Europe’s path to digitisation and datafication in finance has rested upon four apparently unrelated pillars: (1) extensive reporting requirements imposed after the Global Financial Crisis to control systemic risk and change financial sector behaviour; (2) strict data protection rules; (3) the facilitation of open banking to enhance competition in banking and particularly payments; and (4) a legislative framework for digital identification imposed to further the European Single Market. This chapter suggests that together these seemingly unrelated pillars have driven a transition to data-driven finance. The emerging ecosystem based on these pillars aims to promote a balance among a range of sometimes conflicting objectives, including systemic risk, data security and privacy, efficiency, and customer protection. Furthermore, we argue that Europe’s financial services and data protection regulatory reforms have unintentionally driven the use of regulatory technologies (RegTech), thereby laying the foundations for the digital transformation of European Union (‘EU’) financial services and financial regulation. The EU experiences provide insights for other countries in developing regulatory approaches to the intersection of data, finance, and technology.

The economies of scope and scale of finance combined with the network effects of data and technology create benefits and pose risks toccompetition within financial markets. The same FinTech economies that reduce costs and increase efficiencies often contribute to decreasing competition in FinTech market segments. This market concentration is at odds with key objectives of financial regulation, including market efficiency, investor/client protection, and systemic risk prevention, and may require regulators to intervene.

In addition to cybersecurity, the digitisation and datafication of finance at the centre of FinTech raise a range of data-related risks, in particular to data security and privacy (the focus of Chapter 17) and also from concentration and the emergence of new Systemically Important Financial Institutions (SIFIs) in the form of digital finance platforms, TechFins and BigTechs. These new entrants bring with them a range of regulatory challenges we analyse here.

This chapter considers the various requirements for identification in the financial sector and the evolution in the nature of identity from analogue to digitised to digital. We argue that technology presents an opportunity to solve this challenge through the development of digital identity infrastructure and related utilities. The establishment of such utilities for digital or electronic identification requires addressing design questions such as registration methods, data availability, and cross-jurisdictional recognitions. As with any reform, a balance needs to be reached to ensure the objectives of efficiency and financial inclusion are not achieved at the cost of market integrity and financial stability.

The full potential of FinTech may best be realised by a progressive approach to the development of the underlying infrastructure for digital financial transformation. We suggest in this chapter the best way to think about such a strategy is to focus on four primary pillars. The first pillar requires the building of digital identity, simplified account opening, and e-KYC systems. The second pillar is open interoperable electronic payment systems. The third pillar involves using the infrastructure of the first and second pillars to underpin electronic provision of government services and payments. The fourth pillar is the design and development of digital financial markets and systems, which supports broader access to finance and investment. Implementing the four pillars is a major journey for any economy, but one with tremendous potential to transform financial systems, economies, and societies.

This chapter considers how distributed ledger technologies and blockchain can contribute to the creation of new foundational infrastructure for financial services, including crypto-assets and smart contracts. We classify the new business models, analyse the opportunities, and highlight the regulatory challenges.

This chapter focuses on the evolution of non-financial businesses such as technology, e-commerce, and telecommunications companies (tech companies) entering the financial services sector: TechFins. China has been at the forefront of this change, with Alibaba establishing the online financial conglomerate Ant Group, which we have discussed in previous chapters. The global tech behemoths of Amazon, Apple, Google, and Facebook have also all entered the financial services sector in various ways. The chapter considers the emergence of digital finance platforms in the context of traditional finance and then considers the entry of BigTech firms into finance. Together, these processes constitute the expression of the combination of the economies of scope and scale of finance combined with the network effects of data and technology. Together, they embody one of the major trends we characterise as at the heart of the current era of FinTech 4.0: a natural process of concentration, with many benefits, as well as many risks and challenges, which are the subject of Chapters 17, 18, and 19.