to service all markets in Europe. As the post-Brexit regulatory framework begins to take shape, it’s clear that these firms will now need to have two legal entities – one to cover the UK, and the other to cover the rest of Europe. This will involve additional work in the form of creating additional legal entities and getting the right licensing in place – but fintechs may also take the opportunity to consider how best to structure their European businesses.
- Client services
For fintechs that have grown very rapidly, there is a risk that their support and servicing models are not yet sufficiently effective to support the size of their operations – which may deter customers from moving all of their business into these fintechs.
- Compliance challenges
While the industry continues to innovate and disrupt, regulators still expect organisations to implement sound anti-money laundering (AML) compliance programs or face additional scrutiny and potential fines. FinTechs have historically looked at regulations and compliance as a barrier to entry and an innovation stifler. However, the FinTech industry doesn’t have to be scared of compliance. Those companies that put compliance first gain an advantage over their competitors, and are more likely to come out on top in the race to capture market share.
Building resilience in the cloud
The future direction of travel from a regulatory perspective is taking many forms but one that is becoming a significant agenda topic is that of cloud technology. Cloud technology has been credited with helping grow the sector’s forecasted compound annual growth rate of 23.84%. As crucial operations, such as payment systems, move to the cloud, today’s financial services need to be more resilient thanever. Business continuity management has become essential in every function. Operational risks – things that can prevent you from delivering to customers, shareholders and regulators are multiplying. Plus, the impact of getting it wrong is growing. We also see the recent trend where financial regulators and industry oversight boards are casting a closer eye on banks’ cloud expansion and watching what new risks these shifts may create.
But even with this backdrop in mind we are seeing more and more of our customers looking to move their payment systems into the public cloud. To achieve this there are three main approaches that can be taken. The first option allows them to rapidly move into production and focus on a single cloud provider. However this brings a direct dependency on this single selected provider. This over reliance on single technology providers is at the heart of what the EU’s Digital Operational Resilience Act (DORA) is setting out to avoid due to the implications and question around what happens when a single provider goes down.
The next step in this journey is a cloud agnostic approach. This is where cloud tools not specific to any one provider are used so as to be able to run on a payments stack with any cloud provider. Whilst better this still means having to run individual payment stacks on each cloud provider you wish to connect with. The final approach and one what we believe is the future of cloud payment technology is that of multi-cloud.
Here one single platform is run simultaneously across all public cloud providers. This allows data to run across all platforms in real time. That means payments made in one cloud can instantaneously be monitored in the other. The architecture enables the highest degree of availability with reduced cloud provider concentration risk.
A bright future for cloud payment processing in Europe
Cloud computing is hardly a new trend in fintech. But its impact is gathering pace. Despite early concerns about security and data protection, the cloud has proved secure. And with the ability to take a ‘multi-cloud’ approach concerns regarding resilience and whether core systems can reliably move to the cloud the answer seems to be a resounding ‘yes’.
Access our ‘Future of Fintech Disruption in Europe’ report, where we dive into regulation, technology and how the current economic climate are all shaping the future outlook for fintechs and the payments ecosystem in Europe.