## Fintech in Europe: Promises and Threats

_IMF Working Papers, November 13, 2020_

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## Bibliographic details
- Authors: Chikako Baba, Cristina Batog, Enrique Flores, Borja Gracia, Izabela Karpowicz, Piotr Kopyrski, James Roaf, Anna Shabunina
- Published: November 13, 2020
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513561165.001

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### Overview
- Europe’s high pre-existing level of financial development helps explain the relatively smaller reach of fintech payment and lending activities compared to some other regions.
- Fintech activity in Europe is growing rapidly, with important developments in digital payments, automated lending models, and the strategic evolution of fintech firms and traditional banks.

### Payments
- Digital payment schemes are expanding within countries.
- Cross-border and pan-euro area payment instruments are not yet widespread despite:
  - Enabling EU level regulation.
  - The establishment of instant payments by the ECB.

### Lending and business models
- Automated lending models are developing but remain limited mainly to unsecured consumer lending.
- Two principal fintech business model trajectories are identified:
  - Platform-based approaches operating under minimal regulation and relying on investor funding.
  - Balance-sheet-based fintechs that acquire balance sheets and banking licenses as they expand.

### Banking response and market structure
- Competition is pushing many traditional banks to adopt fintech instruments, either in-house or by acquisition.
- As banks adopt these instruments, they increasingly resemble balance-sheet-based fintech companies.
- Potential effects:
  - Improved efficiency and reach of financial intermediation.
  - Increased profitability pressures for some banks.

### COVID-19 implications
- The COVID-19 pandemic could:
  - Call into question the viability of platform-based lending fintechs’ funding models, given that investors could face much higher delinquencies.
  - Offer growth opportunities to fintechs positioned to take advantage of the ongoing structural shift in demand toward virtual finance.

### Key themes and risks
- Expansion of domestic digital payments vs. limited cross-border integration in the euro area.
- Growth of automated unsecured consumer lending, but constrained scope.
- Regulatory and structural shift as fintechs move toward balance-sheet activities and banking licenses.
- Dual impact of fintech adoption on traditional banks: competitive pressure and possible efficiency gains.
- Pandemic-driven stress tests for funding and credit models, especially for platform-based lenders.

*Source: Fintech in Europe: Promises and Threats — https://www.imf.org/en/publications/wp/issues/2020/11/13/fintech-in-europe-promises-and-threats-49859*

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_Source: https://www.imf.org/en/publications/wp/issues/2020/11/13/fintech-in-europe-promises-and-threats-49859_