The number of FinTechs has been on the rise since. The European Fintech sector is the most valuable startup tech sector in Europe with an accumulated valuation of 123 billion € and it receives around 20% of all venture capital in Europe. The highest valuation of the FinTechs can be found among the neo banks. The largest European neo banks already have millions of customers and are now on entering the U.S. Market.
But what has happened since 2008 that enabled the quick development of new entrants into the European banking industry?
According to Davis, new regulations in the EU have created more competition by making it easier for new banks or payment institutions to obtain licences, enabling the customer to easily switch between providers and standardising systems and communication. In general, making it easier to get a product to the market.
Table of Contents
1. Introduction
2. Neo banking and Regulation in Europe
3. Competition drives innovation
4. Neo banks – the new innovative players
5. The new innovative banks
6. Conclusion
7. Bibliography
Objectives and Research Themes
This study examines the impact of European regulatory frameworks, specifically the Payment Services Directives (PSD/PSD2), on the growth and innovativeness of the European banking sector, focusing on how these changes have facilitated the rise of neo banks and new business models.
- The role of EU regulation in lowering market entry barriers for financial service providers.
- The competitive landscape of the European banking industry analyzed via Porter’s Five Forces.
- Definitions and operational models of neo banks and challenger banks.
- The evolution of "Banking as a Service" (BaaS) and its impact on traditional banking structures.
- Strategic shifts from traditional banking to platform-based financial service providers.
Excerpt from the Book
3. Competition drives innovation
According to Aghion, an increase in competition leads to a significant increase in R&D investments and therefore an effort to innovate. To determine the effect of the regulation on the competitiveness of the banking industry we are going to look at the 5 Forces that govern competition in an industry, according to Porter (Aghion, Bechtold, Cassar, & Herz, 2014) (Porter, 1979).
Threat of new entrants. The process of obtaining a banking licence itself has not become easier through the regulations by the European Union though, some factors contribute towards diminishing the barrier. Capital requirements not for the banking licence itself but for some core services of the banking offer, such as the general account management have decreased from 5 Million € to 350 000€ for EMI and 125 000€ for PI Licences, as mentioned above. It enables new entrants to build up a customer base and proof their concept without having to go through the capital intensive process. Also, the possibility of running a direct bank without any branches and always in the customers pocket further results in lower entry costs (Deloitte, 2019) (Rachleff, 2019).
Chapter Summary
1. Introduction: The chapter introduces the rapid growth of the European FinTech sector and highlights the correlation between EU regulatory changes since 2008 and the emergence of new market entrants.
2. Neo banking and Regulation in Europe: This section details how PSD and PSD2 transformed the industry by standardizing payments and creating new licensing categories like Payment and E-Money Institutions.
3. Competition drives innovation: This chapter applies Porter’s Five Forces model to explain how regulatory shifts have increased competition and forced established banks to adapt to more innovative players.
4. Neo banks – the new innovative players: The text discusses the definitions of neo and challenger banks, emphasizing their digital-first nature and lack of physical branches.
5. The new innovative banks: This section provides a practical overview of market leaders like Revolut and N26, alongside the rise of Banking as a Service (BaaS) providers.
6. Conclusion: The final chapter summarizes how lowered entry barriers and modular business models have fostered a diverse and highly competitive European FinTech ecosystem.
7. Bibliography: Lists all academic and industry sources used for the analysis of banking regulation and market competition.
Keywords
Neo Banks, FinTech, PSD2, Regulation, European Banking, Competition, Porter's Five Forces, Payment Institutions, E-Money Institutions, Banking as a Service, BaaS, Innovation, Digital Banking, Financial Services, Market Entry.
Frequently Asked Questions
What is the primary subject of this research?
The research focuses on the impact of European regulations, specifically PSD and PSD2, on the innovation and competitive landscape of the European banking industry.
What are the central themes discussed in the paper?
The central themes include regulatory evolution, the rise of neo banks, the application of competition models in finance, and the emergence of modular banking services.
What is the core objective of this study?
The goal is to analyze how specific EU regulations enable new entrants to overcome traditional banking barriers and introduce innovative services to the market.
Which scientific methodology is utilized?
The author employs Porter’s Five Forces model to evaluate the competitiveness of the banking industry and uses industry data to illustrate the growth of neo banks.
What topics are covered in the main body?
The main body covers the history and impact of Payment Services Directives, the definition of various digital banking models, and case studies of major players like Revolut and N26.
Which keywords define this work?
The work is defined by terms such as Neo Banks, FinTech, PSD2, Banking as a Service (BaaS), and European banking regulation.
How does PSD2 specifically benefit new entrants?
PSD2 mandates the opening of banking systems through APIs, allowing PISPs and AISPs to access account information, which simplifies the entry process for non-traditional banks.
What is the difference between an EMI and a full banking licence?
An EMI licence has significantly lower capital requirements (350,000 €) compared to a full banking licence (5,000,000 €), making it easier for startups to begin operations.
How do neo banks differ from traditional banks according to the author?
Neo banks are characterized by their digital-first approach, the absence of physical branches, and a focus on modular services integrated via apps rather than traditional, all-in-one banking models.
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- Moritz Mey (Autor:in), 2020, Innovation in the European Banking industry. Regulation enables innovative banking services, München, GRIN Verlag, https://www.grin.com/document/974456
