Fintechs in Spain
While Spain has one of the largest fintech ecosystems in the world, there is no organized way of funding them:
Spain has one of the largest fintech ecosystems in the world – over 300 fintech companies and more than 200 insurtech firms. The numbers, however, do not convey the state of health of the sector as there is a huge challenge in terms of investments and quite a few of the startups are very small in terms of funding and operations. Many of them have not even completed the initial round of funding. But the hope is when funding comes in some of them can really flourish and even become unicorns.
Spanish laws do not have any restriction on fintechs in securing funding. However, most of the fintechs in the country are funded through equity and there are several investors - PE firms, VCs, angel investors and financial services institutions, which have come forward to fund them. Crowdfunding too is another source and there are several incubators and accelerators. In addition, fintechs can approach banks, but this source is not very popular as these entities as startups do not have the required creditworthiness in the eyes of banks.
A recent study has indicated that while the sector is struggling for funding, it accounts for some 5000 direct jobs getting generated in 2019 and this number is expected to touch 10,000 in 2020. Similarly insurtech startups have given employment to 3000 and 1500 jobs are expected to be added in the next year. The study maintains that while the formal sector may not be able to generate the required number of jobs, the startups have indeed the opportunity to create technical, digital and high value jobs and improve the job scenario in the country. Curiously, Spain does not have any specific regulation for fintechs, especially i n finance-related activities. Laws relating to crowdfunding and crowdlending platforms apply to fintechs. In fact, any entity operating in Spain that uses fintech
will be subject to any laws and regulations of general application in the country. For instance, if an entity provides banking, financial or insurance services, it will be subject to the same licensing requirements and regulations applicable to other entities operating in those sectors. The Spanish Association of FinTech and InsurTech (AEFI) has published a white book of fintech regulation in Spain, suggesting changes in the regulation to better adjust it to the use of fintechs and to boost these activities. The Spanish authorities are also considering some initiatives to promote these activities and clarify their legal regime.
A l aw enacted i n April 2015 on the promotion of business financing regulates crowdfunding and crowdlending platforms. Under this regulation, the activities of reward-based crowdfunding, equity crowdfunding and crowdlending are subject to licensing requirements under the supervision of the National Securities Market Commission, or CNMV. The regulation covers the legal regime of these platforms and the accreditation of investors, as well as limits for the investments.
Payment services in Spain are regulated by a law of 13 November 2009 on payment systems and Spanish Royal Decree of May 2010 on the legal framework for payment services and payment institutions. These implemented the Payment Ser vices Directive (PSD), which has now been replaced by the new Payment Services Directive (PSD 2) ((EU) 2015/2366). But PSD 2 has not been implemented, as only a preliminary draft law has been approved by the Council of Ministers in May 2018.
BETTER COLLABORATION
One of the improvements experienced in recent years has been the relationship between the financial services companies and the fintechs. Until recently, they were competitors. The scenario has now changed because companies now have a more collaborative vision where they want to work together and are willing to invest.
NO SPECIFIC REGULATOR
Another major challenge the sector faces when achieving optimal development in the coming years relates to regulations. The
role of the regulator has increased, although political instability in recent times has slowed down the changes. However, AEFI has been working with the regulator and supervisor for the approval of a Sandbox within the law of digital transformation of the financial services sector. The Spanish cabinet has approved a draft bill that includes the creation of the Sandbox. This is expected to speed up the development of fintechs in general and creation of innovative ideas in both the finance and the insurance sectors.
DIGITAL DISRUPTION
In spite of the constraints, the fintech sector has come up as a leader in the digital disruption of the financial services industry in the country, as a growing number of startups have developed innovative solutions without bank licenses. The ecosystem as a whole is reported to have grown by 41% in the last 15 months. Some of the startups that have come up in the last 15 months are those in insurance, crowdfunding, financial management, wealth management, corporate lending and payments. According to FinTech Global, Spanish companies have raised over $120 million in 2017 across 19 deals, which is a 10x increase in comparison to raised capital in 2016. This was driven by larger and later stage equity funding for companies in the sector.
BETTER DAYS AHEAD
The number of digital payment users in Spain has been steadily growing, increasing from 23 million users in 2015 to 27 million in 2018. This number is expected to grow to roughly 30 million in 2021 in the area of digital commerce. According to the EY FinTech Adoption Index 2017, Spain has an above average position with respect to the percentage of fintech users, obtaining the 6th position in a study that included the analysis of 20 markets overall. Over 37% of the internet users in Spain has used digitally enhanced financial services at least once, mainly for managing their finances, buying products online, or making transferences via their mobile apps.
Recent studies have shown that the majority of fintech startups operate under a B2B model (over 52%), while 48% of them sell their services to the end consumer. Taking into account both B2B and B2C companies, 76% of them charge for their solutions, 21% provide services for free, and only 3% work with a freemium (mixed) model. It is also observed that the market is experiencing growth not only in terms of companies that develop fintech solutions, but also in the number of users adopting new services to manage their finances. While the country may still be at a nascent stage compared to leaders like the US, UK or China, innovation seems to have got into the minds of Spanish entrepreneurs and the only way it up.
TRUE DISRUPTORS
While Spanish banks like BBVA and Santander are making huge investments in new technologies, there has also been a spurt in number of challenger banks. With the right financial support, these fintech endeavors are disrupting the traditional banking models. Some of these enterprises are:
2Gether Global is a collaborative banking platform app, which offers 2GT token. Users need to hold a minimum of € 10 worth of 2GT to access the services and they get rewarded for their contribution in 2GT.
Bnc10 is mobile-focused banking ser vice, offering chat banking and WhatsApp banking through its app. It does not have its own banking license but is relying on a license of an undisclosed established bank.
Bnext is a digital and mobile bank that follows UK’s Monzo. It has attracted funding of 1.5 million with the aim of reaching 100,000 active customers.
EVO Banco of Madrid offers ‘ The Smart Account’, a mobile app, which also has a smart voice assistant. It has attracted the young generation of customers.
Ferratum Bank is Germany-based but came to Spain. It uses behavioral data analysis to generate intelligent, real-time and targeted recommendations to improve customer experience and add services over time according to users’ preferences.
imaginBank is a mobile-only bank that uses social media to connect with customers. It is part of Caixabank, one of the largest banks in Spain. The core product is the imaginBank current account.
Ipagoo is not technically a bank, but covers all the EU and beyond, offering current/business accounts and cash management services. It plans to open its APIs to become a Bank-as-a-Service (BaaS) company to anyone willing to develop new interfaces or applications.
Nomo Banking is a digital banking service catering for freelancers and the self-employed. It is part of Banco Sabadell, and offers a mobile app for round-the-clock working hours, automatic accounting and tax management.
Openbank is a subsidiary of Santander and targets the professionals with current accounts, savings, i nvestment/wealth management and lending products (including mortgages), debit and credit cards. The bank has over one million clients and € 6 billion in deposits.