Realizing Europe’s digital emergency and making sense of the EU Digital finance strategy

12 min readOct 1, 2020

Introduction

This is an important document and not a island to itself it is very much related to subjects of other articles I have written.

Making educated guesses on the common EU electronic identity scheme Making (digital) sense of the 2020 EU state of the union EIdas consultion summar Making sense of the eIdas consultation The platforms entry into identity The next frontier digital validation

This article will cover some areas in detail while other areas are just mentioned or left out. The subjects receiving the biggest focus will be those related to digital validation who are specific and will arrive in short order.

This is based on the commission text https://ec.europa.eu/finance/docs/law/200924-digital-finance-strategy_en.pdf

The wider context

In terms of the broader economy, there is now talk of a ‘K-shaped’ recovery in which some sectors decline sharply while others boom, often by seizing on opportunities created by the crisis itself. The EU has every reason to worry that its economy comprises more sectors in the first category than in the second, which invariably centres on information and communication technology (ICT).
The pandemic has accelerated the digital transition. China, for its part, has stepped up its efforts to achieve technological dominance in artificial intelligence (AI) and other key sectors of the future. And companies such as Zoom have gone from being nonentities to household names in the space of just months.
There was a time when Europe could proudly claim to have helped launch the era of mobile communications. But now that the world is on the verge of upgrading from 4G to 5G, Europe’s technological contributions are notably absent.
A new report from the European Round Table for Industry finds that the EU trails the US by three years, and China by nearly as much.
According to a 2019 study by the Centre for Data Innovation, the US leads the global AI race “in four of the six categories of metrics” examined (talent, research, development, and hardware), and China comes out on top in the remaining two (adoption and data). The EU commands primacy in none, though it is close behind the US in terms of talent.
But Europe also needs to declare a domestic digital emergency, lest it continue falling behind in the industries that will be necessary for achieving all other development goals — including a green economy.

Tech gap between Europe and China is a digital emergency Former prime minister Carl Bildt

Much of the proposed actions must be understood in relation to these factors and underlines the fact that most of Europe’s proclaimed ambitions in the digital space are no more than emergency catch up and in most respects doing to little to late. This really is a more diplomatic way of expressing my views on many of the items presented in Making (digital) sense of the 2020 EU state of the union.

The importance of the suggestions in the digital finance strategy beyond playing catch up should be seen as the first part of trying to retain the single market in the digital age. The importance of succeeding can not be over estimated quite frankly. There is a real and present danger of loosing out not only by being relegated to being a banana republic in terms of technological proliferation but also fragmenting one of the crown jewels of EU, having a functional x-border single market.

The pilot here for retaining a digital single market are the financial markets and make no mistake priority number one in this case is with large letters and capital 1. This priority is far more urgent and important than the lesser priorities important as they are. One should also realize that of the nice plans of a green and circular economy are just not going to become an reality unless these gaps are fixed.

One should also consider the inclusion in the retail strategy to understand that these developments are not done just for doing it. They are essential to exist in the digital space which the single market must do naively to exist.

If nothing else one takeaway from this article should be.

Do not focus on the tools. They are inevitable to reach the goals.
Goals can always be discussed but unless you subscribe to a narrow view of the world there should be very little reason to doubt these.

Making a deep digital single market

The first priority is to tackle fragmentation in the Digital Single Market for financial services, thereby enabling European consumers to access cross-border services and help European financial firms’ scale up their digital operations (4.1). Many firms have confirmed that scaling up across borders is essential for them, because on-line services are costly to develop but cheap to reproduce and often require deployment at considerable scale. A larger potential market across borders makes it easier to raisethe funds needed to develop such services. It gives consumers genuine access to cross border services. Firms achieving scale may also be able to provide such services at a lower price and higher quality.
By 2024, the EU should implement a sound legal framework enabling the use of interoperable digital identity solutions which will enable new customers to access financial services quickly and easily (“on boarding”). This framework should be based on more harmonised anti-money laundering (AML) and counter-terrorism financing (CTF) rules and a revised framework for electronic identification and trust services for electronic transactions (e-IDAS Regulation)15. It should enable customer data to be reused subject to informed customer consent, which is based on full transparency about the consequences and implications of such reuse.

This is the most important aspect in this strategy document. The forerunner for this is the financial sector but make no mistake this is the first one out where other areas will follow.

One should also read digital common market with boldface. This is removal of any and all barriers enabling a x-border consumption of financial offerings we really have never seen so far. This is hugely important and should be read,reread and considered by any and all market participants.

This is going to be based on the following pillars.

Common identification scheme. This is clearly related but not necessary totally overlapping to the proposed EU Digital identity scheme.
Portable KYC data. This is sub case of the general digital validation.
Harmonized KYC/CDD this is about removing barriers as well as making portability an reality.
Standardization of remote onboarding. Even if this is targeted toward financial it has a clear overlap towards digital identities.
Extensions of passporting in fintech and regtech especially. Clearly harmonization is a keystone for this to possible.

Digital innovation

The second priority is to ensure that the EU regulatory framework facilitates digital innovation in the interest of consumers and market efficiency (4.2).Innovations based on or making use of distributed ledger technology (DLT) or artificial intelligence (AI) have the potential to improve financial services for consumers and businesses.
By 2024, the EU should put in place a comprehensive framework enabling the uptake of distributed ledger technology (DLT) and crypto-assets in the financial sector. It should also address the risks associated with these technologies.
By 2024, the Commission, working together with the ESAs, aims to ensure clarity as regards supervisory expectations about how the legislative framework on financial services should apply to artificial intelligence (AI) applications.

The key points here would be DLT ,crypto assets and AI.

Important but minor points would be.

Promoting cooperation and the use of cloud computing infrastructure. This is probably related to Gaia-x primarily.
Promoting investments in software by adapting prudential rules on intangible assets. This is strengthening of IP with the positives and negatives this carries.

Data-driven innovation by a common financial dataspace

The third priority is to create a European financial data space to promote data-driven innovation, building on the European data strategy, including enhanced access to data and data sharing within the financial sector.
By 2024, information to be publically released under EU financial services legislation should be disclosed in standardised and machine-readable formats. As part of its CMU Action Plan, the Commission will implement EU infrastructure to facilitate access to all publicly available disclosure relevant to capital markets.
By 2024, the EU aims to put in place the necessary conditions to enable the use of innovative technologies, including RegTech and SupTech tools, for supervisory reporting by regulated entities and supervision by authorities. It should also promote the sharing of data between supervisory authorities.
By 2024, the EU should have an open finance framework in place, in line with the EU Data Strategy, the upcoming Data Act, and Digital Services Act. This will be coordinated with the review of the Payment Services Directive.

Now one important factor hidden in the cracks is the lingo about of open digital finance framework. The important as is far more reaching than both PSD2 and Openbanking as this covers a much broader area than any of those areas. One obvious aspect would be insurance but potentially far more areas would fall under this umbrella.

Another important aspect one should not ignore is the title. This is digital validation applied to far more aspects than KYC/CDD.

Address new challenges and risks associated with the digital transformation

By 2024, the EU prudential and conduct regulation and supervision should be adapted to be future proof for the new financial ecosystem, including traditional regulated financial institutions and technology providers offering financial services.
The EU must integrate into all measures taken to implement this strategy the objective of continuously empowering and protecting consumers to ensure that they benefit from a broader access, under safe conditions, to innovative products and services. The protection of the public interest against the risk of money laundering, terrorist financing and any other financial misbehaviours including tax evasion should progress in parallel.
Technology companies are therefore likely to become an integral part of the financial ecosystem.
In this context, regulation and supervision should be proportionate, based on the principle of “same activity, same risk, same rules” and pay particular attention to the risks of significant operators.

One particularly interesting tidbit would be.

EU level to address the current issues faced by payment
services providers when trying to access near field
communication (NFC) antennas available on certain
mobile platforms

Which is probably a warning to Apple.

Related developments

https://ec.europa.eu/transparency/regdoc/rep/1/2020/EN/COM-2020-592-F1-EN-MAIN-PART-1.PDF

This will be discussed partially in this document.

The Commission’s vision for the EU’s retail payments is that:-Citizens and businesses in Europe benefit from a broad and diverse range of high-quality payment solutions, supported by a competitive and innovative payments market and based on safe, efficient and accessible infrastructures; -Competitive home-grownand pan-European payment solutions are available, supporting Europe’s economic and financial sovereignty; and -The EU makes a significant contribution to improving cross-border payments with non-EU jurisdictions, including remittances, thereby supporting the international role of the euro and the EU’s ‘open strategic autonomy
1)increasingly digital and instant payment solutions with pan-European reach;
2)innovative and competitive retail payments markets;
3)efficient and interoperable retail payment systems and other support infrastructures; and
4)efficient international payments, including remittances.

Increasingly digital and instant payment solutions with pan-European reach

The commission will push for making pan European instant payments the new normal. Further legislation will be considered here.

The Commission will assess whether these numbers are satisfactory and, on that basis, decide whether it is appropriate to propose legislation requiring payment service providers’ adherence to the SCT Inst. Scheme by the end of 2021. Such a proposal, if decided, would lay down the criteria for determining which payment service providers should be subject to obligatory participation.

European standard for QR-code

The Commission considers that the development of a single, open and secure European standard for QR-codes would support the uptake and interoperability of instant payments.

Increasing consumers’ trust in instant payments

In order to be more attractive to consumers, instant payment services should offer features that put them on an equal footing with other payment instruments (e.g. cards) that offer chargebacks, i.e. the return of credit card funds used to make a purchase to the buyer in certain cases (e.g. mistakes).
If instant payments are to become the new norm, the Commission considers that it would be appropriate that the charges of both regular and instant credit transfers should be the same.

European-grown payment solutions that work cross-border

New actors wishing to offer pan-European solutions may face a number of significant challenges:
-acceptance by merchants and consumers;
-customer recognition of new brands;
-designing a competitive and innovative business model catering for differing national payment traditions and habits;
-financing costly infrastructures; and
-restrictions to access certain technical infrastructures or functionalities, etc.
The Commission is fully aware of these challenges. Given the strategic nature of payments, it will continue to play an active political role to foster the development of competitive pan-European payment solutions that rely extensively on instant payments, and to address the above challenges, in full compliance with EU competition rules.

Reaping the full potential of the Single Euro Payments Area (SEPA)

Reminder to the authorities.

Exploiting the potential of electronic identity (eID) for customer authentication

The Commission is determined to harness the potential offered by the rapid development of digital identity solutions in the financial sector. As set out in the digital finance strategy, the Commission will implement by 2024 a sound legal framework enabling the use of interoperable digital identity solutions that will allow fast and easy access of new customers to financial services. This will facilitate, as part of such solutions, their deployment in payments, with a view to improving interoperability, efficiency, ease of use (especially across borders), and safety and security, in particular to reduce instances of fraud and other crimes.

This is another reminder that common electronic identities are essentials tools for achieving digitization goals. So this together with digital validation are really precursors for making everything else being possible.

Improving the acceptance of digital payments

By the end of 2023, citizens and companies moving across EU borders will be able to perform a number of procedures in all EU member states without the need for any physical paperwork, like registering a car or claiming pension benefits.

Interesting this is more about digital validation trough the single gateway than about payments. What is missing here but just as important are deployment of this to the private sector. I have previously written about this and I assume that this will be placed on the agenda with equal priority.

Summary and conclusion

There are probably several additional aspects to be read in this document. However in my belief the most fundamental aspect is the push toward a common digital single market where financial are used as forerunners for other sectors to come.

This is a hugely important undertaking for the EU as there will not be a single market in 10 years unless a functional digital market is established. Today we have more and more entrenched national markets in reality and as time go by rooting these up will become more and more a herculean task.

It will be interesting to follow these undertakings going forward, for to long there have been reason to be frustrated since there are no tangible progress indicating the urgency was not understood and acted on.

Now all of the ducks seems to line up and we are going to have quite some interesting and challenging months ahead.

We would be wise to remember the term digital emergency in the back of our mind while working in this area. Let us also hope that the power that be understand this and act accordingly across of the value chain.

About the author

Ronny Khan is an IT and Business development specialist within the Norwegian financial sector, who is involved in standardization effort on remote natural person identification targeting trust level high as part of a shared effort by the Banking association with public sector stakeholders as well as member of the EU expert group on eid and KYC.

He is currently working full time seconded to the banking association as liaison with key players in the public sector to ensure deployment at scale of remote on boarding for electronic identities.

He is also participating in ISO standardization, national standardization with focus on biometrics , security and identification in retail banking , a keen follower of the are of identity, identity proofing , KYC and always looking for new interesting domains. Currently he is focused on digital validation as a natural evolution of digital identities.

Previously he has been working within a broad field covering digital identities, internet bank authentication/authorization, card security and telecommunications.

More information on Ronnys homepage

Originally published at https://www.linkedin.com.