Ripple Interview

Fintech has gone international. In the UK alone, both Worldfirst and Transferwise have launched pan-European bank accounts and Prodigy Finance is providing cross-border loans for graduate schools. In the peer-to-peer lending world, operators are increasingly looking to go international in order to reach the scale of their US and Chinese counterparts. It's a trend we've been seeing for some time - for example, back in 2015, Funding Circle acquired ZenCap to expand to Continental Europe.

This is undoubtedly good news for consumers. Borrowers in many countries face high interest rates on bank lending and limited options from alternative lenders. On the other side of the equation, investors are looking to scale and diversify their portfolios.

In this culture of innovation, regulators need to keep up. Fintech companies looking to internationalise are faced with an almost endless number of different regulatory environments and red tape, something that has undoubtedly dissuaded many of the key players from expanding internationally. Europe is a collection of fragmented and wildly different regulatory regimes. For a fintech player looking to expand across the region it can become a regulatory nightmare.

The European Commission (EC) has a crucial part to play in this, and has recently completed a consultation on creating a more competitive and innovative European financial sector. It's been a few years in the making. Conceived in 2015, it's now two years later and we're yet to see much in the way of improvement. We await the findings, but allowing fintech scale ups to take advantage of the single market needs to happen.

Media reports have speculated that the EU is looking at implementing licences for fintech companies to operate across Europe, as well as a unified regulatory framework. We would urge the EC to act quickly and push for a region-wide standardisation of regulation alongside a de-fragmentation of Europe. We have identified six key issues for lenders looking to expand internationally.

1- Regulation of alternative consumer lending

Each European country has developed its own approach to regulating consumer lending. From prohibiting non-bank lenders to lend to consumers in Germany (creating the necessity to have a partner bank), to almost non-existent regulation of consumer lending in Spain. Peer-to-peer lenders looking to expand across Europe face different types and processes of licensing, different or multiple regulators, and different regulation on the allowed cost of lending. The only winners here are the law firms and advisers.

2- Regulation of peer-to-peer lenders

Similarly to consumer lending, each country has its own approach to regulating alternative lenders. Again, operators face different models on structuring the peer-to-peer model, a variety of regulators and supervisory bodies, as well as different approaches to taxation of peer-to-peer lenders. The UK model of direct agreement between lenders and borrowers contrasts heavily with the Continental Europe model of loan claim assignment from operators to lenders.

3- Identification of customers

Peer-to-peer lending, which by its nature is online only, requires the ability to verify the identity of both borrowers and lenders digitally. Yet here again, every country has its own often wildly differing requirements. We have come up against extreme cases of in-person identification, which is completely unfeasible for pan-European platforms. Every country enforces its own requirements on operators - everything from background checks to specific documention .

4- Harmonisation of reporting requirements

Successful development of pan-European peer-to-peer lending requires to harmonise reporting requirements for peer-to-peer lenders. Lenders on peer-to-peer platforms should be able to compare investment opportunities and lending operators using unified metrics.

5- Data storage and protection

Currently a regulatory minefield, a fintech company interacting with consumers in different territories needs to get to grips with an almost endless array of data storage and processing requirements. It means significant amounts of time wasted adapting business processes and policies. A unified standard would help all market participants.

6- Passporting of P2P licenses

Traditional banks will often attribute the success of alternative lenders to looser regulation, claiming that full banking licenses limit their flexibility, giving fintechs an unfair advantage. However, banking licences have one major advantage: the ability to passport across the EU. Passportable peer-to-peer licenses will level the playing field, allowing peer-to-peer lenders to expand across the whole region.

What needs to be done

We need to see cooperation from key governments across Europe, coming together to help make the digital single market happen.

The UK would have been the obvious choice. It was the clear leader in European peer-to-peer lending, and introduced the first comprehensive regulation in the region. The UK still has by far the most developed alternative lending market but uncertainty caused by Brexit will most likely require other countries to step up and lead the initiatives in Europe.

So far, Germany and France have the most dynamic peer lending markets in Continental Europe, with lenders such as Auxmoney and United Credit. They also have strong influence in the European Commission.

Germany is probably the most likely to step up to the plate given its fast growing fintech sector and wider political influence. A German push on the digital single market and a significant lobbying effort could spur others to follow suit. As former Estonian president Toomas Hendrik Ilves said during a panel discussion at the World Economic Forum. "The digital single market needs to happen, and if Germany is not leading the pack, it won't be happening at the scale Europe needs."

Newcomers, such as Latvia, Estonia and Finland might be small in terms of the political influence, but will definitely support initiatives given rapid development of peer lending markets in those countries. The reforms need momentum to push them through the EC, but with enough backing, and a key country in the driving seat, it will happen. The issue, as ever, is speed. Others are catching up and Europe must act fast in order to retain its status as a leader.

Jevgenijs Kazanins is P2P Platform Lead at TWINO