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The European Union is advancing its digital transformation in finance to boost efficiency, productivity, and profitability, while also expanding customer reach and market presence. A strategy embraced by many companies in today’s fast-moving world. This article explores how the European Union envisions to support the financial services industry. Thereby uplifting the European economy as a whole to make this digital transformation happen.
Digital Europe: The EU’s Digital Finance Strategy
With the Digital Finance Package, it is the EU’s ambition to foster a competitive financial sector. Thus, giving consumers access to innovative financial products, while ensuring consumer protection and financial stability. Digital financial services can help modernise the European economy across sectors and therefore turn Europe into a global digital player.
The digital finance strategy of the EU consists of 4 main priorities:
- Remove fragmentation in the Digital Single Market:
By stimulating responsible innovation and competition among financial service providers and making Europe’s financial services more digital-friendly, the fragmentation in the digital single market will be reduced. This will result in consumers having access to financial products across borders and giving fintech start-ups the potential to scale up and grow.
One of the envisaged solutions to make customer onboarding quicker and easier is the use of an interoperable digital identity. To implement this solution, we need more harmonization in the fields of Anti-Money Laundering (AML) and Combatting the Financing of Terrorism (CFT).
- Adapt the EU regulatory framework to promote id digital innovation:
The EU strategy must ensure that the regulatory framework is fit for the digital age, while also mitigating the risks related to new technologies. Specifically, the EU seeks to adopt a comprehensive framework enabling the usage of Distributed Ledger Technology (DLT) and crypto assets in the financial sector.
While MiCA (Markets in Crypto Assets) regulation provides a legal framework for the issuance and trading of crypto-assets, the DLT pilot regime provides rules for specific authorizations for the trading and settlement of financial instruments that are based on distributed ledger technology (of which blockchain is a well-known example).
- Promote a data-driven finance:
Data management, data sharing, and open finance are key concepts in this financial strategy. Better access to data and data sharing will help to integrate European capital markets, support innovation, and bring efficiencies for both consumers and businesses. Needless to mention this should be in line with the EU’s standards on privacy and data protection. The revised Payment Services Directives (PSD2, PSD3) are an important step towards the sharing and use of customer data (with permission) by banks and third-party providers to create new services.
- Address the risks and challenges of digital transformation:
With technology and technology companies becoming increasingly important for the financial services sector, the associated risk exposure will obviously grow exponentially as well. Hence the Digital Operational Resilience Act (DORA) has been introduced to ensure that the EU financial sector is resilient when faced with severe operational disruption and cyber-attacks.
Finally, the digital financial strategy wants to ensure a level playing field for the different providers of financial services. From traditional market actors (banks, insurance and investment companies) to Fintech’s and Bigtechs that provide payments, savings and insurance, everyone is subject to supervision. In other words: same activity, same risks, same rules.
A New Phase of Innovation for Traditional Finance in Europe
The above-mentioned focus areas already indicate that no coin in the financial industry will be left unturned. The new digital strategy and regulatory framework are about to bring both numerous opportunities and challenges at every level of the financial sector. From onboarding clients, payments and compliance to ICT, … traditional finance is due to enter a brand-new phase of innovation and transformation.