On April 3, 2020, the European Commission launched two public consultations on a new digital finance strategy for Europe and on a retail payment strategy for Europe, which will both run until July 15, 2020. The consultations follow two other consultations on an EU framework for markets in crypto-assets and on a potential initiative on digital operational resilience in the area of financial services, both launched in December 2019. The efforts are part of the larger Commission’s Digital Finance Outreach 2020 to prepare the new digital finance strategy. However, due to the COVID-19 pandemic, most events have either been cancelled or postponed. An overview of upcoming events, such as DG FISMA’s online roundtables and other national events, is available here.
Consultation on Digital Finance Strategy
The consultation builds on the European Commission’s 2018 Action Plan on FinTech, aimed at fostering competition and innovation in the EU’s financial sector, and is part of the Commission’s plan to establish a Capital Markets Union. The 2018 Action Plan on FinTech laid out 19 steps to enhance supervisory convergence of financial industries to encourage them to embrace new technologies, such as cloud computing, and strengthen its cyber resilience. After all steps were completed at the end of 2019, an expert group established under the 2018 Action Plan published a final report with 30 recommendations to further develop the accommodative framework for FinTech. These are set to be addressed by the new digital finance strategy and include:
- Establishing new regulatory frameworks to accommodate risks and challenges arising from new technology, such as artificial intelligence and distributed ledger technology;
- removing regulatory fragmentation between Member States and ensuring a level playing field by lowering barriers to entry for new market entrants;
- integrating the opportunities of technology-enabled financial services with the EU’s data protection regime; and
- assessing the impact of FinTech with regards to financial inclusion.
In particular, the expert group prioritizes certain recommendations, such as: the explainability of technology (for instance of artificial intelligence) to protect consumers and facilitate regulatory supervision; countering regulatory fragmentation in the areas of Customer Due Diligence (“CDD”) and Know Your Customers (“KYC”); prevention of foreclosure through vertically integrated platforms of financial institutions; and facilitating data sharing.
The underlying consultation is divided in three sections that invite stakeholders, such as stakeholders of the financial industry, experts, academics, civil organizations, to contribute. The first section includes questions regarding the need to keep the financial services regulatory framework technology neutral and innovation-friendly. The second section has forward-looking questions on (potential) fragmentation of the internal market for digital financial services. The third section seeks input regarding the integration of the opportunities of FinTech with the EU’s data protection standards and values.
Special attention is given to the way FinTech could contribute to tackling the COVID-19 pandemic and associated economic fallout. For example, the lockdowns in many Member States showcase the importance of the digitization of the financial sector with remote access to bank accounts and other financial services, including for those not digitally native.
The Commission is tasked to propose a new digital finance strategy in the third quarter of 2020, which is expected to determine the EU’s policy in this area for the coming five years.
Consultation on Retail Payment Strategy
The Commission simultaneously launched a public consultation on a retail payment strategy (“RPS”) that the Commission will also propose in the third quarter of 2020 alongside the digital finance strategy. The consultation seeks input regarding the digitization of retail payments and their contribution to a Single Euro Payments Area.
Currently, the EU’s framework around retail payments consists of two E-money Directives and two Payment Services Directives. These measures introduced licensing systems for the issuance of E-money and related payment services by non-bank financial institutions. The second Payment Services Directive also facilitated new business models based on data-sharing, that include payment initiation services and account information services. Supported by Regulation 924/2009 on Cross-Border Payments, this framework needs to establish a Single Euro Payments Area in which cross-border payment services are in quality and security indistinguishable from domestic services.
While technology has contributed to the development of such payment systems, it also poses potential risks and challenges, such as the increased risks of fraud, money laundering and cyber-attacks, which the Commission will need to address in the RPS. The consultation will also deal with concerns regarding the impact of “stablecoins” on monetary sovereignty and financial exclusion of access to basic payment services.
Similar to the digital finance strategy, particular attention is given to the COVID-19 pandemic. Innovative payment solutions such as non-cash or contactless payments will become more strategic in a post-COVID-19 economy.
The consultation focuses on four distinct areas:
- “Fast, convenient, safe, affordable and transparent payment instruments;
- Innovative, competitive, and contestable European retail payments markets;
- Access to safe, efficient and interoperable retail payments systems and other support infrastructures;
- Improved cross-border payments, including remittances, facilitating the international role of the euro.”
The Covington Financial Services team will continue to monitor the situation and update you on any new developments.