Fintech companies offer financial products and services that have been developed through new digital technologies. The number of companies in this sector has grown rapidly, and new players are challenging established financial actors, which are in turn developing their own fintech solutions. The financial sector is in transformation.
There are many potential benefits to this transformation. Fintech companies offer increased competition and create innovative and often more user-friendly products. They also make financial services available to a wider range of consumers. The rise of fintech companies may also lead to gains in transparency and sustainability. At the same time, these developments may pose risks to financial stability and individual customer security. These developments present a challenge for regulators and decision-makers: how to facilitate innovation while minimizing risks.
Growth Analysis was commissioned by the government to
- analyze the innovativeness of the Swedish financial market
- compare it to developments in other countries
- clarify potential obstacles in the Swedish market
- provide recommendations on how to enhance innovation in the fintech sector.
In our study, we have excluded established financial companies, such as large banks and large tech companies. Our study therefore focuses on "clear" fintech companies.
When we began the study, no comprehensive inventory of the Swedish fintech population based on scientific methods was available. The inventory therefore became one of the sub-studies of the project.
Strong growth indicates high degree of innovativeness
An algorithmic method to identify the Swedish fintech population was developed and used in this study. The results indicate that during the period 2000–2020 there were just over 500 fintech companies, of which a good 450 were active in 2019. The company population has had strong growth in both employment and in contribution to GDP, especially in the last ten years.
The sector's contribution to GDP grew from SEK 243 million in 2000 to SEK 7,2 billion in 2018. This is a median growth of 21 percent. The sector's contribution to GDP thus grew from 0,01 percent of GDP in 2000 to about 0,15 per cent of GDP in 2018. This means that the sector continues to be a small phenomenon in the Swedish economy but with a high growth rate.
The number of employees has increased from just over 340 employees in 2000 to almost 9 750 in 2018. This is a median growth of over 18 percent per year.
Swedish fintech relatively highly ranked internationally
Compared to other countries, Sweden ranks highly when it comes to general innovation and in terms of how easy it is to start and maintain a company. We are a country that rapidly adopts new technologies and the degree of digitalization is high in both the private and public sector. The general public is also quick to adopt new digital technologies. These factors have contributed to making Sweden, especially Stockholm, an early fintech hub and given rise to several large internationally successful fintech companies. However, fintech development has gained momentum in many countries in recent years too. This development has often been backed by national fintech strategies and measures to promote the development of local fintech companies. Sweden's position in international fintech rankings varies, but Sweden is often considered to offer good preconditions e.g. a high degree of innovation, good financial infrastructure, high human capital and a high degree of digitalization in the public and private sector and among the general public. What is highlighted in several rankings as a weakness is the country’s inability to bring innovations to market.
Fintech companies want regulatory guidance, quicker licensing and equal access to financial infrastructures
In order to investigate obstacles and opportunities in the Swedish fintech sector, we surveyed the known fintech population. The over 100 representatives that answered said that the biggest challenges were financing and recruitment. These are challenges they share with startups in other industries. About a quarter of the companies stated that both obtaining a financial license and understanding whether, and how, to comply with financial regulations was challenging.
Those surveyed were not critical of the regulations themselves, which they believe are important for trust in the industry. However, they wanted better guidance around regulations and a better overview of how long the licensing process would take. Unclear processing time, in particular, was highlighted as being problematic as it led to high costs in a phase where financing and staff are scarce resources. Some companies also pointed to problems accessing basic financial infrastructures like bank accounts, Swish and the digital identity service BankID. They expressed a desire to avoid being dependent on their competitors to gain access to this infrastructure. They also called for a more proactive attitude from politicians and authorities.
Both promotion and learning justify a proactive attitude from the state
There are strong economic and fiscal policy motives for a country to promote the development of fintech.
The sector has experienced high growth and often creates highly qualified jobs. Swedish fintech companies are already relatively successful, but removing certain obstacles would give the sector the potential to grow even more. In addition to growth and jobs, fintech offers increased competition, and the improved and more efficient financial services that result benefit both companies and households.
Fintech development and its transformation of the financial sector is also an international phenomenon as described above. The companies that take an early lead gain a big advantage as their services attract a lot of consumers. From a Swedish perspective, being successful in this international market would be an advantage for Swedish companies.
The policy challenge is to maximize innovation and minimize risk
At the same time as the potential benefits are great, financial innovation may entail increased risk. These risks are related to faster and more decentralized transactions, increased dependence on IT and increased global interconnection. In order to manage and minimize the risks, it is important that the supervisory authorities are at the forefront of knowledge. Sweden has a well-functioning financial infrastructure from an international perspective, but could learn more through a more proactive attitude. There are measures that both increase innovation potential and can reduce the risks. Concrete examples include the use of regulatory sandboxes and innovation centers.
Growth analysis recommends
Based on our analysis, we conclude that the following measures, which Sweden has at its disposal, would contribute to increased innovation potential in the Swedish fintech sector:
Growth Analysis recommends that the public sector increase its advisory capacity in order to assist fintech companies with basic advice on licensing and regulatory compliance. We discuss the advantages and disadvantages of strengthening Finansinspektionen's existing Innovation Center or establishing this capacity elsewhere (Chapter 7). Better advice and dialogue between regulators and companies should lead to benefits for both parties.
As noted, fintech development has potential benefits but also entails increased risk. It is important to be knowledgeable and keep up to date; and, where possible, be one step ahead in risk analysis. We propose measures aimed at increased knowledge and continuous learning. These recommendations are directed at universities and colleges, the Government Offices, authorities, industry organizations and fintech companies.
Sweden's general financial infrastructure is to a large extent modern in that it uses new and digital technologies and is efficient and inclusive. However, in the case of fintech companies, there are shortcomings that are detrimental to individual companies. Some companies, notably those working with cryptocurrencies have been, for example, be denied access to basic financial infrastructures like bank accounts, Swish and BankID. In addition, this is a decision made by a competitor, creating the perception of an unequal playing field. Legislators can either make demands of commercial infrastructure providers or open government alternatives.
Digitization and access to data
The fintech companies have emerged from new technological possibilities and access to data, in particular. Sweden's early and widely implemented digitalization efforts have therefore created good conditions for innovation. Efforts to increase digitalization further and improve access to data are important for continued innovation and entrepreneurship.
One of the potential weaknesses of the Swedish fintech sector, which is highlighted in international fintech rankings, is that the Swedish market is relatively small. Sweden can work actively to, as proposed in the European Commission's “Digital Finance strategy”, create better conditions for a European single market for fintech. Swedish authorities can also help fintech companies with advice linked to internationalization.
The recommendations provided by Growth Analysis are in line with the measures the European Commission's proposes in its Digital Finance strategy, and in how other countries promote fintech. The regulations surrounding financial services are, for the Swedish part, largely governed by the EU. Several measures in the EU's strategy will, if implemented, benefit the Swedish fintech sector and allow companies to gain access to a larger market with fewer of the obstacles presented by multiple jurisdictions - which is very positive. However, it will take time for these proposals to be implemented in the EU and in Sweden. Importantly, though, the above recommendations can be launched in the near future, which will make a difference for fintech companies.
Serial number: PM 2020:20
Reference number: 2020/3