This article first appeared in the Irish Times on 13/01/2023.
Fintech, or the use of technology to deliver financial services, is an area that is scaling at a massive pace globally. Whether it’s a banking app or online payments, chances are you’ve used fintech services recently. As with anything money-related though, the industry needs to be regulated. What does that mean for an industry that’s trying to grow at pace?
Regulating the industry
Last year we were very focused on the interface between fintech firms and the Central Bank of Ireland (CBI), and the licensing process and application process that firms were going through and some of the difficulties that they were facing, says Liam Flynn, partner and co-head of the financial regulation team at business law firm Mason Hayes & Curran. “Over the course of the last 12 months, in our view, the CBI has streamlined and enhanced its processes for applicants dealing with new licence applications, and overall experience has improved. That’s not to say that it’s perfect – or quicker – but the experience is better.”
Getting regulated in the fintech space in Ireland is not an easy endeavour – but that is not necessarily the fault of the Central Bank, says Flynn. “Every firm that comes to us wants a licence in three months, and we tell them that’s not realistic, it will be more like 12 months. So, they say, okay, try and do it in nine – and it ends up being 15, or something like that.” Flynn says this is part of the process, and part of the journey in some cases to build a brand-new business. “It’s sometimes part of their cultural evolution, in terms of moving into a financial service regulated environment in a mainstream jurisdiction like Ireland.
“It’s not fair to say that because they want a licence in three months, and the Central Bank doesn’t give them one for 12 months, that that’s the Central Bank’s fault. It’s not.”
Sarah Cloonan, partner in the financial regulation team at MHC, says the Central Bank has developed new processes to streamline the application procedure, especially in the payments and e-money space. “The CBI has become more sophisticated with how it deals with these applications and has put mechanisms in place in the process which makes the process more seamless. In some cases, these new processes speed up the licensing process itself.
“That can take the form of pre-application meetings with the Central Bank in advance of making a submission, and once you’re in the review process, holding bespoke sessions to talk through the products with the Central Bank to get them on board and understand the products. From feedback we’ve found, this has speeded up the process.”
Flynn says that part of the criticism they would have heard in the past was that the applicant worked really hard on the application and sent it in, only for it to go into a vacuum for three months. Then after three months, you’re sent 150 questions to answer.
“Now, there’s more engagement as they go through the journey. Now, when they get the questions, they understand better where the CBI is coming from. So, the Central Bank deserves some credit in terms of how it is dealing with the process.”
Fintech in 2022
The pace of evolution of regulation in financial services, particularly at the European level, and how it impacts the fintech space, was a fundamental trend in 2022, says Flynn, and this will continue in 2023. “To give you a couple of examples – the markets in crypto assets regulation (MICA) are now in final form, it’s waiting for the final vote in the European Parliament, which is scheduled for February 2023. So, we’re likely to have a finalised law governing the issuance of crypto assets and the trading and provision of all sorts of services in crypto assets in Europe by early next year.
“Another example is the Digital Operational Resilience Act (DORA) which is to do with regulatory measures to supervise the provision of important outsourced services to financial services firms. So, where a financial services firm makes extensive use of cloud technology, Europe is bringing in new layers of oversight and enhancing the kind of standards that the bank or insurer using those services will have to meet.”
There’s a European Commission proposal that all banks in Europe will have to make same-day instant payments available – for the same fee that they charge for conventional payments. The Commission is trying to push all banks into speeding up the payment process. “There’s an awful lot happening in digital finance and staying on top of it is very challenging,” says Flynn.
“However, all these changes are throwing up business opportunities – not just for financial services firms, but for wider tech firms and the wider fintech ecosystem.”
Ireland as a fintech destination
There’s massive potential for Ireland to become a very strong player in the fintech space, says Flynn. “That’s not only in terms of us being a good headquarters location for regulated financial firms. It’s also about growing the wider ecosystem and growing a host of firms, whether they be small start-ups all the way up to the very large tech firms that we have here already, that are looking at innovative ways to interface with financial services.
“We’re an obvious place in Europe to be a centre for that. Because other than London there’s no other financial centre in the EU that hosts a big financial services community as well as a big tech community.” The fact that we can bring them both together is a huge business opportunity for Ireland Inc, says Flynn. “The government has already seen it in the International Financial Services strategy for Ireland. But given the amount of new regulation that is coming at European level, we need as a country to engage with that opportunity much more intensively. That requires a national stakeholder effort – it’s not just lawyers talking about the opportunities and working with their clients, it’s the Central Bank, the Department of Finance, and industry bodies all working together to maximise the opportunities for the nation as a whole.”
Flynn says we need to energetically engage with developments at EU level now and in the next three years. “Once new laws are all finalised and on the books in the different EU countries, the opportunity to position ourselves as effectively as possible will close. We have a short time window to position Ireland well to mop up a big share of the digital finance business in Europe.
“We could be looking at another 40,000 jobs added to the Irish economy without any difficulty if we do that well.”