These are two very important consultations that give a clear indication of the key policy priorities the Commission is likely to address in its Digital Finance and Retail Payment Strategies later this year. These include regulation of AI, oversight of large technology companies, digital identities, Open Finance, and further development of pan-European instant payment solutions. As COVID-19 forces many customers and businesses to resort to “remote” services and cashless transactions, the Commission sees the current crisis as an additional reason to press ahead with this work. Firms too need to recognise the need to push ahead with their digitalisation plans and to give these consultations, and their responses, rapid and appropriate consideration. Third country firms should note in particular the absence of any discussion of equivalence mechanisms.
Despite the current pandemic, on Friday 3 April, the European Commission resoundingly confirmed the timetable for its financial services (FS) innovation agenda by launching two consultations on digital finance and retail payments. The immediate political focus clearly remains on COVID-19, but the Commission believes that the current crisis has highlighted just how important a role digital FS and payments play in our lives and how much we rely on them as a society.
We share the Commission’s view that, far from slowing down innovation, COVID-19 is likely to accelerate the digitalisation of FS, as many more customers and businesses come to rely by necessity on “remote” services and cashless transactions.
The two consultations take the form of initial questionnaires to gather stakeholders’ views. The Commission will use the information it gathers to shape the actual Digital Finance and Retail Payment strategies, due to be published in the third quarter of this year. These will set out the key areas that EU policy will focus on for the next five years, and whether the Commission will launch any additional legislative initiatives in this area.
While last week’s consultations do not include any specific proposals yet, they do give very clear insights into what the Commission’s main policy priorities are likely to be.
As expected, the overall objectives of the Commission’s financial innovation agenda mirror those embedded in the EU cross-sector Digital Strategy, as well as the EU’s wider work on cybersecurity and competition. Enabling a technologically independent, attractive, resilient, and data-driven digital single market that strikes the “right balance between promoting innovation and properly managing risks to consumers and investors”.
A number of specific policy priority areas in these two consultations also align, and need to be read in conjunction, with the broader EU cross-sectoral framework. For example, the EU is already consulting on a new cross-sector regulatory framework for Artificial Intelligence (AI) and for Cloud Services Providers. In these and other areas of overlap, we expect that FS-specific policy and regulatory initiatives will generally complement, and not override, horizontal ones.
With this in mind, we expect the following key areas will be at the core of the future Digital Finance and Retail Payments strategies:
- addressing barriers or gaps in the regulatory approach to new technologies (e.g. AI, Cloud computing, Distributed Ledger Technologies, Internet of Things, etc.) to support their adoption while adequately protecting consumers. This will also include a framework for crypto-assets, on which the Commission consulted separately earlier this year;
- adopting a more activity-based approach and expanding the regulatory perimeter to respond to technology companies (e.g. BigTech) gaining significant market share in FS;
- ensuring fair and open access to critical technical infrastructure, such as Cloud services and payments infrastructure;
- support for the development and adoption of pan-European interoperable digital financial identities, to facilitate customer on-boarding as well as payments authentication;
- cross-border innovation hubs and sandbox testing, to reduce further fragmentation in the single market for digital FS;
- improving security and access to payments accounts data under the revised Payment Services Directive (i.e. PSD2), for example by promoting different authentication methods and processes and/or ensuring deeper standardisation of dedicated interfaces;
- further developing an innovative data-driven financial sector, while mitigating risks to consumers and their privacy. This may include the development of an Open Finance policy in the EU, as well as the creation of a common FS European data space for publicly available data in finance;
- facilitating the creation of a pan-European payment solution based on instant credit transfers, including through legislative action if appropriate; and
- improving cross-border payments and remittances between the EU and the rest of world.
Digital operational resilience will also be a key area of focus of the future Digital Finance strategy, but like crypto-assets, this topic was the subject of a separate consultation and therefore not specifically included in these new consultations.
Notably absent from both consultations are any explicit references to any proposed approach to FS firms or infrastructure providers outside the EU wishing to operate in the single market, or to any mechanism for equivalence decisions concerning third countries’ legislative and regulatory approaches. In part this may be due to the fact that these are initial consultations rather than fully developed strategies. But as the EU makes clear in its cross-sector Digital Strategy framework, its ambition is to become a leading global digital player and set its own rules, especially in key areas such as AI and data. While it will take time to turn this ambition into reality, non-EU countries and firms can reasonably expect the standards to access to the EU’s digital single market, including for FS, and adherence to current and future EU standards, to become increasingly strict.
Given the expected breadth and depth of the future Digital Finance and Retail Payments strategies, these consultations are obviously only the start of what will undoubtedly be a long policy journey. Different components of these strategies will advance at different paces depending on how complex and controversial they are. FS firms should be both pragmatic and ambitious in their engagement with the Commission in these areas. They should offer practical suggestions on how to address areas that can be tackled in the shorter term and accept that some areas will require more extensive and sustained engagement.
These are challenging times for all. As the Commission has done, FS firms should recognise that current world events have reinforced the need to boost their innovation plans to help build a resilient, competitive and fully operational digital financial sector for the benefit of the individuals who increasingly rely on their services, the economy and society as a whole.
The coronavirus outbreak has shown that consumers and businesses are increasingly relying on digital financial services, as shown for example by cashless – including contactless – payments. This emergency has also underlined the importance of innovation in digital financial products, as reliance on remote services has increased considerably.