The startups-turned-giants Bunq, N26 and Revolut have enshrined their names in Western Europe’s financial sector as they make significant inroads in the sector and capture a significant section of the market share with their innovative approaches. Yet, in certain regions, traditional banks continue to hold sway, benefiting from factors such as lower financial literacy rates and conservative regulatory environments. A unique opportunity is arising for new digital banks and payment providers, enabled by regulation, to bring better access to finance.
Financial literacy and inclusivity
Literacy in the sector is the indisputable foundation for building financial inclusion. Those who can demonstrate a widespread understanding of financial concepts are more likely to engage with new, digital products and services, fermenting economic inclusion. However, disparities in financial literacy persist across Europe.
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Finland, keeping with its historic approach to all-encompassing social democratic education programmes, has implemented comprehensive schemes to uplift the knowledge of its nation’s financial intelligence. The Yrityskylä initiative engages 12- and 13-year-olds in a simulated business village, teaching them about business, the economy and teamwork through hands-on experience. This proactive approach has contributed to Finland’s high ranking in financial literacy in the OECD’s Pisa surveys. While Luxembourg boasts a high adult banked population of 99.7% as of 2023, financial literacy initiatives remain central, especially among younger demographics. The 18 – 29 age group in Luxembourg scores 63 out of 100 on the OECD’s financial literacy measure, below the OECD average. In contrast, according to the OECD/INFE 2023 International Survey of Adult Financial Literacy, Italy ranks among the lowest for financial literacy among European nations, with an average score of 10.6 out of 20, indicating a significant need for enhanced financial education efforts.
The regulatory dilemma
Markets with successful adoption of digital financial services all have one thing in common: supportive regulatory frameworks. In certain regions, overly stringent restrictions on activity coupled with a risk-averse stance can impede the entry and growth of fintech challengers. The Republic of Ireland, for instance, has experienced a rise in its cost-to-income ratio, primarily due to increased operational costs and regulatory pressures, further exacerbated by the low interest rate environment.
The picture isn’t as simplistic as over-regulatory bodies infringing on the dynamism of commercial activity. In fact, they have the potential to act as catalysts for innovation. By adopting progressive policies and fostering collaboration between traditional banks and fintech companies, regulators can create an environment conducive to financial inclusion. Open banking initiatives, for instance, have demonstrated how regulatory frameworks can encourage competition and innovation, ultimately benefiting consumers.
One demonstrable impact is the UK’s Financial Conduct Authority (FCA) instrumental role in driving Open Banking through the EU’s Revised Payment Services Directive in 2018. By mandating banks to open their APIs to licensed third parties, the initiative spurred competition, enabling fintechs to build innovative financial products. Companies like Plaid and TrueLayer have thrived in this environment, offering financial data-sharing and payment services that empower consumers.
Challenge creates opportunity
The urgent need for financial education in the Europe’s under-served regions can be met by the neo and challenger banks.
Neobanks are known for their innovative tools that help in educating the public about financial services. Monzo, Revolut, and Starling keep consumers notified of spending at each transaction – and provide prompts to consider budgeting options, spending habits and savings.
Virtual cards enable seamless e-commerce transactions and ease the management of expenses for individuals. Similarly, digitally enabled payments are serving a much greater purpose than meets than eye, leveraging technology to facilitate financial inclusion through faster and lower-cost transactions.
Country-specific challengers stand a strong chance of directly addressing consumers’ pain points and delivering on financial education. Salt Bank, owned by incumbent Banca Transilvania, launched as Romania’s first all-digital bank last year. With the firepower of one of Romania’s largest banks, it is onboarding the country’s unbanked while also better serving the digitally savvy.
Similarly, in Greece, Piraeus Bank, a well-established institution in the country, announced in 2022 plans to launch an independent digital bank in Greece. Snappi recently received its European banking license in June 2024 and upon launch, it promises to bring a digital-first experience to Greek consumers for the first time in the nation’s history. This advancement in accessibility leaves traditional incumbents with even fewer justifications for their slow adaptation.
The persistence of traditional banking hegemony in certain corners of Europe is less a testament to its strength than to the tendency of a refusal to move away from outdated institutions. This lingering dominance is not an inevitability but rather a call to action that demands a concerted effort to enhance financial inclusion through both education and regulatory reform.
This is not a task for regulators alone. Financial institutions, educators and policymakers must abandon their usual lethargy and collaborate to implement meaningful financial literacy programmes that do not simply explain the workings of the system but empower individuals to challenge and choose among its offerings. At the same time, embracing regulatory frameworks that invite, rather than resist, fintech challengers will inject long-overdue competition into a market that has thus far been content with complacency.
Ignacio Gironella is Head of Sales Europe, Paymentology
