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Cashless Sweden: Prepared or Vulnerable? by EOS Intelligence
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Cashless Sweden: Prepared or Vulnerable?

Sweden’s cashless initiative is gaining momentum, driven by high digital literacy, favorable regulations, and rapid adoption of technology. Since most consumers (~95%) are digitally savvy, a tendency to prefer mobile payments over cash is pushing Sweden closer to its goal of becoming a cashless economy. Technology solutions will likely play a crucial role in shaping the evolution of payment systems as Sweden transitions to a cashless society.

Consumer preference for mobile payments drives Sweden’s cashless shift

The shift toward a cashless society in Sweden reflects both consumer preferences and the increasing number of businesses that prefer or require card and mobile payments. At the same time, Swedish society shows a high level of trust in banks and government institutions, which reduces resistance to financial innovation. Together, these factors create a strong foundation for the widespread adoption of new digital payment systems.

Since the COVID-19 pandemic began in early 2020, cash usage has declined, with cash in circulation accounting for only 1% of the country’s GDP, owing to the convenience and security of digital transactions.

Card offerings, such as Handelsbanken’s Allkort Mastercard, SAS EuroBonus Cards, and the Lunar-SAS partnership, encourage consumers to adopt digital payments by offering various reward programs, including cashback, bonus points, and travel incentives.

Growth in real-time payments fast-tracks the cashless initiative

The Swish mobile payment system is boosting the country’s cash-free initiative by driving growth in real-time payments. Swish is the country’s second most common payment method, highlighting its significance in Sweden’s digital payment landscape. A recent addition of the tap-to-pay function in December 2024 has further expanded Swish’s capabilities for in-store purchases for over 8.6 million Swedish app users (a high number, considering the country’s population is around 10.5 million).

Moreover, the Riksbank, Sweden’s central bank, intends to expand its RIX-INST, a real-time settlement service that currently only allows for domestic payments. The government plans to explore synergies between the RIX INST system and other regional systems, such as the European Central Bank, Banca d’Italia, and Danmarks Nationalbank, seeking to facilitate cross-border payments utilizing cross-currencies. The plan focuses on supporting seamless international transactions that would ultimately strengthen Sweden’s position as a global leader in digital payments.

Despite this favorable scenario for Sweden’s cashless initiative, Sweden’s central bank still aims to support both cash and digital payments, as a way to be more inclusive. This means that while digital payments will continue to be a popular option, cash payments should not disappear entirely. Swedish authorities acknowledge that the role of cash is still key, especially to protect vulnerable groups such as the elderly population and people with disabilities. In case of emergencies (natural disasters, cyberattacks, or other crises where digital systems might fail), cash will also be necessary.

Cashless Sweden: Prepared or Vulnerable? by EOS Intelligence

Cashless Sweden: Prepared or Vulnerable? by EOS Intelligence

Open-banking regulations aid in alternative payment adoption

In 2019, Sweden implemented the EU’s revised Payment Services Directive 2 (PSD2). This European law aims to strengthen customer authentication, ensure proper authorization and regulation of third-party providers, enhance security and data protection, and promote open banking.

The ratification of the recent revision to PSD2 fosters growth in open banking in Sweden, resulting in innovative fintech products such as digital identity BankID. This innovative system leverages secure certificates and biometric authentication to enhance security. Users across Sweden rely on this innovative system for secure authentication and digital signatures.

The adoption of open banking greatly benefits Sweden’s cashless initiative. Companies such as the Swedish payment platform Open Payments enable real-time payments directly from consumers’ bank accounts and facilitate seamless bank-to-bank transfers without intermediaries. These capabilities are accelerating the growth of account-to-account (A2A) payments and solidifying the foundations of a cashless economy.

Government plans new regulations to improve consumer protection

Alternative payment methods (APMs) such as Buy Now Pay Later (BNPL or simply Pay Later) have become essential to Sweden’s cashless success. Klarna has emerged as the leading provider of BNPL solutions, with other players, including Walley, Qliro, and Zaver, also growing their presence. BNPL’s seamless integration with all major e-commerce platforms, technology partners, and payment service providers (PSPs) enhances its accessibility and adoption.

Regulators plan to fully implement the updated regulation, the Consumer Credit Directive 2 (CCD2), by Q4 2026, aiming to make APMs even more accessible and safer for consumers. Under the directive, APM providers must conduct in-depth assessments of credit liability to ensure responsible lending, expand coverage of interest-free loans under €200, and comply with clearer advertising rules that include mandatory warnings when consumers take on debt.

AI and Blockchain facilitate secure and automated transactions

Tapping into the growing prevalence of cryptocurrency, the Riksbank has been exploring the development of its digital currency, e-Krona, based on distributed ledger technology (DLT), which offers a more secure digital payment method.

The Riksbank launched several pilot programs between 2021 and 2024 to explore the application of e-Krona in both retail and wholesale transaction setups. The bank expects this token-based, state-backed digital currency to complement existing payment systems and enhance financial stability. It also aims to promote greater inclusivity by acting as a public alternative to cash.

Technology is also driving a change in consumer preference for digital payments. The growing integration of IoT and AI enables seamless and automated transactions, further accelerating the country’s transition to a cashless society.

Although the vast majority of payments in Sweden are already digital, there is no precise data on how often consumers use voice‑activated transactions via Google Home, Alexa, or similar platforms. The rapid integration of payment apps with these connected devices suggests a strong likelihood that voice-activated and IoT-based payment solutions will gain traction in the future.

Added compliance and limited infrastructure access challenge fintechs

Lack of access to central financial infrastructure is a significant challenge for most fintech companies, forcing them to rely on banks and other intermediaries to provide essential financial services. This results in higher costs, reduced efficiency, and a limited ability to compete with traditional financial institutions.

Infrastructure upgrade and scalability

The Riksbank is looking to modernize the payments infrastructure to facilitate the integration of more fintech companies with its RIX payment system. This modernization aims to support the growing number of fintech companies adopting new cashless payment technologies while ensuring the stability and resilience of Sweden’s payment infrastructure.

e-Krona, albeit still in its pilot phase, presents a transformative initiative. However, the government must ensure scalability for successful widespread adoption among merchants. Processing a large volume of transactions without compromising speed or security remains a significant hurdle. Moreover, e-Krona must seamlessly integrate with Sweden’s payment systems, such as Swish.

Regulatory compliance

Fintech companies seeking to enter Sweden often find it difficult to navigate the complex regulatory landscape set by the Swedish Financial Supervisory Authority (Finansinspektionen). According to a survey by SweFinTech, an independent financial association, 82% of its fintech members reported being weighed down by the additional burden of anti-money laundering and combating the financing of terrorism (AML/CTF) regulations. Companies are increasingly implementing Regulatory Technology (RegTech) solutions to monitor transactions, ensure data integrity, and comply with Sweden’s national and international regulations.

As digital payments increase, merchants must also invest in cybersecurity measures against rising threats. This compounds costs due to high interchange fees, ultimately reducing profit margins.

Potential disruptions and cyberattacks

Disruptions and cyber risks regarding the country’s payment network are also a concern, prompting a cautious approach. Between 2023 and 2024, brief outages disrupted critical digital payment infrastructure, affecting the Riksbank’s RIX system and the supporting systems for Swish, including Bankgirot, Getswish AB (Swish), and BankID.

In these cases, the disruption did not cause major issues. However, with growing concerns about cyberattacks amid Europe’s uncertain geopolitical climate, Sweden is taking steps to protect its cashless economy. To reduce the impact of possible outages, the Riksbank is considering a system that would allow offline card payments for essential goods during disruptions lasting up to seven days.

The Swedish government has also encouraged people to keep enough cash on hand to cover a week’s worth of necessities, helping households stay prepared in case of a cyberattack.

EOS Perspective

Sweden’s swift move towards becoming cashless reflects the country’s focus on digitalization, innovation in fintech, and regulatory changes. The growing adoption of platforms such as Swish and Klarna suggests that Swedish consumers are highly tech-savvy, regardless of age. This trend also indicates that flexible payment solutions can drive consumer behavior to prefer digital payment methods over cash.

The integration of blockchain and IoT technologies into payment systems is likely to offer new opportunities in improving the efficiency and security of digital transactions, reinforcing Sweden’s position as a global leader in cash-free transactions.

There is significant room for developing and launching innovative financial tools and services, offering opportunities for fintech companies. Real-time payment innovations, such as Swish, and blockchain-based solutions that benefit from the rise of decentralized finance (DeFi) offer promising growth opportunities. RegTech tools that improve digital identity verification, AML compliance, and AI-driven financial planning tools may also witness growth.

Sweden’s strict regulatory and compliance requirements, as well as the difficulty of obtaining access to central financial infrastructure controlled by established banks, remain challenging, particularly for fintech companies attempting to enter the market. Arbitrary de-risking by banks, which has affected nearly 40% of fintech companies in 2023 by restricting banking services, further challenges companies.

Nonetheless, open-banking initiatives that grant access to third-party providers suggest a shift toward a more inclusive economy, enabling greater competition, easier market entry for fintech companies, and broader access to digital payment solutions for both consumers and businesses.

Further enhancements in financial infrastructure will support a cashless economy. Modernization of the Riksbank’s RIX payment system will enable more fintech companies to participate, while also facilitating integration into Sweden’s payment system.

The potential introduction of e-Krona offers further opportunities to increase inclusivity, which in turn boosts cashless adoption. However, we must wait and see how it evolves as the Riksbank continues to monitor the development of other digital currencies, such as the Digital Euro.

While Sweden has made significant strides toward its cashless vision, progress may stall due to Europe’s current scenario, amid a vulnerable political environment and the risk of susceptibility to cyberattacks. Nevertheless, the country has demonstrated a clear trend toward becoming a digital-first economy, evident in its low reliance on cash usage and the ongoing development of a robust digital payment infrastructure.

Estonia's Rise as Europe's Fintech Powerhouse by EOS Intelligence
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Estonia’s Rise as Europe’s Fintech Powerhouse

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Estonia, a small Baltic country with a population of 1.4 million, is in the news for all the right reasons: its burgeoning fintech sector. With a market size of €15.2 billion in 2023 and projected growth of 5.7% CAGR from 2023 to 2028, Estonia’s number of fintech companies has increased by 23% from 2020 to 2023. The country has 264 fintech startups, half emerging between 2020 and 2022. Strategic investments in digital infrastructure, a progressive regulatory environment, and a tech-friendly culture make Estonia a leading hub for fintech innovation in Europe.

Estonia has become an important name in the fintech sector ever since its financial institutions started using fintech in the early 2000s. It has become the leading fintech hub in Europe, with 2.3 fintech unicorns (startups with a valuation exceeding US$1 billion) per million population.

Most fintech startups, accounting for 87% of all fintech companies in Estonia, fall into six categories: digital asset exchange (33%), digital lending (15%), enterprise technology provisioning (14%), digital payments (11%), wealthtech (9%), and digital capital raising (6%).

Startups dominate Estonia’s fintech landscape with fewer established companies, indicating a favorable environment for new players. Digital asset exchange services that facilitate the trade of cryptocurrencies or digital currencies for other assets form the lion’s share of these startups. This includes Tallinn-based companies such as AsicVault and Guardtime.

Finding customers is a concern for Estonia’s fintech sector

Fintech is flourishing in Estonia despite various challenges that players must navigate. Typically, these challenges affect the smallest and newest entrants to the market the most.

One of the significant challenges that businesses can expect is finding loyal customers for their solutions, according to the 2023 report by the TalTech School of Business. In their research, the respondents indicated finding customers as the most critical problem in two survey editions, 2021 and 2023.

Since Estonia has a small population of 1.4 million, the domestic market is relatively small. Businesses across sectors, including fintech, often face limitations in expanding their customer base. This can force companies to look beyond national borders to achieve significant growth, which can be difficult for new players.

Estonia's Rise as Europe's Fintech Powerhouse by EOS Intelligence

Estonia’s Rise as Europe’s Fintech Powerhouse by EOS Intelligence

Rising costs are affecting smaller and newer players

The financial side poses a substantial challenge for players with limited budget planning to start and expand a fintech firm in Estonia. Estonia used to be a place of low living costs and cheap labor since its independence in 1991. However, the rising operation costs now affect the fintech landscape. A 2023 report published by the European Commission indicated that in the fourth quarter of 2022, compared to the same period in the previous year, Estonia saw a 10.1% increase in hourly wage costs. This can harm small new players looking to enter Estonia’s fintech landscape.

Competition with Big Tech in foreign markets can challenge expansion

Estonian fintech companies attempting to expand into more mature markets can face several hurdles. For example, a high degree of sophistication and regulation characterizes the UK financial services sector, a desired expansion target, leaving little room for new entrants without an established brand presence or a solid track record.

Establishing trust is paramount for fintech startups, as consumers and businesses often prefer providers with known reputation, selecting them through word of mouth or established market presence. As a result, new entrants must devise comprehensive (and often cost-intensive) marketing strategies to overcome these initial credibility barriers.

Increased competition from established financial institutions that leverage their substantial resources to compete with startups can exacerbate these challenges. Big Tech firms such as Google, Amazon, and Apple have also begun to venture into the financial services sector. These companies possess strong brand recognition, customer trust, and rich data sets, enabling them to overshadow smaller fintech operations.

Cross-border expansion signals Estonia’s thriving fintech sector

Estonia’s cross-border expansion activities highlight its flourishing fintech sector. Fintech ranks as the second largest industry within the Estonian startup ecosystem, following business software and human resources, accounting for 13% of the nation’s startups. In terms of revenue, it also holds the second position, generating €196 million in turnover as of 2023.

Estonian fintech startups are actively pursuing opportunities beyond national borders. For instance, the financial cybersecurity firm Salv, based in Estonia, has extended its operations to Latvia and is planning further expansion to Lithuania and the UK. The firm aims to promote its AML solution, Salv Bridge, in these markets.

Additionally, in June 2024, Depowise, a startup located in Tallinn, announced its plans to expand into Ireland and the UK to enhance its market presence in the region.

Estonian fintech startups are increasingly seeking opportunities outside their home market, demonstrating the sector’s robust success and appetite for expansion.

Several catalysts are fueling the growth of Estonian fintech

Ease of doing business

The country ranks 18th in the World Bank’s ease of doing business index, beating more developed countries such as Germany (22nd), Canada (23rd), and Ireland (24th) as of 2019. This favorable business environment in the country is one of the main factors making it an attractive location for fintech businesses. According to the World Bank, the country has a highly conducive tax system, ranked 12th in the ease of paying taxes.

Efficient corporate tax systems

Due to its efficient tax policy and straightforward tax compliance frameworks, Estonia holds the top spot in the 2023 International Tax Competitiveness Index published by Tax Foundation, a US-based think tank. This allows companies to spend considerably less time (five hours per year in Estonia compared to 42 hours per year in an average OECD country) on tax-related tasks.

The Estonian tax system also boasts a similarly low compliance burden (resources and costs associated with complying with regulatory requirements) for other taxes, including value-added tax (VAT).

The country’s corporate tax rate is 20%, but it only applies to distributed profits. This means that if a company reinvests its profits back into the business, it does not pay any corporate income tax until it distributes those profits as dividends. This has significantly encouraged reinvestment, growth, and expansion of businesses, including fintech companies.

Internet freedom

Internet freedom is robust in Estonia, and the country is known for its numerous e-government initiatives. For the past several years, Estonia has maintained the second position globally in the Freedom on the Net reports by the US-based NGO Freedom House, indicating a very high internet freedom rating in the country. This minimal restriction on online content facilitates easy information and idea transfer and helps businesses, including fintech companies, to flourish.

Cybersecurity

Though online activities have minimal restrictions, the Estonian authorities have implemented proactive measures to ensure cybersecurity. The 2020 Global Cybersecurity Index (GCI) published by the International Telecommunication Union (ITU) ranks Estonia as the third most cybersecure nation. This is especially beneficial for fintech companies since most of their operation is online.

Estonia is a cashless society with around 99% of transactions occurring digitally. This creates a significant demand for innovative fintech solutions. Startups and established companies take this as an opportunity and offer services such as digital wallets, payment gateways, and peer-to-peer lending, among others, to which strong cybersecurity is essential.

E-residency scheme

Estonia’s e-residency program supports fintech investments by allowing foreign entrepreneurs to establish businesses remotely without a physical office. This program provides online business owners, digital entrepreneurs, and freelancers with a digital Estonian ID, granting access to various local services such as business registration, banking, payment processing, and tax management.

Since its introduction in 2014, the e-residency program has grown significantly, with 117,000 individuals from 185 nationalities obtaining e-resident status and creating over 31,800 Estonian companies. This represents roughly one in five new companies annually and links 38% of startups to e-residents. The initiative has also contributed €244 million to Estonia’s economy, generating €67.4 million in direct revenue in 2023 alone, with associated costs of €7 million, achieving a nearly tenfold return on investment.

Regulatory sandboxes

A regulatory sandbox (RS) is a framework established by regulators that allows businesses to test new products, services, or technologies in a controlled environment for a specified time. This concept is prevalent in various sectors, including finance, transportation, and healthcare.

In March 2024, Estonia expanded its RS through the Accelerate Estonia program to support non-fintech startups, inviting a medical startup, Your Cue, and a clean energy startup, O-Innovations. While regulatory sandboxes are more common in the US fintech sector, European countries such as the UK, Poland, and Spain are also developing their own. As of October 2023, there were 14 fintech sandboxes in 12 EEA countries, including Estonia, which launched its sandbox in August 2023 but has yet to invite any fintech participants.

Technological advancements dictate the direction of development

The use of newer and more innovative technologies is on the rise. Many Estonian fintech startups now use technologies such as artificial intelligence (AI), machine learning (ML), the Internet of Things (IoT), etc.

An example is Depowise, which has developed innovative AI-powered solutions to automate critical functions for financial institutions, including compliance oversight, cash flow monitoring, and digital asset safekeeping.

Companies such as Value.Space, an insurtech firm founded in Estonia and currently headquartered in London with an operating office based in Tallinn, uses deep tech (advanced technologies engaged to address and revolutionize the fields they are used in) such as InSAR (Interferometric Synthetic Aperture Radar), AI, predictive analytics, and satellite imagery to help businesses monitor and assess the risk of damage to commercial assets.

Open banking and embedded finance are the budding trends in Estonia’s fintech solutions developments. BaaS (Banking as a Service) enables secure data sharing and collaboration between financial institutions, technology companies, and customers. Open banking facilitates the entry of new players into the Estonian market through strategic partnerships with local fintech companies. This dynamic allows fintech and technology companies to challenge traditional financial models, creating innovative customer engagement methods with financial institutions. Furthermore, open banking grants developers access to an extensive financial data repository. This accessibility has spurred the emergence of novel fintech business offerings, including budgeting applications, robo-advisors, and automated savings solutions.

Embedded finance involves fluidly incorporating financial services and products into non-financial platforms, such as e-commerce websites, mobile apps, or other digital landscapes. One of the leading examples of fintech companies in Estonia leveraging embedded finance is Inbank, which has developed a portal for solar panel installers to provide financing solutions to their customers.

Opportunities for financial cybersecurity players emerge with increasing crime

Online financial crime and money laundering protection are also gaining traction in the development of fintech solutions. This has particularly accelerated following the 2007 mass cyberattack on a range of institutions and the 2017 money laundering scandal involving Danske Bank’s Estonian branch. Since those events, Estonia has seen a surge in demand for services and products providing solutions in compliance and AML measures.

An example of a solution meeting this demand is SalvBridge, Salv’s anti-money laundering solution, which uses advanced analytics and ML to detect and prevent financial crimes in real time. It also helps financial institutions meet increasingly stringent regulatory requirements and combat money laundering effectively.

Similarly, Tallinn-based Veriff offers solutions to help reduce fraud and ensure regulation compliance. Veriff protects against identity fraud and theft by automatically verifying customer identities through an AI system that assesses various technological and behavioral factors, including facial recognition.

Serokell is another Tallinn-based R&D company offering cybersecurity solutions for fintech companies. Its solutions use functional programming, making it ideal for the complex fintech sector.

Demand for such solutions will likely continue to grow, offering lucrative opportunities for players operating and innovating in this space.

Estonia’s fintech scene is shifting towards sustainable investing

As with many other industries, sustainability and environmental awareness have entered the fintech playing field. Some players attempt to improve their sustainability score while expanding their investment portfolios to include sustainable exchange-traded funds.

Companies that operate using carbon credits and sustainability fintech players are some of the newer market entrants. An example is Grünfin, founded in 2020, which facilitates investments in sustainable stocks.

Several fintech companies are also increasingly leveraging carbon credits to enhance their sustainability practices and offer financial solutions to clients. A notable example is the partnership between XTCC, an Estonia-based company specializing in exchange-traded carbon credits, and Finmaal, a UAE-based fintech platform. This collaboration allows customers purchasing financial products, such as insurance and banking, to offset their carbon emissions at the point of sale, thus integrating sustainability measures with financial transactions.

These activities reflect a broader trend in which fintech firms are leveraging cloud technologies and financial instruments to maintain a lower carbon footprint while contributing to carbon neutrality goals. It is fair to expect that the trend of focus on the environment and sustainability will gain more traction in the future.

EOS Perspective

Estonia is emerging as a strong and resilient ground for fintech startups as well as established fintech businesses. Given the country’s favorable conditions, this growth will likely continue. Industry experts expect the market to advance further in key areas such as digital payments, blockchain technology, and AI-driven financial services.

While no single company has a dominant market share, notable players such as Wise, Guardtime, and Bolt are likely to continue strengthening their positions. These companies have the financial resources, established brand presence, and technological capabilities to drive innovation and expand their market reach. Players can also expect increased competition from established financial institutions, such as banks, which are likely to enter the space.

New players and startups can expect a better level playing field in niche fintech areas, such as financial security or climate fintech, and other related areas often working in tandem with fintech, e.g., insurtech or regtech.

With several countries, including China, Egypt, Qatar, Oman, Morocco, Algeria, and Tunisia, banning bitcoin or other cryptocurrency mining due to high energy use and safety issues, climate fintech startups can use this opportunity to expand their operations to offer more sustainable financial solutions.

Fintech startups offering cyber protection and customer data safety are expected to grow significantly in the coming years, especially with large financial institutions such as US-based Evolve Bank & Trust experiencing cyberattacks and a subsequent data breach in 2024.

The new tax policies scheduled to take effect in 2025 will increase individual and corporate tax rates from 20% to 22%. These changes are likely to create some ripples in the fintech sector, at least in the portion of players’ profits that are not reinvested. The new tax laws may increase the operating costs for fintech companies, which could somewhat stifle innovation. This new development may curb investment, especially for small, budding players.

Over time, consolidation is likely to occur as the Estonian fintech market will head towards maturing. Larger companies may acquire smaller startups to expand their product offerings and increase their market share.

While development is rife in the global fintech sector, with its tech-savvy culture, strategic digital infrastructure investments, and progressive regulatory conditions, Estonia will likely carve out an even more prominent place in the fintech landscape.

What’s Fueling Asia’s Drive to Develop Wholesale CBDCs by EOS Intelligence
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What’s Fueling Asia’s Drive to Develop Wholesale CBDCs?

The emergence of Central Bank Digital Currencies (CBDCs) has become a central focus in the global financial space, as it offers the potential for revolutionary shifts in how the world conducts and manages monetary transactions. While much of the spotlight has been on retail CBDCs, wholesale CBDCs are gaining momentum globally. Asia is leading the pack in developing wholesale CBDCs that offer opportunities that may significantly impact the global financial landscape.

Asia is outpacing developed countries in the drive toward wholesale CBDCs

Wholesale CBDCs are digital forms of a country’s fiat currency. Unlike retail CBDCs, only a limited number of entities can access wholesale CBDCs, which are designed for undertaking interbank transactions and settlements. The concept of wholesale CBDCs is similar to currently available digital assets used for the settlement of interbank transactions, with the key differentiation being the use of technologies such as distributed ledger technology (DLT) and tokenization.

Wholesale CBDCs have garnered global interest with central banks. Facebook’s (albeit failed) attempt to launch its Libra cryptocurrency in 2019 was a breaking point for blockchain technology’s use in global finance, eventually spurring the development of wholesale CBDCs. Initially launched as a measure to counter private cryptocurrencies, wholesale CBDCs are fast emerging as a potential disruptor in the fintech space.

Currently, more than 30 countries are researching the use of wholesale CBDCs. Interestingly, about half of these countries are from Asia. The development of wholesale CBDCs in Asian countries has outpaced the efforts of financially strong economies such as the USA and the UK, as these CBDCs offer more tangible benefits to developing economies in Asia than their more developed counterparts.

Several Asian countries have engaged in pilot programs, and proof-of-concept runs to explore the use of wholesale CBDCs to improve the efficiency of domestic large-value transactions and cross-border transfers.

China has been at the forefront of the development and widespread testing of wholesale CBDCs. Several Southeast Asia and the Middle East countries, including India, the UAE, Thailand, and Singapore, have launched pilot programs to explore the viability of wholesale CBDCs and test interoperability for cross-border transactions.

Achieving faster and cheaper cross-border transactions is key to Asian central banks

Growth in global trade has resulted in exponential growth in cross-border transaction volumes. However, these cross-border transactions are faced with challenges. There may be involvement of potential intermediaries, varying time zones, and regulatory frictions that may cause slower settlement. Financial systems such as SWIFT have a stranglehold on the cross-border transaction ecosystem, with many of these transactions using SWIFT messaging to settle payments.

Potential intermediary fees and forex-related charges also lead to increased transaction costs. According to World Bank’s estimates, transaction costs for cross-border transactions may range up to 6% of the transfer value, a significant surcharge.

Removing friction associated with cross-border transactions is a key goal behind Asian countries’ push toward exploring wholesale CBDCs.

A growing interest in wholesale CBDCs is attracting investments in building large-value payment infrastructures in Asia, allowing for faster and more efficient cross-border transfers. Wholesale CBDCs enable central banks to transact directly with each other, removing the involvement of multiple intermediaries and resulting in quicker transaction settlement. This also results in the elimination of intermediary fees to help lower transaction costs.

Technology also adds elements of security and traceability to these digital transactions. It also offers the potential to program them by automating or restricting payments if certain conditions are met.

Challenging US dollar dominance in cross-border settlements offers additional motivation

Several Asian countries are also looking to reduce their reliance on financial settlement systems that involve US dollar reserves. Currently, most cross-border transactions involve the use of the US dollar. Countries with limited forex reserves also face the challenge of outgoing reserves, resulting in potential currency inflation and adding to the already high transaction costs.

Wholesale CBDCs offer several Asian countries, particularly those with limited US dollar reserves, an opportunity to directly transfer the amount in their local digital currencies and eliminate the need for US dollars in bilateral transactions.

Developing Asian economies, such as China and India, with significant cross-border transactions, are looking to promote their CBDCs as a potential reserve currency in the Asian region that would allow cross-border settlement directly in the digital currency. It is also in the interests of countries such as China to develop its CBDC (e-CNY) as a potential alternative to the US Dollar in cross-border trade to mitigate any potential currency-related challenges posed by economic sanctions from the USA and EU.

What’s Fueling Asia’s Drive to Develop Wholesale CBDCs by EOS Intelligence

What’s Fueling Asia’s Drive to Develop Wholesale CBDCs by EOS Intelligence

Tandem development and collaborations offer tailwinds to CBDC projects in Asia

Central banks of several Asian countries are undertaking information sharing and tandem development of CBDC infrastructures to mitigate some challenges associated with CBDC.

Recent pilot projects such as mBridge, launched by central banks of China, the UAE, Thailand, and Hong Kong, have been testing the use of a common ledger platform for real-time peer-to-peer transactions. The launch of several other projects, such as Project Mandala (involving Singapore, South Korea, and Malaysia) and Project Aber (involving Saudi Arabia and the UAE), is laying the groundwork for the widespread implementation of wholesale CBDCs.

Another potential avenue for collaboration includes forming partnerships with central banks to maintain reserves of digital cash to facilitate direct settlement. China, in particular, plans to develop e-CNY as a potential reserve currency alternative to the US dollar.

Interoperability and ownership are key challenges to CBDC implementation

While the use of wholesale CBDCs certainly comes forward as a boon, there are challenges in using these technology-driven digital currencies. CBDCs may have varying protocols, and interoperability between different CBDC frameworks remains a key challenge for implementing wholesale CBDCs for cross-border transactions.

Establishing common technical and operational standards is essential to ensure CBDC interoperability. Currently, most pilot programs involve CBDCs with common or similar technological frameworks and rules, which limit the application of wholesale CBDCs to a certain number of compatible entities.

Recent research projects are laying the groundwork for CBDCs’ compatibility with various ledgers and technical frameworks. However, significant testing will be required before compatibility can be established across the Asian region.

Ownership, governance, and regulatory oversight of wholesale CBDC technologies are other key concerns. Doubts exist over who will oversee the transactions and ledger entries, especially for any multi-party cross-border transaction.

Systems must also to adhere to anti-money laundering and counter-terrorism financing regulations. Varying financial laws may also hamper the seamless implementation of these anti-money laundering and counter-threat funding regulations across the region.

Lastly, like any digital asset, CBDCs are also susceptible to cyberattacks.

EOS Perspective

Wholesale CBDCs can potentially change the nature of cross-border transactions across Asia and globally.

We are likely to witness significant growth in test runs and pilot programs by several Asian countries to provide proof of concept for the applicability of wholesale CBDCs in countering the challenges associated with cross-border transactions. We can expect a spurt in CBDC alliances and treaties among countries with significant bilateral and intra-regional trade. Simultaneously, it may result in slightly reduced transaction volumes going through existing cross-border financial systems such as SWIFT.

The next stage of CBDC evolution is likely to coincide with the emergence of pilot programs involving multiple CBDCs with different technological frameworks, creating possibilities for easier and seamless cross-border transactions among banks or countries without any existing bilateral or regional partnerships.

These developments are likely to be aided by the development of enabling technologies such as RegTech (regulatory technologies) and SupTech (supervisory technologies), which could provide the sandbox environment for widespread testing of the CBDC systems, as well as lay the groundwork for potential regulatory systems to manage these infrastructures.

With the bulk of cross-border transactions still being conducted in the US dollar, wholesale CBDCs do not pose any imminent threat to its dominance. The US dollar’s future prospects in this role will depend on whether digital currencies such as e-CNY take off as a reserve currency, which is unlikely, at least in the short- to medium-term.

The overall success of wholesale CBDCs will depend on the level of cooperation that countries across Asia can develop over the next few years.

Charting the RegTech Journey – Navigating Consolidation as the Next Vital Phase by EOS Intelligence
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Charting the RegTech Journey: Navigating Consolidation

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RegTech, short for regulatory technology and often categorized as a subset of fintech, emerged in 2015. The RegTech industry was fragmented, with numerous small players targeting specific niches within the regulatory compliance landscape. However, the recent trend towards consolidation is reshaping the sector. Larger RegTech firms are increasingly acquiring smaller players to expand their offerings and solidify their market positions.

RegTech comprises powerful tools that leverage advanced technologies such as artificial intelligence (AI), automated machine learning (AML), and big data analytics. These technologies streamline regulatory compliance processes, addressing challenges from technology-driven economies, largely through automation. Automation plays a significant role in reassuring regulatory compliance professionals about the effectiveness and efficiency of RegTech solutions.

According to a 2023 report by Corlytics, a Dublin-based regulatory risk intelligence firm, regulatory penalties associated with legal and regulatory enforcement in the financial sector exceeded US$10.5 billion globally. This underscores the escalating pressure on financial institutions to comply with regulations, prompting them to turn to innovative technological solutions. RegTech has emerged as a promising avenue for organizations within the fintech ecosystem to efficiently navigate complex regulatory landscapes while reducing cost and time and improving compliance effectiveness.

Market landscape transformation through investments and strategic acquisitions

Investors increasingly recognize RegTech’s potential, and it remains a bright spot within the fintech ecosystem. Data from UK-based financial market platform Dealogic shows 116 global RegTech deals in 2023 with a total value of more than US$13.5 billion, demonstrating significant investment activity in the sector. Last year witnessed notable acquisitions across various markets, with larger financial services corporations and RegTech vendors acquiring smaller players to strengthen their market position through consolidation.

Key transactions, such as the acquisition of Adenza by Nasdaq for US$10.5 billion in 2023 and Finellix by Stellex Capital for US$176 million in 2022, underline the strategic importance of RegTech solutions for both financial and technology companies.

These developments reflect a broad strategic move to address the escalating compliance costs faced by banks and brokerages in the wake of regulatory reforms such as the Dodd-Frank Wall Street Reform and Consumer Protection Act (simply known as the Dodd-Frank Act). The Dodd-Frank Act, introduced in the USA in 2010 following the 2007–2008 financial crisis, has had a profound impact on the global financial sector. The Act has prompted financial institutions globally to significantly improve their regulatory reporting systems and processes, leading to more extensive adoption of technology solutions. Dodd-Frank and other stringent regulatory measures have significantly increased compliance costs for financial institutions and companies operating in various sectors.

Larger financial services firms and RegTech companies are consolidating to integrate complementary financial solutions and expand their operations. In one such development, US-based automated RegTech player CUBE acquired UK-based counterpart The Hub Technology in 2023 to further boost their automated regulatory intelligence (ARI) abilities to reduce compliance risk and cost.

Consolidation within the RegTech sector aims to empower larger entities to effectively tackle challenges related to anti-financial crime measures, cross-selling opportunities, and regulatory compliance services, primarily among banking and brokerage clients. This strategy aims to diversify revenue streams, broaden market reach, and increase the serviceable market.

Simultaneously, M&A offers small and mid-size RegTech companies a strategic avenue to enhance capabilities, achieve accelerated growth, better competitive market positioning, and maximize value. While acquisitions often lead to integration within the larger corporate structure, there is still room for acquired smaller RegTech companies to maintain a level of independence.

In 2023, Corlytics acquired the UK-based RegTech firm Clausematch to integrate its capabilities into a comprehensive platform for managing the regulatory risk value chain for tier-1 clients. Despite the acquisition, Clausematch maintains its independence and is a strategic partner to Corlytics. It continues to serve existing clients while also extending its services to Corlytics tier-1 clients, including 14 of the top 50 global banks. This autonomy can be instrumental in fostering partnerships that are essential for scaling up and achieving sustainable growth in the ever-changing fintech regulatory ecosystem that demands agility and continuous innovation.

The appeal of RegTech’s one-stop-shop model

The concept of a one-stop shop model in the RegTech industry, facilitated by consolidation, appeals to businesses seeking streamlined and comprehensive compliance solutions. In the evolving financial market landscape, clients are increasingly preferring to consolidate their RegTech solutions under a single provider rather than engaging with multiple vendors. This demand stems from the desire for streamlined processes, reduced administrative burden, cost savings, and seamless integration of services.

RegTech companies can meet this demand and improve the overall customer experience by offering comprehensive end-to-end solutions and value-added services. In 2023, Muinmos, a Denmark-based RegTech company, saw substantial revenue growth as more clients flocked to the firm. This surge was attributed to Muinmos’ comprehensive platform, which manages the entire onboarding process, spanning from KYC/AML procedures to risk assessments and regulatory classification.

Through strategic acquisitions of smaller RegTech firms with specialized solutions, RegTech solution providers can further enhance their offerings, capitalizing on the trend for integrated solutions and establishing a competitive edge in the market.

Partnerships with smaller firms provide larger companies in the RegTech sector with advantages such as accelerated time-to-market and the opportunity to serve as a testing ground, paving the way for potential future acquisitions.

RegTech startups joining forces

Many RegTech startups are partnering to provide a broader range of regulatory solutions to their clients by enhancing their platforms and adding compatible services from other partners. This forms a robust entity with expanded capabilities to compete with established players.

In November 2023, Flagright, a German-based startup specializing in AML compliance and fraud prevention, formed a strategic alliance with Regtank Technology, a Singapore-based RegTech services provider. This partnership underscores their joint commitment to developing an advanced transaction monitoring solution for fintech companies using AI/ML algorithms. Additionally, these partnerships are likely to help startups reach more customers across various geographies, solving risk and compliance challenges for more businesses.

The double-edged sword of consolidation

For existing and emerging RegTech companies, consolidation presents a double-edged sword. As larger players consolidate and dominate the market, there may be fewer opportunities for investment in smaller, emerging RegTech startups. Investors may perceive greater risk in backing smaller players when larger, more established firms offer similar or more comprehensive solutions. This could lead to a concentration of investment in a few key players, potentially stifling innovation and diversity in the market.

Consolidation impact on the RegTech investment landscape

With fewer startups and a more prominent role for established players, the overall number of investment opportunities in RegTech may slow down in the short term. This could lead to a shift in focus from rapid innovation to the successful integration of acquired technologies as larger players seek to leverage their expanded capabilities and market presence.

Challenges faced by small firms and emerging startups

Consolidation within the RegTech sector could heighten entry barriers for new and smaller firms. Small companies are likely to face resource constraints compared to their larger counterparts. They may struggle to match the scale of investment, R&D capabilities, and market reach of consolidated firms, potentially limiting their ability to innovate and expand their market reach.

Opportunity for small vendors due to consolidation

Consolidation could create gaps in the market for specialized RegTech solutions catering to unaddressed regulatory needs within the RegTech industry. Consolidation efforts in the RegTech sector mainly target large tier-1 clients, including large banks and other financial institutions. However, there are potential gaps and opportunities in smaller businesses across non-financial verticals that require tailored regulatory solutions. This would likely prompt smaller companies to carve out niche areas of specialization within the evolving RegTech landscape.

Specializing in particular regulatory domains, industries, or technological niches allows smaller firms to distinguish themselves as providers of specialized solutions. This makes them appealing targets for acquisition or partnerships by larger players, driven by the ongoing consolidation trends in the RegTech sector.

EOS Perspective

Traditionally, many RegTech companies evolved as single-point solutions for specific regulations. The market is witnessing a shift away from multi-point solutions that address specific issues and moving towards modular solutions that offer flexibility and can be reconfigured to address diverse problems and industry verticals. This shift is likely to drive further consolidation as regulated entities seek mature, cost-effective solutions tailored to their needs.

Conventionally, RegTech solutions have primarily targeted large enterprises with significant budgets. However, we are witnessing a notable shift, as small RegTech companies are now offering affordable compliance solutions tailored to small and medium-sized enterprises (SMEs) as well. This shift is driven by the recognition of unique regulatory challenges faced by different sectors, such as healthcare, insurance, and energy. This recognition prompts small RegTech players to tap into opportunities arising from the growing demand for industry-specific RegTech solutions. This trend reflects a broader movement within the RegTech industry towards democratizing access to compliance tools and addressing the specific needs of diverse business sectors.

With venture funding slowing down due to the economic downturn, a rise in M&A activities is anticipated in the coming years. Due to the time-consuming nature of decision-making around procuring RegTech solutions by regulated entities, major RegTech players are expected to focus on developing and offering sticky RegTech solutions to ensure stable and recurring revenue growth. Consequently, this trend is likely to drive further consolidation within the large RegTech sector, as evidenced by Corolytics’ acquisition of ING SparQ RegTech and Clausematch in 2023, followed by a substantial investment from Verdane, an investment firm, in April 2024. This investment is poised to accelerate Corlytics’ M&A activity, signaling a shift towards the emergence of technology partners that provide unified platforms by integrating solutions from multiple firms through consolidation.

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