The EU is considering relaxing banking software rules to help banks resist competition from fintech providers. As fintech usage surges, traditional lenders are finding they're unable to invest in their own web-based platforms due to European regulations.
Financial technology companies, particularly those using the blockchain, have observed a surge in demand over the past year. They offer clients more flexible investment opportunities and lower costs, making them attractive alternatives to banks.
As fintech use rises, banks are becoming cognisant of the incumbent threat. In the EU, their response is limited by strict rules covering software spending. As Reuters reports, the European Commission this week confirmed it's aware that the regulations are proving limiting. It said it has started a "dialogue with stakeholders" to discuss relaxing software investment rules.
Under the current legislation, spending on banking software is treated as a cost. Banks therefore have to cover their spending on digital, cloud and web products with an equal investment in capital. The proposal would see software platforms reclassified as an "investment," allowing banks to bypass the dedication of capital and accelerate their digital transformations.
"The Commission services are in a dialogue with stakeholders to gain a better understanding of the interaction between accounting and prudential treatment of software," a European Commission spokeswoman commented to Reuters. "We will envisage appropriate action if needed."
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Fintech firms are growing so rapidly because they are quicker to adapt to trends in technology. Banks have consistently demonstrated they can't respond to shifts in demand for finance tech as promptly as consumers would like.
Services such as online banking, mobile payments and digital-only products have all taken years to get established. Globally, banks are still evaluating "next-generation" finance technologies such as the blockchain. Startups are already actively using them, attracting significant outside investments which are expected to balloon over the next few years.
The changing dynamics in finance are prompting concerns that banks could lose control of the economy. If private cryptocurrencies such as Bitcoin gain mass acceptance, it'll be more difficult for banks to regulate how payments take place. As more transactions occur on the blockchain, less of the global economy will be monitored by central banks. As the Financial Times reported today, only now is the "penny dropping" amongst financial leaders.
The EU's recognition that fintech is a serious threat shows thought is now being given to the issues. While change won't come overnight, a relaxation of the software spending rules could allow banks to operate with a similar level of agility to the rising swathes of fintech startups. As digital disruption begins to be felt in finance, it's increasingly obvious banks are facing a new kind of competition.