EU banks face stiff competition from fintech firms, as banking rules treat software as a cost rather than an investment

**European Union** banks facing increasing competition from financial technology firms could find it easier to invest in software under rule changes being discussed with regulators. EU banking rules treat software as a cost rather than an investment, forcing lenders to cover expenditure on digital applications with an equal amount of capital. [caption id=“attachment_3736917” align=“alignleft” width=“380”] Representational image. Reuters[/caption] But with banks threatened by a growing number of cyber attacks and under pressure from nimble new entrants to the sector, regulators are now considering changes. “The Commission services are in a dialogue with stakeholders to gain a better understanding of the interaction between accounting and prudential treatment of software,” a European Commission spokeswoman told Reuters. “We will envisage appropriate action if needed.” The Commission, which proposes laws at the EU level, shied away from the issue in an overhaul of banking rules last year, despite lobbying from banks in the region. If expenditure on software, which amounts to roughly half of banks’ total digital investment, were treated in the EU as it is in the US it could free up more than 20 billion Euros ($24 billion) in capital this year alone, one banking lobbyist said. “It would help immensely if the Commission recognised the importance of this issue,” Wim Mijs, head of the European Banking Federation, said. Digital Divide Many European banks have been slow to invest in adapting to rapid changes in the way consumers use technology for finance, with so-called **fintech firms** starting to steal market share in a variety of sectors from payments to lending. Fintech companies have also attracted the money needed to develop new technologies, with global investment worldwide in the sector more than $100 bn dollars at the end of 2016, data cited by the Bank for International Settlements shows. Although fintech is still relatively small, the BIS warned of the “increasing challenge” it poses to banks, which have in many cases reacted by buying startups and their technologies. They are also investing in upgrading their digital infrastructure, with a recent report from Celent, a financial services consulting firm, forecasting European banks would spend more than 60 billion Euros ($71 billion) in software and information technology this year. Banks argue software is a key component of their business, as customers demand more digital products such as mobile payments or online services. As software becomes more bank-specific, it increases in value and should, therefore, be incorporated in capital, as is the case for tangible assets like buildings, banks say. This would reduce the amount of cash they have to hold to cover digital expenses under EU rules. However, the European Banking Authority (EBA) said changes to existing rules should be treated “with the highest caution”. If banks were free to set aside less capital to cover software expenses, they could end up with a lower capital ratio, which may increase risks. Bonus Block Banks are also seeking clearer exemptions for digital experts to EU rules which were introduced after the financial crisis to limiting bonuses to 100 percent of bankers’ salaries. Banks say this hinders acquisitions of fintech firms, as high-ranking digital staff are used to big bonuses which they may have to relinquish if they become bank employees. The Commission says the rules already provide exemptions for digital experts, but banks want the EU to clarify them to avoid “unintended consequences,” Mijs said.