The Danish Fintech sector has experienced speedy growth for the past 10 years sprouting into a multitude of different services and expanding into foreign markets. Here is an overview of the Fintech landscape in Denmark and the legal challenges in the Danish market.
Denmark has a thriving Fintech scene consisting of companies at various maturity levels. The market players range from Danish start-ups and scale-ups to fully matured companies with hundreds of thousands of customers.
A rapidly growing Fintech market
The high degree of digital and technological development of Denmark integrating with a great entrepreneurial culture has led to a rapid growth of the Danish Fintech sector over the last decade, and we have seen an explosion in the number of new Fintech startups in recent years ranging from 70 new Fintech startups in 2015 to 280 new Fintech startups in 2021 , partly fueled by COVID-19.
Also, we see a trend going from an emphasis on competition between Fintechs on one hand and established financial institutions on the other towards a collaborative environment in which all parties may contribute to jointly growing the Danish Fintech sector.
Danish Fintech companies span across a multitude of different services such as banking services, expense management, payroll management, robot trading, various payment services, money remittance, lending, and cryptocurrency. Denmark has produced numerous Fintech successes spanning across those areas, including companies such as Spiir, Aiia, Coinify, Cardlay, Penneo, Subaio, Leneo, Proper and Nord.investments and a number of unicorns such as Tradeshift, Pleo, Lunar and Chainalysis.
Investor appetite and international expansion
The Danish Fintech industry continues to grow rapidly within a multitude of areas and has also, especially within recent years, expanded into foreign markets. Following from the global trend of massive investments in Fintech in combination with the matured Danish Fintech market, the Danish and international venture capital and private equity industry have been showing a great interest in providing funding to promising Danish ventures.
However, given recent geopolitical developments and the increase in interests, it seems that the interest and risk appetite of international venture capital and possibly also the private equity industry may be slowing down.
The Danish eco system has matured and grown over the last six or seven years, now employing approximately 4,300 individuals , and this means that many of these Fintech growth companies attract larger and larger rounds of funding.
Furthermore, in recent years we have also seen a range of foreign Fintech players entering the Danish market, within services such as payment services, money remittance and, to some extent also within consumer credit. However, the interest ceiling on consumer credits and late payment fees that was introduced in 2020 has hampered the offering of consumer credits with the consequence that many foreign players have retrieved from the Danish consumer credit market.
Regulators with an open approach to the Fintech market
The growth of the Danish fintech industry is accompanied by a continuously more and more finely meshed financial regulation. The supervisory authorities have increased their focus on primarily AML checks and customer KYC, the monitoring of consumer lending and have put a much greater emphasis on credit risk assessments.
The Danish Financial Supervisory Authority (the "FSA") and other regulators practice an open and including approach to the Fintech market with the purpose of easing the establishment of Fintech companies in Denmark. For many years, it has been possible for Fintechs and their advisors to have a good and constructive dialogue with the Danish FSA, the Danish Consumer Ombudsman and the Danish Data Protection Agency in specific cases, which has helped in interpreting applicable legislation and thus supported the continuing growth of the industry.
FSA Lab and Copenhagen Fintech Lab
The Danish FSA has introduced the 'FSA Lab', which is the Danish FSA's regulatory sandbox, where selected companies can test their innovative business models in a safe environment with the aim to deal with questions regarding the applicable regulation for new business models and innovations within Fintech. The sandbox is part of the Danish FSA's effort to establish a good business environment for Fintech companies.
Another catalysator for the thriving Fintech scene in Denmark and the development of Copenhagen as a Nordic FinTech hub is, and has been, the establishment of Copenhagen Fintech Lab. The Lab is a co-working place for Fintech entrepreneurs and the meeting point of large parts of the Copenhagen fintech community and the biggest center of Nordic Fintech. Hosting more than 50 Fintech startups and scale-ups and having had more than 120 Fintech companies working out of the lab since it started, it has become one of the best springboards to accelerate smaller Fintechs whether looking for advice, investment or partnerships.
Licensing and registration requirements
The startup and scale-up Fintech companies in Denmark cover a wide range of business models, including robot trading, money remittance, automatized invoice payments, mobile payment applications, banking services, payment services, lending, cryptocurrency and crowdfunding platforms.
Depending on the business model, Fintech companies may become subject to one or several licensing or registration requirements with the Danish Financial Supervisory Authority, including:
- payment services – license or registration pursuant to the Danish Payments Act (that implements PSD2).
- issuance of electronic money – license or registration pursuant to the Danish Payments Act;
- banking or financing services – license pursuant to the Danish Financial Business Act;
- investment firms – license pursuant to the Danish Act on Investment Firms etc.;
- consumer lending – license pursuant to the Danish Credit Agreements Act; and
- alternative investment fund management – license or registration pursuant to the Danish Alternative Investment Fund Managers Act.
Certain financial services that are not subject to licensing requirements may still be subject to a requirement to register with the Danish FSA, e.g. in the AML register.
Governance, internal controls and risk management are key challenges
Some of the key challenges for regulated Danish Fintech companies that we encounter are typically linked to financial regulatory requirements in respect of governance, internal controls and risk management.
For smaller and medium sized Fintech companies, it is challenging to work out what a sufficient number of employees is to ensure the required segregation of compliance responsibilities within the organisation and to avoid dual roles when it comes to reporting obligations and reporting chains within the company. Those requirements are particularly difficult to identify, as they are directly linked to the size, type and complexity of the activities carried out by the Fintech company and needs to be in the right proportion thereto.
Also, the precise requirements in respect of internal control functions are often unclear for Fintech companies of all sizes, including when a second line of defence is required and what are the responsibilities for proactively identifying, monitoring and reporting to the board on material risk areas to ensure that implemented policies and procedures are working as intended to comply with applicable rules and regulations.
Fit & proper requirements can be a roadblock
Related to the above is what at times can turn out to be a major roadblock for many Fintech companies being the unknown range of fit & proper requirements for members of management and the board. Given that the fit & proper rules in principle apply to all shapes and sizes of regulated financial companies, ranging from the largest banks to the smallest Fintech companies, it can be tremendously challenging to identify when a given person will be deemed fit & proper for the position before him/her.
The above uncertainties lead to adverse commercial consequences. First and foremost, we oftentimes see a vastly prolonged processing time for application processes when Fintech companies apply for relevant financial licenses resulting from many back and forth discussions with the regulator, drafting and redrafting of required policies and procedures and amending - and adding to - the organisation of the Fintech company. Apart from taking up internal resources and increasing external advisor costs, this means that the development and growth of a Fintech company can be set back quite heavily, even if the application process was started in due course.
Secondly, the above uncertainties mean that there is a greater risk that Fintech companies inadvertently do not comply with applicable rules and regulation and may be subjected to various demands – and even a fine - from the regulator in connection with a subsequent control visit, which requires the use of further internal resources for the Fintech company and potentially making material changes to its operations that was otherwise thought to be compliant.
Transparency and guidance crucial to stay at the forefront
Copenhagen as a Fintech hub has arguably been punching above its weight since the emergence of Fintech as a concept. For the Danish Fintech industry to stay at the forefront of international developments, further regulatory transparency and specific guidance on the range of the above requirements would be essential.
The heavy and rapidly changing financial regulation is a real challenge to monitor and comply with, in particular for small and medium sized Fintech companies with limited regulatory resources. For first movers and new business models within a heavy regulated area, transparency and guidance is key in order to stay compliant.
Uniformity in law across borders
However, transparency and guidance need to be complimented by even more responsive, flexible and fast working regulators for Fintech companies to manoeuvre efficiently within the finely meshed financial regulation. This should also include expanding further the Danish FSA's regulatory sandbox and making it more accessible and allowing more Fintechs to be testing their ideas up against seasoned regulatory experts before investing large amounts into developing their contemplated Fintech solutions.
It is also important to avoid any domestic ‘goldplating’, i.e. that the national implementation into Danish law of EU directives does not go beyond the minimum necessary to comply with it, and that the interpretation does not differ to that of other EU member states. Fintech businesses are often modeled in a scalable way so that they can easily cross borders into other countries. For that purpose, legal uniformity across borders – at least within the EU – can be paramount.
Financial institutions working together
In addition to the regulatory issues, further collaboration between Fintechs and other financial institutions, as well as between Fintechs – both young and established players, is likely a necessity in order to maintain an innovative edge. The financial services market is still developing at a rapid pace and Big Techs have arrived on the Danish scene introducing various payment solutions that provide competition to both Danish Fintechs and financial institutions.
Our role as legal advisor
Fintech companies operate in or on the verge of heavily regulated areas such as payment services, investment services, credit services and financial transactions. At Horten, our dedicated team helps our clients navigate around this ever-changing regulatory framework. Horten has wide experience in analysing new business models up against the financial regulation and has leading teams within Financial Regulation, IP and IT-Tech, Debt and Equity Funding, Corporate M&A, Outsourcing, GDPR and AML compliance.
Horten has a good and constructive dialogue with the Danish FSA, the Danish Consumer Ombudsman and the Danish Data Protection Agency in specific cases, which has helped in interpreting applicable legislation and thus supported the continuing growth of our clients.
Representatives from Horten's Fintech team are available on a regular basis for informal sparring to companies at Copenhagen Fintech Lab as part of the Lab's Law Connect Programme. We are happy to introduce clients to the network of the Lab and to contribute to the development of Copenhagen as a Nordic Fintech hub.
Horten is the only Danish law firm classified in Tier 1 in Chambers & Partners' FinTech Legal Rankings.