Fintech and the Finnish Market — Are They Ready for Each Other?

The next big thing on both sides of the Atlantic is financial technology, more commonly known as fintech. As the Guardian noted in an  article last spring, startups focusing on specialised financial services are making use of cheap cloud computing, big data, mobile devices and social media applications to compete with banks and other conventional providers of financial services.

From personal finance planning apps to crowdfunding, fintech companies leverage user-friendly interfaces and the flexibility of their services to take market share in products and services[1] that used to be the exclusive domain of larger players.

Complex Regulation Makes Dangerous Waters for Fintech Startups

As fintech companies enter the Finnish market, their biggest challenges may well be understanding and navigating complex regulation. Even simple fintech services, such as providing mobile payment solutions or trading applications, may require licenses to provide payment or investment services.

When it comes to peer2peer lending, operators should keep in mind that micro-lending is also regulated by consumer protection rules, and prospective service providers may need to register with regional authorities.

Obtaining licenses for all this and complying with statutory obligations can be both cumbersome and costly, which is far from an ideal fit for the generally lean and agile startup business model. Therefore, creating a proactive policy to address and mitigate regulatory concerns are vital initial measures for a startup looking to enter the fintech market.

Personal Data a Potential Land Mine

The use of personal data is strictly regulated in the EU under the Data Protection Directive (95/46/EC). Further data protection regulation is expected to come into effect during the upcoming years in the form of the new European Data Protection Regulation. At the same time as regulation is increasing, new technologies are looking for broader opportunities to permissibly utilise personal data.

Certain personal data has long been used for risk analysis in the financial industry. However, many traditional concepts associated with data processing are facing a revolution in the form of developments such as dual purpose social media applications, such as peer2peer lending platforms.

As tempting as the significant opportunities to use personal data available through various social media platforms may be to fintech startups, they have to watch their step and make sure their operations comply with constantly developing  data protection rules.

What to Look Out for In Fintech Investments

When looking to invest in fintech startups, venture capital investors should keep in mind the regulatory landscape described above. Most importantly, investors need to take into account the possibility of increased compliance and risk management costs as well as liability risks when conducting due diligence relating to start-up targets. This is especially demanding in the current environment of swelling regulation that remains inherently ambiguous with respect to new and disruptive technologies.

At worst, a fintech startup’s business could involve significant liability risks if it has neglected regulatory obligations. It is vital that investors identify such situations and engage the expertise to appropriately assess the risks involved when making investment decisions. As fintech companies gain more ground in the financial sector, venture capital and private equity investors have two possible ways to react: adapt 

or invest. If the financial sector  is reluctant to adapt by embracing new technologies, we may see a repeat of the kind of changes that occurred in the music industry since the launch of mp3 and P2P networks, albeit restricted by the industry’s regulated nature.

The mobile pay applications that have been launched by large banks and welcomed by customers are a good example of using investment to integrate fintech in existing businesses.

Fintech clearly holds potential that intrigues investors. This is evident in BlackRock’s recent of acquisition of FutureAdvisor, a previously Sequoia-backed start-up offering automated algorithm based financial planning services to consumers.

While interest among investors grows, fintech start-ups in the US are already expanding into insurance, yet another highly regulated financial services business. Despite the limitations set by regulation, the advance of fintech into the Finnish market seems inevitable. After all, this is a country that is already accustomed to widespread and well-functioning digital financial services, such as long-established internet banking portals.

[1] A World Economic Forum graphic of the fintech scene