EU FinTech Index: An Evaluation of Countries' Opportunities for FinTech Growth

Introduction

Increasingly more decision makers and practitioners in the financial field perceive the emergence of new, innovative financial technology, called FinTech, as a potential solution for improving a country’s financial inclusion. The study conducted by McKinsey (2016) argued that digital and financial inclusion are able to trigger major macroeconomic benefits, and FinTech could boost the GDP of emerging economies by 6% in 2025 which is supposed to generate about 95 million new jobs. Nevertheless, the reality shows that country-specific initiatives meant to support financial inclusion are uneven, fragmented and focusing mostly on financial education. Public authorities should consider designing a comprehensive and tailored financial inclusion strategy, encompassing also a digital approach, to address the identified gaps.

However, the success of FinTech initiatives is difficult to ascertain, as it is the outcome of several country-related and individual-related factors, such as economic development, the state of existing physical and technological infrastructure, supporting regulations for the business environment, demographic and financial access indicators (Frost, 2020).

In this regard, analysts from ING Bank have set up in 2016 a FinTech index, meant to assess a country’s need for FinTech led financial inclusion, its FinTech infrastructure as well as country-specific governance and demographic features. This FinTech Index comprises 3 sub-indices, related to: a) the urgency or need for FinTech to financially include individuals; b) the FinTech infrastructure and ecosystem which assesses countries’ business environment for FinTech companies; c) the political and regulatory environment which is a determinant of a country’s investment climate. Each sub-index gathers several proxy variables, whose values have been normalized before computing the unweighted index. The scores provide insights on whether the FinTech environment in one country is better or worse compared to other countries in the sample. It has to be mentioned that this initial index was built only for low and middle-income countries across the world.

Our research relies on the same methodological steps and variables as proposed by ING’s FinTech index, but we focus exclusively on European Union (EU) countries. The EU FinTech index developed within this chapter is computed distinctly for the years 2014 and 2017, due to data availability constraints for some indicators, and covers 28 EU countries. Another significant novel feature of our research resides from updating the structure of the FinTech overall index, by creating a fourth new sub-index meant to measure the financial access conditions for start-ups and small and medium sized companies (SMEs). In this respect, we employed detailed data regarding SMEs access to various bank, non-bank and capital market sources of financing, such as loans, issuance of bonds or equity, leasing and factoring.

The aggregate index level allows making comparisons and rankings between countries in terms of FinTech environment and prospects, as well as to assess the FinTech improvements one year from another. In addition, the values recorded by each sub-index will indicate which component of the overall index contributes more to FinTech advancements in a given country and, respectively, which one should be improved, through targeted public policies. By plotting on a map the results obtained, one can gain a visual insight of the best-performing countries in terms of FinTech environment.

The novelty of our research approach resides in being the first study computing an EU FinTech index for the EU member countries. Our attempt overlaps on the active debates, meetings and public consultations which take place at European level, related to identifying obstacles for financial innovation and creating prospects for FinTech developments. The momentum for quantitatively assessing FinTech opportunity of growth is outlined by the official roadmaps defined at European level. For instance, the European Commission has adopted in March 2018 an Action Plan on FinTech comprising 19 steps to foster the development of a more competitive and innovative European financial sector, by relying on new technologies, while the European Banking Association has published several reports on the FinTech impact on banks’ business models and the risks and opportunities arising from incorporating FinTech in the regular banking business.

The remaining of the chapter is structured as follows: the literature review section outlines the existing concerns and challenges linked to FinTech, the methodology section describes the stages for computing the FinTech index score and the variables used. The next section presents and explains the findings obtained, while the last part concludes.