“You can’t fight city hall”. This is one of my favorite phrases when talking about fintech regulation. Or if we want to take a stoic mindset, we can also say we shouldn’t worry about things that we cannot control. What has happened?
In the last weeks, we had two separate fintech companies that are restricted in onboarding new clients in Italy. Initially, SME neobank Qonto received in late July the order from the Bank of Italy not to onboard any new customers until it improves its AML operation (Fintech Futures). A few days later, we learned that Lemonway has received a similar order (The Paypers). While Qonto is a pure fintech player, Lemonway provides IBAN infrastructures to other fintech companies and non-financial brands. Additionally, I am hearing rumours from at least one more embedded finance infrastructure provider that is facing similar issues in Italy.
So the main question after reading all of this is whether all these companies have not taken the appropriate effort to comply with local regulations or if the Italian regulator has changed. From what I can see, it is probably a mix of the two and it is not unlikely that the Italian regulator will take a closer look at other players too.
What can other companies learn from this? As mentioned in the beginning, you cannot or should not fight the regulator (quite obvious isn’t it). But sometimes you can choose your battle, especially if you are launching a product in the EU. Depending on your financial product, you can sometimes choose the country which regulation will apply to your product all over the EU. This means, you can choose a country whose regulator is more open to fintech solutions versus regulators that require intense and lengthy processes. In reality, this means that either you or your regulated infrastructure provider has a licence in one EU country but can use this licence also in other EU countries. This concept is known as passporting. For example, the German B2B BNPL provider Mondu has recently obtained an e-money licence in the Netherlands (Fintech Futures). Likely, Mondu wanted to avoid the German regulator which is “not very popular” among fintech companies to work with. In Mondu’s case (and similarly also German Pliant that chose to obtain its licence in Finland), they can passport their licence to many EU countries and offer the same product.
So should Qonto, Lemonway and other embedded finance companies also opt for this approach? Well, as I mentioned it depends on the product you are offering. Both companies actually have a French licence which they passport to Italy. However, both companies are offering local Italian IBANs (IBANs starting with country code “IT”) which is an important feature for their own clients. In order to offer local IBANs, the regulated company needs to open a local branch in Italy, thus, they need to comply with the Italian regulator,
This makes it a great example, that sometimes you can choose the battle (i.e., Mondu or Pliant) but sometimes you cannot. And obviously, if you are in such a situation it is important to comply with the local requirements. Not because it is the right thing to do, but because sooner or later it will backfire and impact your business. It’s a bit like tech debt.
If you are interested in licencing and passporting topics within the EU, let me know and I will invite the right person for a podcast episode. Otherwise, I can also recommend Alex Johnson’s piece “The refs always wins” with an US view on the same issue.
