Chapter 2. SMEs and FinTech in the European Union: How to Balance Innovation and Regulation?


Jonathan McCarthy
School of Law, University College Cork, Ireland

Part of the book: Advances in Business and Management. Volume 20

Chapter DOI:


The growth of technological innovations in financial services – frequently denoted as ‘FinTech’ or ‘digital finance’ – is causing concern for regulators internationally, including within the European Union (EU). As the overwhelmingly most prevalent form of business in the EU, SMEs are focal to the emergence of innovative FinTech products, services, and processes. By concentrating on FinTech activity within the EU, the chapter addresses the regulatory factors which must be considered when SMEs are the catalysts for unprecedented developments in finance. The chapter argues that the fluid nature of FinTech innovation infers that regulation should respond in a flexible manner. In light of the contribution of SMEs to FinTech, the efficacy of certain regulatory initiatives could be understood best by evaluating their suitability for SMEs. The chapter profiles the current features of FinTech activity in the EU and describes the characteristics of SME digitalisation. The chapter explains how SME innovation and start-up growth dynamics can be integral to FinTech’s ongoing rise. The chapter critically evaluates the degree to which contemporary developments in FinTech could be represented as being genuinely disruptive innovation, as the term is defined in existing literature. Innovations introduced by SME firms are more likely to be assimilated into market practices and gradually adopted by incumbent financial institutions. The types of technologies associated with FinTech are at relatively nascent stages of development. Significant expansion is expected, and regulation will need to respond accordingly. The chapter considers the various regulatory approaches which are utilised within the EU, ranging from examples such as sandboxes, innovation hubs and accelerators. By focusing on the importance of such regulatory mechanisms for SMEs, the chapter contends that a combined and complementary use of regulatory innovations can be highly suitable for the varied and dynamic forms of SME and start-up innovation in FinTech.


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