Opinion: Europe can regulate its way to a better fintech future

Crypto crashes, money laundering, and digital fraud — the EU’s financial watchdogs have had enough. Regulatory bodies need to keep up by rolling out tighter regulations aimed at strengthening consumer protections and stabilising the market. 

As EU lawmakers scramble to protect consumers, others worry they are smothering growth. Case in point: in 2024, the FCA fined HSBC £6.2mn for not properly treating customers in financial difficulty. The regulatory bodies are defending the public, but had restrictions been lighter, would HSBC have had more creative solutions for its customers, such as embedding personalised, data-first lending?

Banks have been fearful of exploring innovative embedded lending solutions, as they were 15% more likely to receive formal enforcement action. However, in August 2024, HSBC decided the benefits were worth the compliance battle.

While some argue that regulation can hinder innovation — with companies hesitant to invest in operations due to increased oversight — others state that additional regulation will increase innovation and, with that, see regulation as a key driver of their growth. So, who’s right?

Breaking down the recent EU fintech regulations

Recently, a few new regulations came into effect in the EU that have majorly impacted fintechs.

DORA, implemented in January 2025, requires EU-established financial institutions (FIs) to implement processes and structures to help them respond to and recover from ICT-related disruption, providing them with extra digital resilience. Additionally, the AMLA is being introduced to give governments more assurance in combatting money laundering. 

DORA and the AMLA will apply to all FIs and their products and processes, but leave crypto outside their scope. That’s where MiCA comes in. Rolled out in December 2024, MiCA was drafted to protect individual crypto users.

The EU’s regulatory agenda — especially with the introduction of MiCA, DORA, and AMLA — is about tightening oversight. However, it is also part of a broader strategy to simplify and harmonise regulations, providing stability to the EU financial markets as a whole. The latest rulings strike a delicate balance between reassuring consumers and regulators, and easing the burden on regulated FIs.

A new set of regulations may seem contradictory to the so-called Competitiveness Compass — published in January by the European Commission — which includes initiatives on simplifying and effectively implementing EU law. Nevertheless, these laws aim to replace fragmented national rules with unified EU-wide frameworks, making compliance clearer, faster, and more predictable.

As the digital finance ecosystem continues to accelerate, MiCA, DORA, and AMLA form a comprehensive framework. Collectively, they aim to balance innovation with financial stability, consumer protection, and security throughout the fintech sector.

Will these updates support or slow innovation in fintech and banking?

This answer depends on the perspective. Recent EU regulations may slow innovation in the short term, particularly for the larger and well-established FIs like banks, but the future outlook looks more fruitful. These new rules are designed to support long-term stability.

As these three regulations require full harmonisation across the member states, they’re designed to reduce fragmentation and regulatory arbitrage. A bigger and more uniform market will encourage cross-border activities, innovation, and competitiveness between fintechs and related service providers. The regulations also support the creation of better, more transparent products and services, helping to increase consumer and regulator trust, ultimately boosting customer adoption. 

In short, this environment will offer greater opportunities for smaller and more agile fintechs to scale and compete long-term. For consumers and businesses, acting on the latest regulations results in more reliable and resilient services, which are much needed for essential functions like digital payments and lending.

These new regulations level the playing field, encouraging traditional banks and fintechs to compete on innovation and service quality rather than only on regulatory strengths. Moreover, a stable and secure financial system boosts the EU’s attractiveness as a hub for digital financial services, which will help make the union more attractive to new investors and innovations than the US.

What investments will be required to meet these new standards?

Additional investment in governance and compliance structures is needed. Bigger, more well-established players may struggle to implement the required regulatory changes in their extensive processes and products. Those with existing compliance and governance processes will likely find the transition more seamless, while smaller fintechs may need to build these from scratch. The costs of their implementation present a potential hurdle.

Navigating compliance is often a significant challenge for fintech startups and other smaller players. They’ll need to invest in knowledge, including how to correctly implement regulatory requirements into their processes and product designs, and translate these into operational business processes. 

On top of this, investments in technology will need to be made as businesses must meet customer-facing requirements around transparency and language. For example, stricter anti-money laundering (AML) requirements will demand changes in know your customer (KYC) and transaction monitoring tools.

However, compliance with the DORA regulatory framework is what will entail the biggest investment in technology, since digital operational resilience requires more robust security, backup, and testing methods. When working with partners who are fluent in compliance, the long-term payoff is clear.

The new finance model: Legacy institutions meet agile innovators

New technology has changed the way people interact with financial services, driving the growth of fintechs and increasing rivalry with established banks. One report found that 36% of 18-24-year-olds would choose fintech platforms over conventional financial institutions. Built on modern tech stacks and lean teams, fintechs’ agility allows them to react fast to changing consumer needs and market trends — a sharp contrast to the legacy infrastructure slowing down traditional banks. 

However, for both the old and new factions to succeed in Europe’s evolving regulatory landscape, traditional institutions and digital-native disruptors will need to depend on alliances. Effective partnerships between fintechs, banks, and FIs under the new EU regulations will be based on a mutual effort to enhance compliance, embrace innovation, and strengthen operational resilience. These collaborations are key for navigating complex regulations while delivering secure, innovative financial services.

Fintechs, FIs, customers, and merchants can also all benefit from Banking-as-a-Service (BaaS) partnerships. For example, in the case of embedded lending, banks that partner with technology providers can scale quickly into new revenue opportunities, reaching new and existing customers outside of the direct scope of the bank, and thus try to keep pace with fintech competitors, without building their own technology in-house.

In fact, 41% of FIs have already implemented embedded finance solutions, and close to 50% have expanded their BaaS capabilities. Merchant customers then gain convenient, safe access to regulated, secure, innovative financial products from a trusted bank.

Another way that banks and fintechs can increase innovation while ensuring compliance is by engaging in collaborative models, including participation in regulatory sandboxes. These controlled environments can support testing of new financial products and services under the supervision of regulators, providing a balance between innovation and regulatory compliance.

The EU’s new wave of financial regulations isn’t just about tightening control — It’s part of a bigger push to simplify and unify rules across Europe. By uniforming patchwork national laws with consistent, EU-wide standards, compliance is now simpler to follow and predict. This uniformity and predictability can help encourage innovation while keeping consumer protection and financial stability front and centre. As fintech and banks collaborate, the future of digital finance in Europe is on track to be more open, safe, reliable, and inclusive.