The continuing growth of the FinTech sector in Ireland, notwithstanding the challenging environment of 2021, reflects Ireland’s strong position as a location for global technology firms and a thriving international financial services centre.
The FinTech sector in Ireland benefits from a skilled, highly-educated, English-speaking talent pool with direct access to the EU labour market and EU regulatory passporting. As a result, Ireland hosts a number of FinTech hubs, including Aon’s Centre for Innovation and Analytics, Citi’s Innovation Lab, Bank of Ireland’s Innovation Lab and Mastercard’s European Technology Hub.
FinTech growth is facilitated by the Irish Government which has prioritised FinTech and digital finance in its ‘Ireland for Finance Action Plan 2022’ and established a FinTech steering group to respond to the sector and benefit from global investment in FinTech.
The Role Of The Regulator
Ireland benefits from a robust regulator, the Central Bank of Ireland (the Central Bank), which recognises the importance of FinTech in advancing financial inclusion, supporting better access to online services to give consumers more choice and enhancing the competitiveness of the European and Irish economy.[i] The Central Bank operates within the European FinTech regulatory environment and values its role as a contributor to wider European initiatives. The Central Bank has emphasised the view that there is a need to avoid solutions or approaches that are focused solely within national boundaries.[ii]
In 2018, the Central Bank established an Innovation Hub to provide a direct point of contact for FinTechs to facilitate access and engagement and to allow the Central Bank to gather information on innovative products and services. A broad range of firms approach the Innovation Hub to discuss the regulatory framework, including firms at the stage of considering Ireland as a base for establishment to early stage start-ups engaged in mid to long-term forward planning.
Recent Trends And Developments
A number of recent trends and developments can be identified in Ireland which we have summarised in further detail below.
All virtual asset service providers (VASPs) established in Ireland are required to register with the Central Bank for anti-money laundering/countering the financing of terrorism (AML/CFT) purposes. The Central Bank does not supervise VASPs from a prudential or consumer protection perspective. However, in line with other EU jurisdictions, the Central Bank has warned consumers in respect of the risk of investing in crypto-assets.
In assessing a VASP registration application, the Central Bank conducts a review of a firm’s AML/CFT policies and procedures and a firm’s management and ownership structure. The Central Bank has stated that it expects the firm to have a physical presence located in Ireland and at least one employee in a senior management role to be located physically in Ireland. This employee is expected to act as the contact person for engagement with the Central Bank. A dedicated VASP section on the Central Bank’s website provides details of the VASP registration process and the Central Bank offers prospective applicants an optional pre-application meeting. In a welcome development, the Central Bank recently registered the first two VASPs in Ireland (Gemini Digital Assets Limited and Zodia Custody Ireland Limited) for AML/CFT purposes.
The payments and e-money sector forms the largest sub-sector of FinTech in Ireland and has grown substantially in recent years. The pandemic has led to a surge in online transactions and contactless payments which the Central Bank states has compressed years of digital transformation into months. Between Q4 2019 and Q4 2021, the number of authorised firms in this sector increased by 45 per cent while the volume and value of transactions increased by 47 per cent and 83 per cent respectively.[iii]
The Central Bank notes that the main line of enquiry from payment firms is in respect of e-money authorisations and includes enquiries from those firms which propose to use e-money as an on-ramp to provide digital asset payment and trading services. The Central Bank has also received enquiries on the provision of instant payments. In the past, the Central Bank has stated that Ireland is behind other jurisdictions in the roll-out of instant payment solutions and encouraged banks and payment service providers to develop approaches to instant payments which will integrate smoothly at European level.[iv]
Payment institutions and e-money institutions which are authorised and regulated by the Central Bank must ensure compliance with all applicable legislation, codes and guidelines on an ongoing basis.[v] The IMF has highlighted a key challenge facing the Central Bank as keeping pace with the evolution of this sector.[vi] In this respect, the Central Bank issued a ‘Dear CEO’ letter in December 2021 clarifying its supervisory expectations and reminding firms of their regulatory obligations to be well-governed, with appropriate cultures, effective risk management and control arrangements in place.
In respect of the banking sector, threats to incumbent banks in Ireland have arisen from challenger banks and other business models. Challenger banks, such as Bunq and Revolut, provide digital-only offerings and operate with low cost bases. Certain challenger banks offer Irish IBANs to consumers and other challenger banks offer non-Irish IBANs. The Central Bank has recently written to all regulated firms reminding them of their obligations to prevent IBAN discrimination to ensure consumers can choose a provider with a non-Irish IBAN. Incumbent Irish banks are now required to substantially invest in FinTech to keep pace with these challenger banks and are playing ‘catch-up’ having delayed FinTech investment in the post-crisis years.
At a European level, open banking facilitated by PSD2 is intended to enable third-party payment service and financial service providers to access consumer banking information through the use of application programming interfaces (APIs). The IMF has noted, however, that take-up of open banking opportunities has been slow in Ireland. The IMF cites a number of factors as possible explanations, including, difficulties faced by incumbent banks in upgrading legacy systems, a relative absence of third-party providers operating in Ireland compared to elsewhere in Europe, a lack of interest among Irish consumers and challenges around harmonisation of APIs.[vii]
The insurance sector is a key adopter of InsurTech, utilising technologies such as telematics and wearable technology to assess customer behaviour and price risk. In 2021, an InsurTech hub, instech.ie, was founded by Insurance Ireland and 11 firms in the insurance industry to support the development of a strong InsurTech sector in Ireland.
Instech.ie is intended to promote Ireland as an EU InsurTech hub and position Ireland as a test bed for insurance innovation by bringing together startups, insurance firms, brokers, investors and academia to work together to advance innovation. The Government is supportive of instech.ie and has stated a number of State agencies will work with the hub to develop a package setting out Ireland’s selling points to attract international InsurTech investment into Ireland, develop a programme to encourage InsurTech innovation partnerships with research institutions and third-level spin out companies and develop an innovation forum to encourage insurance firms to procure innovation products and services from Irish SMEs and start-ups.[viii]
Future Trends And Developments
In terms of future FinTech trends, we expect to see increased activity in the areas of:
The expansion of FinTech beyond the ‘traditional’ financial services sector is expected to continue – the Central Bank has noted that it is now engaging with a broader range of business models from ‘non-traditional’ sectors citing FinTech enquiries from the fashion, gaming and food industry.
We expect FinTech growth in Ireland to continue apace facilitated by Government and industry initiatives and fuelled by consumer demand. The Central Bank’s recent registration of the first VASPs in Ireland should also stimulate interest in this sector and encourage other firms to consider Ireland as an attractive base.
This document has been prepared by McCann FitzGerald LLP for general guidance only and should not be regarded as a substitute for professional advice. Such advice should always be taken before acting on any of the matters discussed.
[v] Including national implementation measures for PSD2, the E-Money Directive and AML/CFT and consumer protection requirements.
[ix] With the enactment of the Consumer Protection (Regulation of Retail Credit and Credit Servicing Firms) Act 2022.
Josh Hogan is a Partner in McCann FitzGerald LLP's Finance Group. Josh’s practice includes work relating to prudential and conduct regulation, authorisations, acquiring transactions, fitness and probity, compliance issues, transaction regulatory due diligence, regulatory investigations and remediation. He has deep experience advising clients in the areas of consumer and SME finance regulation, credit / hire purchase origination and servicing, electronic money, payment services, crowdfunding, MiFID, virtual / crypto assets, AML and market abuse.
Joanne O’Rourke is a Senior Associate in McCann FitzGerald LLP's Knowledge Team. Joanne specialises in the area of financial services regulation and monitors, writes and speaks about topics including fintech, esg and sustainable finance, financial sanctions, corporate governance and conduct standards and European capital markets union.