Market Overview
Finland has provided a good breeding ground for fintech operations for a long time. Its technological expertise, easily approachable institutions and strong compliance culture make Finland attractive for fintech companies.
During recent years, the Finnish fintech market has been growing rapidly. Currently, financial software is strongest represented in terms of the amount of fintech companies, while the second-largest number of companies focus on payments. Crowdfunding platforms and many B2B services have also been particularly strong during recent years and financing services have succeeded in many aspects. During the past year, Finland has witnessed fresh initiatives, such as the birth of new Finnish neobanks and Finnish fintech companies acquiring foreign competitors.
Fintech has matured to become an excellent opportunity also for banks and other existing financial institutions in Finland. Market participants have found new ways to collaborate with smaller fintech companies and co-operation between the finance and technology industries has become the new normal. The value of cooperation is widely valued and has long roots in the industry sector in Finland.
From Open Banking to Open Finance
Finland, together with the whole of Northern Europe, has played an instrumental role in the digitalisation and automation of payments. For example, Finland pioneered online banking in the 1990s and is the world leader in the use of electronic payments. Consumers can choose between several payment methods, as many products can be paid for by cash, card or bank transfers through online or mobile banking.
P27 is a recent example of payments-related innovations in the Nordics. P27 is a joint initiative by several banks to explore the possibility of establishing a pan-Nordic payment infrastructure for domestic and cross-border payments in euros and the Nordic currencies. P27 received its name from the project's aim to improve the system of payments for the 27 million inhabitants in the Nordics. By aligning its standards with those of the Single Euro Payments Area and applying to payments in the eurozone, P27 is expected to bring further harmonisation to the European payments landscape. The official launch of P27 services is subject to regulatory approvals.
In terms of legal developments within payments, the Second Payment Services Directive (PSD 2) has affected the Finnish fintech market for a few years now, but open banking has taken its place. However, there are still questions on the interpretation of PSD 2 and related regulation at both the national and EU level. The relationship between PSD 2 and the General Data Protection Regulation (GDPR) also requires continuous interpretation.
Although the business potential of PSD 2 has not yet been fully utilised, there are already many “beyond PSD 2” services in Finland. Market participants are also looking forward to open finance, as the European Commission aims to enable even wider use of data in the financial sector and other areas of society. As part of its Digital Finance Strategy, the European Commission has announced its intention to adopt an open finance regulatory framework by mid-2022.
Progress does not come without risks. The digitalisation of payments has created risks in the infrastructure to shift to information networks and cyber threats. The large volumes of assets handled by market participants and payment systems can be attractive targets for cyber criminals.
Cryptocurrency Finding Its Place in the Financial Sector
Cryptocurrency and distributed ledger technology are starting to gain credibility. Market capitalisations keep growing and more institutional investors are moving into the space. Also, banks, hedge funds and financial market participants are hiring crypto teams to investigate and ensure market presence. However, at the moment, there are fewer than ten companies in Finland registered as cryptocurrency providers (one of them was recently listed by Talouselämä, the Finnish weekly business magazine, as one of the most interesting start-ups in Finland).
Currently, central banks around the world, including the Bank of Finland, are considering the possibility of issuing central bank digital currencies (CBDCs). Drivers for this trend include the decline in the use of cash and the spread of new payment methods. CBDCs, in comparison to virtual currencies, would be a more cautious construction of a digital euro to supplement banknotes and coins. A retail CBDC would grant consumers access to digital central bank money. According to the Bank of Finland, a digital euro could, at best, compete with the prevailing retail payment methods in such a way that the markets, which tend towards monopoly, would remain competitive, for the benefit of consumers and businesses.
At the same time, regulators are trying to find solutions that will enable the creation of regulation while staying competitive for innovation. The US Securities and Exchange Commission recently took a stand against BlockFi, a USbased crypto financial institution, that resulted in a USD100 million fine for failing to register the offers and sales of its retail crypto lending product.
In the EU, the Commission introduced a proposal for a Markets in Crypto-Assets Regulation to increase consumer protection, market integrity and financial stability in autumn 2020. It is expected that the regulation will be published in the Official Journal of the European Union during 2022. The regulation will apply 18 months from its entry into force, meaning that the majority of the provisions will become applicable in 2023 or 2024. Finland has also enacted country-specific legislation. Consequently, only registered cryptocurrency providers can market cryptocurrencies and related services in Finland.
Part of the rush for efficient regulation is a result of the ability of distributed ledger technologies to scale and become relevant very quickly. As an example, Compound, an open-source peer-topeer borrowing financial service that was founded in 2019, is currently holding assets earning interest worth over USD10 billion. While a direct comparison to Finnish banks is challenging, if assets earning interest were to be compared to bank deposits, Compound is already larger than many Finnish household credit institutions.
Another dimension of the regulation of this technology is the subject of regulation in cases where operations are carried out autonomously. When governance is determined by open-source software code and operations are carried out by computing power, it is worth asking who is responsible for the code. At the moment, the answer remains unclear.
Sustainability as a Driver for Fintech
Sustainability is also something that fintech companies have started to prepare for in Finland. Since 2018, the European Commission has been developing a comprehensive policy agenda on sustainable finance, comprising the Action Plan on Financing Sustainable Growth and the development of a renewed Sustainable Finance Strategy. The Sustainable Finance Strategy introduces a broad set of new and enhanced regulations that will define the ESG reporting requirements of financial institutions and large companies.
When financial institutions are faced with ESG compliance requirements, they will make corresponding requirements for their customers. ESG compliance will therefore become an integral part of corporate banking and it will also be both a compliance requirement and a business opportunity for many financial institutions. In terms of future success, new and innovative fintech companies typically have an advantage as their businesses are often built around digital processes. The growing demand for ESG-compliant products not only requires such fintech companies to understand the ESG regulatory framework but may also provide a competitive advantage. As investors, companies and other financial market participants require more specific information on where money is flowing, fintech companies can become an integral part of the value chain by controlling data required in reporting and comparing.
Fintechs focusing on providing flexible alternative financial solutions are themselves, at best, at the forefront of improving social matters by enabling value transactions for anyone, regardless of time or place. The positive impact may be highlighted in countries with less advanced banking systems.
Fintech in a Time of Crisis
Russia's invasion of Ukraine has been a humanitarian and geopolitical disaster. It also has several implications for fintech. First of all, as modern financial systems are intertwined, the global sanctions targeted at Russian financial institutions will require awareness from fintech companies to ensure compliance with sanctions. For example, at the time of writing, Russian officials, their allies and certain financial institutions are prevented from accessing and transacting with, among others, the EU and US financial systems.
This situation also impacts ordinary consumers' finances. As fintech companies are in the business of providing alternative solutions with or without traditional financial institutions, the war may increase the interest in alternative payment solutions, cryptocurrencies and other fintech companies.
Whether the motive is to access the global financial systems or reduce reliance on financial institutions, a decentralised financial system that many fintech companies generally are aiming to achieve would be harder to hit with current sanctions. This, too, will most probably increase the interest in transparency and reliability in finance and payment services.
As a related matter, during the first days of the war, many Finnish fintechs were already allying with NGOs to provide help to Ukraine. It appears that fintechs also want to provide their expertise for the benefit of those in need.
Legal Developments to Keep an Eye on
In terms of other legal developments, many trends are related to sharing and protecting data in Finland. Keeping up with data privacy is a challenge for companies in the fintech sector. At the same time, most companies struggle to derive value from the data they have access to. For example, cloud computing is a technology trend that has had a major impact on the way analytics are carried out.
Finally, AML legislation will be amended nationally in Finland in parallel with the preparation of the new game-changing EU regulations, including the creation of a new EU authority and the regulation on AML/CFT containing directly applicable rules. These national amendments are based mainly on the recommendations of the Financial Action Task Force and will clarify, for example, the definition of a client.
Originally published by Chambers Global Practice Guides
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