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DENMARK: An Introduction to FinTech Legal

Overview of the Danish Fintech Market
by Lars Lüneborg, Partner, Horten

Denmark has a thriving FinTech scene consisting of companies at various maturity levels, ranging from start-ups and scale-ups to fully matured companies with hundreds of thousands of customers. Denmark is known to be a highly digitalised and technologically advanced country, and in combination with the great entrepreneurial appetite that has grown over the last decade, Denmark has produced numerous FinTech successes spanning areas such as banking services, robo-trading, payment services, money remittance, lending and cryptocurrency. Denmark has produced FinTech companies such as Lunar Bank, Spiir, Pleo, Tradeshift, Coinify, Cardlay, Penneo and Nord.investments.

The Danish FinTech industry continues to grow rapidly in a multitude of areas and is also expanding into foreign markets. Also, following a global trend of massive investment in FinTech, the Danish and international venture capital and private equity industry is showing a great interest in providing funding to promising Danish ventures. But there are a number of factors that are causing investments to explode right now. Among other things, the Danish ecosystem has matured over the last five or six years, and this means that some of these growth companies can attract larger and larger rounds of investments.

Furthermore, we currently see a number of foreign FinTech players entering the Danish market, particularly within consumer credit, money remittance and payment services.

Financial Regulation 

The growth of the Danish FinTech industry is accompanied by continuously more and more finely meshed financial regulation. Other than various licensing requirements, the supervisory authorities have, inter alia, increased their focus on Anti Money Laundering (AML) checks, Know Your Customer (KYC) and monitoring of consumer lending, and have put a much greater emphasis on credit risk assessments. Furthermore, 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introduced in 2020 has hampered the offering of consumer credits, with the consequence that many foreign players have withdrawn from the Danish consumer lending market.

FinTech companies operate in or on the verge of these heavily regulated areas such as payment services, investment services, credit services and financial transactions. Horten works determinedly to clarify the regulatory framework and obligations to which clients are subjected, and how the set-up of the company should be in this regard. Horten has wide experience in analysing new business models up against the financial regulation and has one of the leading groups within IP and IT-Tech, GDPR and AML compliance.

For many years, it has been possible for FinTechs and their advisors to have a good and constructive dialogue with the Danish Financial Supervisory Authority (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. The Danish FSA has introduced the 'FSA Lab', a regulatory sandbox where selected companies can test their innovative business models in a safe environment, with the aim of dealing 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.

For a number of years, Horten have had a good dialogue with the Danish FSA, the Danish Consumer Ombudsman and the Danish Data Protection Agency in specific cases, and we are happy to assist our clients in their dialogue with the authorities.

Another catalyser for the thriving FinTech scene in Denmark and the development of Copenhagen as a Nordic FinTech hub is, and has been, the establishment of the Copenhagen Fintech Lab. The Lab is a co-working space for FinTech entrepreneurs, the meeting point of large parts of the Copenhagen FinTech community and the biggest centre of Nordic FinTech. Hosting more than 50 FinTech start-ups 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 looking for advice, investment or partnerships.

Representatives from Horten's FinTech team are available on a regular basis for informal sparring with companies at Copenhagen FinTech Lab as part of the Lab's Law Connect Programme. Horten are happy to contribute actively to the development of Copenhagen as a Nordic FinTech hub.

New national electronic identification system 

The current national Danish electronic identification system, NemID, is the most commonly used method of electronic identification in Denmark for both individuals and companies. However, although NemID is an advanced electronic signature, it does not qualify as a method for safe customer authorisation under the Payment Services (PSD2) Directive, unless, following an individual risk assessment, the specific customer relationship is considered to only imply a low risk of money laundering and financing of terrorism. However, the next generation national successor of NemID, 'MitID' is currently being developed and is expected to be launched in 2021 and to be phased in nationwide during 2021 and 2022. MitID is an eID solution for digital authentication in Danish banks and public websites providing online services solution. Contrary to NemID, MitID supports Strong Customer Authentication (SCA) and is therefore PSD2 compliant. MitID supports three levels of assurance (LoA) using multiple authentication mechanisms to step up to a higher level of security, and hereby MitID is compliant to the eIDAS regulations for governments in Europe. The MitID software can be used on multiple devices, including mobile phones.

Business Models 

The start-up and scale-up FinTech companies in Denmark cover a wide range of business models, including robo-trading, money remittance, automated invoice payments, mobile payment applications, banking services, payment services, lending, cryptocurrency and crowdfunding platforms.

The legacy players, such as banks, generally adapt either by creating their own customised version of FinTech solutions like Danske Bank's Mobile Pay application, or through purchase of or co-operation with smaller players and their services. As such, FinTech companies have a wide range of possible market approaches to choose from.

Certain FinTech players have achieved rapid growth and market expansion to directly compete with legacy players. By way of example, Lunar, a Danish FinTech company founded in 2015, now holds a full banking licence and has more than 200,000 users in Denmark, Sweden and Norway.

Other FinTech players avoid direct competition with banks and instead choose to co-operate with them. For instance, listed robo-trader Nord.investments is co-operating with Saxo Bank, which is providing the account set-up for Nord.investments' trading customers. Another example is Matchbanker, which focuses on consumer credit intermediation by offering consumers a platform where they can obtain multiple competing loan offers from banks.

Regulatory Regime 

Depending on the business model, FinTech companies may become subject to one or several licensing or registration requirements. Below is a list of the most common activities in the Danish FinTech industry:

• payment services – licence or registration pursuant to the Danish Payments Act (which implements PSD2);
• issuance of electronic money – licence or registration pursuant to the Danish Payments Act;
• banking or financing services – licence pursuant to the Danish Financial Business Act;
• investment firms – licence pursuant to the Danish Act on Investment Firms etc.;
• consumer lending – licence pursuant to the Danish Credit Agreements Act; and
• alternative investment fund management – licence or registration pursuant to the Danish Alternative Investment Fund Managers Act.

The Danish FSA has also issued various regulations and guidelines supplementing the above acts. Certain financial services that are not subject to licence requirements may still be subject to a requirement to register with the Danish FSA, e.g. in the AML register.