As we did in 2021, 2022, 2023 we have crowdsourced some fintech predictions for the year ahead from the EU Freshfields Fintech team, with a couple of longer-term trends. The topics for these predictions are:
- Navigating the landscape of financial influencer accountability
- From open banking to open finance: a new era of customised services
- Exploring potential of a digital euro
- Embedded payments taking centre stage in financial innovation
- AI powered fintech innovation amidst first EU rules for artificial intelligence
- Digital wallets and the eID’s impact on financial services
Decoding ‘finfluencers’: navigating the landscape of financial influencer accountability
In an era where influencer marketing holds significant sway over public perceptions and financial decisions, the EU is actively contemplating regulatory measures to govern influencers who give financial advice or promote or advertise financial services products or providers online.
While France has already launched a ‘responsible influence certificate’ specific to the financial sector for ‘finfluencers’, the EU might also consider similar strategic initiatives aimed at safeguarding consumers, ensuring they receive accurate information and are fully aware that they are subject to promotional content.
As the use of social media and digital platforms continues to surge, so does the impact of influencers in the financial realm. Recognizing the potential risks associated with misinformation or biased endorsements, there have already been some attempts to tackle this phenomenon especially in the European Parliament in the context of other consumer facing legislation – although these ultimately did not make it through the legislative process. Nonetheless this highlights the interest and willingness of policymakers to tackle the issue, so we may well see in the next political mandate following the elections in June a push to look at legislation in this context. In addition to transparency requirements, the EU might – in the same way as France is doing – envision legislation that would require influencers to possess a foundational understanding of the financial products or services they endorse or to make it clearer to the consumer that there is a paid partnership behind the endorsement. This ensures that the information disseminated is accurate, reliable, and in the best interest of consumers, as well as protect consumers from deceptive financial services.
While ‘finfluencers’ are not totally unregulated in the EU, considering that the Markets in Crypto-Assets Regulation (MiCAR), the Markets in Financial Instruments Directive (MiFID II) and other legal acts cover some of their activities, and noting that the Retail Investment Strategy (RIS) proposing new rules is also currently under discussion, even more sectorial legislative and non-legislative actions might come in this regard.
From open banking to open finance: a new era of customised services
EU decision-makers are currently discussing draft legislation that would foster the sharing and re-use of financial services customer data (FIDA – see our blogpost), thereby building on the already existing open banking framework governed under payments legislation (PSD2). PSD2 is currently being revised into a new directive called PSD3, will which be accompanied by a new Payment Services Regulation (PSR) that will provide for and further clarity additional rules for offering a dedicated interface for accessing open banking data (see our blogpost). The hope is that open finance (applicable beyond payment account information) would lead to the increased offering and uptake of highly customised products that would further the ability of firms to leverage technology to enhance financial services.
Focused on boosting customisation based on explicit consent and full alignment with the GDPR, FIDA would allow financial institutions, account information service providers (AISPs), and a new category of actors – financial information service providers (FISPs) – to act as data users to facilitate more seamless integration of specific customer data related to various financial products. The proposal mandates customer-centric dashboards for managing data permissions, ensuring transparency and control.
In order to be successful, EU co-legislators must agree on a clear delineation of the data within scope, that the correct parameters for data sharing are put in place and that the right technical infrastructure to support data sharing schemes is made available. The Commission’s proposal would require market participants to establish these data sharing schemes and agree on, e.g., contractual liability and compensation rules under these schemes. In addition, timelines for application to particular data categories, products and sectors has to be agreed and level playing field concerns between financial sector incumbents and technology firms ironed out. 2024 should see a final agreement on this key text that could open the floodgates beyond open banking and put the EU on the map in terms of digital finance developments.
Exploring the potential of the EU digital euro
Since the publication of a legislative proposal on a digital euro (see our blogpost) and technical work picking up pace at the European Central Bank, political discussions are playing a crucial role in shaping the path towards adoption – or not – of this technology. Policymakers who were initially in favour of the introduction of a digital euro (in part to stave off private stablecoin offerings) and who had argued that the initiative would help fulfil other ambitions such as increased strategic autonomy, higher privacy standards, and local data storage, have yet to now be fully convinced of its need and use cases.
Privacy and holding limits (for the sake of financial stability) are currently taking centre stage in the debate with policymakers discussing temporary restrictions for monetary control and privacy considerations. Discussions also extend to the compensation model for making the digital euro available, inter-PSP fees, and measures to increase for financial inclusion, emphasising the importance of fair access.
On the technology side, the debate focuses on fungibility concerns, aligning the digital euro with physical banknotes. Distribution strategies are also yet to be defined with discussions ongoing that look at options for both designated public entities and payment service providers (PSPs) to ensure broad accessibility.
Together, these multifaceted political discussions highlight the delicate balance that needs to be struck between technological advancement, strategic autonomy, and safeguarding individual rights as the EU navigates the complexities of introducing a central bank digital currency (CBDC). While the specific technology, holding limits, and distribution models remain uncertain, the EU in 2024 is inching closer to finalising draft legislation but we expect progress to be slow and painstaking, with the outcome of the upcoming European elections also likely to have an impact on the discussions.
Embedded payments taking centre stage in financial innovation
Over the course of 2024 we expect embedded payments to continue to emerge. Aligned with the concept of invisible payments, this technology offering involves seamlessly integrating payment functionalities into diverse platforms, services, and devices, enriching the user experience whilst alleviating transactional frictions.
The impact of embedded payments is particularly felt in the e-commerce context where is it serving as a catalyst to revolutionise transactions within platforms with the possibility to mitigating issues including ‘cart abandonment’. This trend extends to the Internet of Things (IoT), where automated payments can be seamlessly interwoven with interconnected devices.
Beyond convenience, embedded payments can also help to drive financial inclusion, allowing more active participation in the participate actively in financial sector. Security plays a crucial role in ensuring embedded payments can take place, which in turn is driving the uptake of biometric authentication and cutting-edge encryption protocols. In summary, embedded payments stand as a potentially transformative force, where innovation, convenience, and security converge to develop and evolve the industry landscape.
AI powered fintech innovation amidst first EU rules for artificial intelligence
The integration of artificial intelligence (AI) stands out as a key driver of innovation, poised to revolutionise the financial industry. With AI applications already making an impact and swiftly expanding, financial institutions are recognising the potential advantages of AI and machine learning. In fact, several major financial players are starting to use generative AI to offer more tailored products to their customers.
From cost reduction and process automation to risk management optimisation, enhanced productivity, and increased profitability, these technologies offer an extensive toolkit. AI and machine learning are finding practical applications in areas such as investment, fraud management, lending and, the abundance of big data.
As the entry into force of the AI Act is just around the corner, the fintech and insurance sectors in particular, anticipate significant impacts, marking a pivotal moment for the convergence of technology and finance. Furthermore, we predict that the coming years will mean more regulatory and political focus on the use of AI in the financial services sector.
Digital wallets and the eID’s impact on financial services
Alongside the digital wallets that already exist in the market, the recent endorsement by EU policymakers of the EU-wide digital identity framework is expected to change the way things work in the payments sector.
Building on the existing eIDAS framework as well as on the principles of preserving privacy and cybersecurity, the EU-wide digital wallet is expected to help citizens identify and authenticate their identity when carrying out payment transactions. Banks are also expected to improve customer onboarding processes when opening bank accounts thanks to this framework.
Despite the voluntary nature of this initiative, the acceptance of the wallet will be obligatory for payments. The EU has already started to develop several pilot projects that would allow authorisation of payments and leverage the use of digital wallets. It remains to be seen how this initiative will be implemented and whether fintech firms will develop their own solutions or adopt existing ones.
We expect the digital identity to remain a key priority on transatlantic cooperation between the EU and the US, especially when it comes to related technical standards and solutions that ensure interoperability across these two major jurisdictions.
The Freshfields Fintech team will continue to closely monitor these and further developments. Please feel free to reach out to discuss any of the above.