France: Fintech

The main sources of French payments laws are European.

The European Union directives are not directly applicable, so they are not direct sources. They are however sometimes implemented as is in the French legal and regulatory framework, and they remain in any case useful for interpretation purposes since they allow understanding the rationale of the rules.

Directive 2015/2366 of 25 November 2015 on payment services in the internal market (“PSD2”) is an essential source, implemented in France with Ordinance n°2017-1252 and Decree n°2017-1313 across the French Monetary and Financial Code (“CMF”), in sections dedicated to payment services and payment services providers (“PSP”).

European Union directives on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing, especially Directive 2018/843 (“AML5”) which amended Directive 2015/849 (“AML4”) is also key. AML5 was implemented in France by Ordinance n°2020-115 and Decrees n°2020-118 and n°2020-119 dated 12 February 2020 which amended articles L. 561-2 and seq. and their corresponding regulatory provisions of the CMF.

The European Union sources also include delegated regulations, directly applicable, and guidelines of the European Bank Authority (“EBA”), that complete and specify the above directives. This concerns for instance Delegated Regulation 2018/389 of 27 November 2017 with regard to regulatory technical standards for strong customer authentication and secure communication, and the guidelines of the EBA on the limited network exclusion under PSD2 (for which a draft was published on 15 July 2021).

Lastly, more specific EU regulations, such as EU Regulation 2015/751 of 29 April 2015 (the “IFR Regulation”) aimed at ensuring price transparency and comparison throughout the payment process for credit and debit card transactions, and the EU Regulation 260/2012 of 14 March 2012 (the “SEPA regulation”), establishing the Single Euro Payments Area (“SEPA”), can also be cited as relevant sources of payment law.

At national level, regulated services providers shall also comply with Order of 3 November 2014 on the internal control of companies in the banking, payment and investment services sector, as well as with the guidelines and administrative case law of the French supervisor (“ACPR”, for Autorité de Contrôle Prudentiel et de Résolution).

Only PSPs, i.e., credit institutions, payment institutions and e-money institutions, can provide payment services. If “bank” refers to credit institutions, then non-banks can indeed provide payment services. Payment and e-money institutions are however regulated and need to apply for a license to the ACPR in a process similar to the one applicable for credit institutions.

There are however situations where non-regulated entities can provide payment services without license.

First, there is an exclusion of the PSD2 scope. According to the French implementation of this exclusion, organisations can provide payment services if such services are based on payment instruments which can be used only for acquisition of (i) goods or services in the premises of the issuer or within a limited network of service providers under commercial agreement with the issuer, or (ii) a limited range of goods or services. This exclusion is limited since these undertakings are required to send a declaration which almost equals to an authorisation request as soon as the total value of payment transactions executed during the previous twelve months exceeds one million euros.

This exclusion was also implemented for specific payment instruments subject to a special legal regime, provided for specific social or tax purposes and enabling the acquisition of specific categories of goods or services, such as meal vouchers. Contrary to the services described in the above paragraph, services based on these specific payment instruments are not payment services exempted but services which do not qualify as payment services. Undertakings providing them have therefore no declaration obligation, even if they must send the Banque de France an annual report justifying the security of the instruments they issue and manage.

In its annual report on the security of payment means, the Banque de France gives statistics on the use of payment methods and instruments in 2021(Observatoire de la sécurité des moyens de paiement, Rapport annuel 2021).

The easing of sanitary measures and the economic recovery have led to a very strong growth in cashless transactions (+12.4% in number, +17.5% in value), thus confirming the rapid and lasting digitisation of payment practices.

Card payments are confirmed as the most widely used means of payment in France (56.9% in 2021), including contactless payments which became, with the pandemic, the preferred method of in-store payments, now accounting for more than half of all card transactions (57% of card payments vs. 19% in 2020).

Direct debits (17,7% of payment transactions in 2021) and credit transfers (17,1% of payment transactions in 2021) are then the most used means of payment. On the other hand, traditional means of payment, such as cheques, continue to decline, albeit less steeply than before the pandemic (- 6% drop in the number of transactions and – 4% drop in the amounts exchanged).

The open banking concept was introduced in 2018 by PSD2 and constitutes a major evolution in the banking sector.

Indeed, it requires banks to share customer data with other financial sector players called third-party payment service providers (“TPPs”) which are (i) payment initiation service providers and (ii) account information service providers.

These new practices are subject to regulatory measures and the TPPs must, like other payment institutions, be approved, except in limited cases.

As this opening is not risk-free, measures are also required to protect consumers, as the PSD2 requires banking institutions to strengthen their security measures.

Banking institutions have to adapt their online interface or offer a specific API that is (i) sufficiently secure to prevent them from being circumvented, (ii) subject to strong authentication, (iii) guaranteeing a high level of interoperability between banks and TPPs.

One year after the September 14, 2019 date allowing banks to open up to such a system, a minority of banks had taken the step, due in part to the health crisis, but also because of a lack of clarity in the expected security measures.

In an Opinion published on 4 June 2020, the European Banking Authority (“EBA”) identified a number of obstacles to the provision of TPP services under the PSD2, before setting out, in a subsequent opinion published on 22 February 2021, its expectations regarding measures that should be taken to remove these impediments.

In particular, the EBA stated that it expects national authorities to take more effective supervisory action to ensure compliance with the applicable law, including, but not limited to, revoking exemptions from the contingency mechanism already granted to banks and/or by imposing fines. The removal of barriers, particularly during the authentication journey, should therefore increase conversion and the adoption of open banking solutions.

The emergence of BtoB and BtoC financial services has been impacted by both PSD2 and the General Data Protection Regulation n°2016/679 (“GDPR”) which came into force on May 25, 2018. In France, the protection of personal data is also framed by the Law on Computer Technology and Freedom dated 6 January 1978 (“LIL”).

The French legislator has not introduced more restrictive provisions against financial services and both banking players and third parties which will access customer data will have to implement adequate compliance measures.

Open banking raises the question of compliance with the rules of transparency and the collection of consent.  It also reinforces the position of the PSD2 regarding the implementation of adequate security measures to ensure the confidentiality of the processed data.

On the customers’ side, banks and technical service providers involved in such an open banking process will have to enable the full exercise of their rights of access, portability or opposition.

Since 2016 the ACPR has been supporting fintechs by having set up a Fintech Innovation Unit.

This is an ACPR team dedicated to fintechs and financial innovation. This team acts as an interface between project leaders and the ACPR departments involved, as well as the Banque de France (for projects involving payment services) and the Financial Markets Authority (“AMF”) (for projects involving investment services).

This unit allows fintechs to have a contact point that is aware of these innovative projects, which require specific support in order to understand the regulations and prepare the way for approval or authorisation.

This unit also enables close coordination between the ACPR and the AMF, depending on the project.

The AMF has also set up a fintech, innovation and competitiveness division, which also serves as an entry point for innovative project leaders.

In line with this goal to assist fintechs, the ACPR and the AMF have also set up the fintech Forum.

The Fintech Forum is an annual event jointly organised by the ACPR and the AMF. It brings together fintech players and the authorities. This key event provides an opportunity to discuss important news and foster dialogue between professionals and institutions.

There are no particular risks to the growth of the fintech market in France. On the contrary, there is a will to encourage the growth of the market. For example, in addition to the initiatives above, the AMF and the ACPR have taken a joint decision to adopt a friendly welcome policy vis-à-vis financial institutions licensed in the UK regarding the consequences of the Brexit:

• Appointment of dedicated contacts: upon request, the relevant regulator will appoint an English-speaking contact, which will assist the applicants before the filing of their license application;
• Simplified proceedings: both regulators propose simplifying and speeding the license application by allowing the reuse of the documents and information used for the license application in the UK.

There is no specific tax incentives for fintechs.

However, there are different research and development tax mechanisms in France.

It should also be noted that the French government has put in place financial support measures for the companies most affected by the health crisis and its consequences on the French economy.

The first half of 2022 confirms sustained growth in fintech fundraising, which reached a total of nearly €2 billion in 73 deals, i.e. a 27% increase compared to the first half of 2021. (source: France FinTech):

From a sectoral point of view, fundraising primarily concerned :

• The neo-banking segment (27% of the total amount) with one major deal (Qonto, €486m),
• Operational services (23%),
• Insurance services (20%).

In 2022, the analysis of transactions confirms that the fintech ecosystem is reaching maturity. The average deal size is growing strongly, from €22m in 2021 to €27m. Growth is even more pronounced in Series B deals, where the average ticket is over €40m (vs. €30m in 2021).

The FinTech market in France is booming and represents a significant share of the investments made.

In the first half of 2022, France is the second largest fintech ecosystem in Europe (17% of funds raised), ahead of Germany (12%). 3 new fintech unicorns have emerged (PayFit, Qonto and Spendesk), bringing the total number to 11 (i.e. 40% of French unicorns).

The French authorities are attentive to the needs of fintechs: incubators, support for the research and development phases, fabrication laboratories (fablabs), etc.

France encourages innovation by providing grants and loans to fintech startups, and facilitates communication between entrepreneurs and supervisors.

In addition, innovation in the financial sector is a priority of the European Commission.

Finally, there is also a law protecting corporate leaders depending on the corporate form used to create the company (SARL, SAS, SASU, EURL) which allows:

• To set up a company with a reduced capital (1 euro);
• Limit the liability of directors to their professional assets, thus protecting their personal assets from creditors.

No visa, work permit or residence permit is required for a European Union (“EU”) or a European Economic Area (“EEA”) citizen to establish a residence in France. For other foreign citizens, a multi-annual residence permit called the “talent passport” has been created to allow foreigners who are employed or self-employed and who want to contribute to the economic attractiveness of France to settle.

To be eligible for the talent passport, the applicant must meet the conditions according to the category concerned, in particular being a qualified employee or, for example, joining a company recognised as innovative by the French Ministry of the Economy.

The multiannual residence permit “talent passport” is equivalent to a work permit and is issued for a renewable period of 4 years.

In March 2019, in order to facilitate recruitment in french tech startups, a french tech visa was created, which is a simplified procedure for foreign employees who want to settle in France. The conditions for obtaining this visa are as follows:

• To justify an employment contract of at least three months with a French company eligible for the french tech visa;
• Justify a gross annual salary of at least twice the French minimum wage.

Access to talent has been facilitated by the implementation of tax measures facilitating the entry of foreign employees in France. The “impatriate” regime was created for individuals who come to France to carry out their professional activity and who can benefit, under certain conditions, from income tax exemptions.

This impatriation regime is aimed at people domiciled for tax purposes outside France during the five calendar years preceding the year in which they take up their duties in a company established in France:

• Either the employee is “called by a company” which has links with the original company established abroad [intra-group mobility].
• Or the employee is directly called from abroad to take up employment with a company in France [external recruitment].

A fintech has different levers to protect their intellectual property rights.

First of all, a fintech can benefit from copyrights (moral and patrimonial rights) without any formalities as long as the work meets the criteria defined by the French intellectual property code. Software is also covered by this protection. A fintech can also benefit from the protection related to designs (subject to novelty as well as specific character).

A fintech can patent its inventions, provided they meet the criteria of patentability (answering a new technical problem) and are not expressly excluded from protection by the law.

A fintech could benefit from database protection if it proves a substantial investment in databases.

At the same time, a fintech may benefit from protection related to its corporate name, the registration of its domain names, business secrecy or image rights.  A fintech may also register trademarks useful for the management of their activities, again provided that they meet the requirements of the French intellectual property code.

These different rights have specific conditions, effects and durations that must be assessed on a case-by-case basis.

Cryptocurrencies and their issuance are not directly regulated in France. Only the provision of services on cryptocurrencies is regulated since the entry into force of the French law n°2019-486 of 22 May 2019 (PACTE Law), which created the qualification of digital assets (which includes tokens issued for ICOs and cryptocurrencies), the one of services on digital assets (ten services listed in Article L54-10-2 of the CMF), and the status of digital asset services provider (DASP).

The PACTE law provides for a mandatory prior registration with the AMF for DASPs intending to provide the following services:

• Custody of digital assets on behalf of third parties,
• Purchase or sale of digital assets for fiat currency that is legal tender,
• Exchange of digital assets for other digital assets, and
• Operation of a trading platform for digital assets.

Out of the ten services listed by the CMF, the provision of four of them requires prior registration.

The PACTE law also provides for an optional licence. Providers established in France may apply for authorisation with the AMF to provide one or more of the ten services on digital assets. For each service for which the service provider is authorised, the AMF General Regulation sets out several requirements to comply with.

Since the entry into force of the PACTE Law, the CMF and the AMF General Regulation provide for an optional approval of the AMF. Any issuer incorporated in France can submit a white paper for approval by the AMF. The AMF will give approval if it meets certain requirements aimed at ensuring better information and protection for investors, and that includes provision of all relevant information on the ICO and its context and the implementation of a system for monitoring and safeguarding of the assets collected during the offer.

Fundraising without AMF approval remains legal, but issuers that do not receive AMF approval will not be able to market it to the public.

On 30 June 2022, in the frame of the European Union’s (EU) digital finance strategy, the Presidency of the Council of the European Union and the European Parliament reached a provisional agreement on the Regulation on markets in crypto-assets (the “MICA Regulation”) which notably provides for a regulatory framework for ICOs that includes the publication of an information document and allows issuers to issue their tokens within the 27 Member States.

The French retail group Casino, with several other French companies including Société Générale, Coinhouse and PwC, launched on 22 March 2021 the first ever French cryptocurrency based on the euro. This cryptocurrency, named Lugh and created using the Tezos blockchain, is intended to be used as a payment method in shops within two years.

The Banque de France has also implemented a programme of experiments on a central bank cryptocurrency (CBC) with ecosystem players for the purpose of settling interbank transactions, which is about to end. The objective of this programme is to assess whether and how the issuance of an interbank CBC could contribute to improving the performance, speed, transparency, and security of transactions between major financial players.

The most common artificial intelligence (“AI”) used by fintech companies are chatbots to answer common questions on websites and voicebots for voice messages sent to customers.

AI can also be used in banks to facilitate customer scoring or in the prevention of payment fraud and by fintech to meet their various regulatory obligations, in particular the KYC requirements.

As the use of AI raises data security risks, the ACPR has published a discussion paper on the principles of governance and evaluation of AI algorithms in the financial sector.

In order to support the development of AI in the financial sector, in June and July 2021, the ACPR held its first Tech Sprint on the explainability of artificial intelligence (AI) “i.e. the ability to explain the functioning or the result of an algorithm”. The subsequent report, published by the ACPR in January 2022, summarizes its key findings but also points to potential future work by the ACPR related to AI explainability, including a likely focus on algorithm fairness, interactions between human operators and AI algorithms and, generally, the auditing of AI-based algorithms.

Despite an unprecedented crisis, the creation of insurtechs in France has continued to grow. The amount of funds raised by French insurtechs in 2021 represents 25.6% of European investments in the sector and amounts to 504.6 million of euros (vs. 216.2 million of euros in 2020) for 25 operations (Insurtech & Innovation dans l’assurance – Novembre 2021 – KleinBlue).

Moreover, according to the same study, the more important fund raising of 2021 were in the sectors of health insurance (Alan), multiline insurance (Acheel and Lovys) claims management and fraud detection improvement (Shift Technology) and automating pricing solution for insurance providers  (Akur8) (Insurtech & Innovation dans l’assurance – 2021 – KleinBlue).

Other insurtechs are targeting B2C market with services focused on car insurance or home insurance (Lovys, Leocare).

In November 2020, the first insurance industry association, Insurtech France, was created to represent and federate insurtech players in France which are constantly offering new services and new user experiences.

In France, several Fintech categories stand out for their activities and their innovations such as paytechs allowing to optimise any type of payment (Leetchi for online money pot or Lydia for mobile payment), robo-advisors (Yomoni or Nalo with online platforms delivering financial advice and portfolio management), insurtechs (Alan, Shift Technology) or even “neobanks” (in particular Qonto).

Fintechs were initially only start-ups bringing competition to an old system and disrupting the traditional banking business by offering digital and personalised solutions.

The new services they introduced in the market or the new ways to provide traditional services lead the incumbent financial institutions to react quickly, which they did in different ways: they developed their own fintech solutions and marketed them within their existing products and services, they purchased fintechs so that competition becomes in-house services (Leetchi by Crédit Mutuel Arkéa, Dalenys, Le Pot Commun and Pumpkin by BPCE, Compte Nickel and Floa Bank by BNP Paribas, etc.), and/or they developed programmes aiming at fostering innovation and disruption as well as to invest in promising start-ups.

Many fintechs and incumbent financial institutions also realise the need to cooperate to remain or become attractive and then conclude partnerships to develop and offer together co-branded products and services.

Banks and other incumbent financial institutions carry out their own fintech development especially regarding online availability and customer experience.

In addition, many of them have implemented innovation programmes consisting in the development of incubators or accelerators aiming at spotting the most promising start-ups and projects, giving them the environment to develop their business, keeping an eye on new financial technologies, sometimes implementing their solutions internally, and investing in them.

This is for instance the purpose of the Village by CA created by Crédit Agricole, of l’Atelier BNP Paribas, of Global Markets Incubator created by Société Générale, of platform58 created by La Banque Postale, and of KAMET created by AXA for insurtechs.

The strongest recent example concerns Sorare, a startup which created non-fungible tokens (NFTs) around football players and professional clubs, and which allows gamers to form football teams and trade virtual players. It has announced the biggest fundraising in the history of French Tech by raising $680 million in September 2021, only a few months after the 40 million raised in series A.

Fintechs strongly disrupted the credit market, with examples such as Younited Credit which offers 100% online credit and gives users a quick response to their loan application, and which raised €142,4 million in July 2021 with a private equity round including Goldman Sachs Asset Management and Bridgepoint.

The mushrooming of “buy now pay later” and instalment payment solutions by companies such as Oney Bank, Floa Bank, Alma and Pledg is also a strong example. As of early 2022, more than 15 French fintechs are positioned on this B2B2C market and 12% of merchants in France accept a deferred payment solution. Business banking was also disrupted by several fintechs providing to professional online payment accounts and other payment services. Ones of the strongest examples in France are Qonto, manager.one and Shine.

Also noteworthy is the trend, which began in 2021 and seems to be confirmed in 2022, of the emergence of “green neo-banks” (such as Green-Got, Helios, Onlyone) which, in addition to traditional banking services, are developing complementary services geared towards the energy transition, such as the calculation and compensation of carbon footprint, responsible savings solutions or the financing of eco-responsible projects.Finally, the emergence of peer-to-peer solutions during the last decade is another example of fintech disruption in France, with the lead companies Lydia, Pumpkin and Paylib.