On 03 July 2018, the European Banking Authority (EBA) published thematic Reports on the impact of FinTech on incumbent credit institutions’ business models and the prudential risks and opportunities arising for institutions from FinTech.
The Reports follow publication of the EBA’s FinTech Roadmap in March 2018 and aim to raise awareness and knowledge sharing among regulators, supervisors and the industry.
Report on the impact of FinTech on incumbent credit institutions’ business models
The EBA identifies four broad drivers that shape change in incumbents’ business models: (i) customer expectations and behavior; (ii) profitability concerns; (iii) competition; (iii) and regulatory changes.
The EBA believes that the payment and settlement business lines appear to be most affected by new entrants and has a negative impact on incumbents’ revenues while noting that new entrants are becoming active in non-capital-intensive business areas such as cross-border transfers, micro-payments and card payments.
A diverse level of activity and involvement in different technologies has been observed across the EU banking sector, in terms of both geography and institutions. The EBA notes that the first wave of technological changes in the financial services sector, which encompass online and mobile banking, as well as the use of biometrics, appears to have affected a significant number of EU institutions, which have already incorporated them into their existing processes and activities. The EBA notes a growing interest in cloud computing and early use of big data and machine-learning solutions. Further, many initiatives aiming to explore blockchain technology are currently ongoing.
Incumbents’ business models can also be affected by different risk factors with regards to sustainability. The EBA sets out five factors that might significantly affect incumbents’ business models from this perspective: (i) digitalisation/innovation strategies pursued to keep up with the fast-changing environment; (ii) challenges arising from legacy IT systems; (iii) operational capacity to implement the necessary changes; (iv) concerns over retaining and attracting staff; and (v) increasing risk of competition from peers and other entities.
In examining the relationship between incumbents and FinTech, the EBA believes that the predominant type of relationship currently involves partnership and collaboration by incumbents with FinTech firms.
Report on the prudential risks and opportunities arising for institutions from FinTech
This Report analyses seven use cases for the application of new technologies to existing financial processes, procedures and services, with a focus on examining prudential risks and opportunities. The seven uses cases are:
- biometric authentication using fingerprint recognition
- use of robo-advisors for investment advice
- use of big data and machine learning for credit scoring
- use of distributed ledger technology (DLT) and smart contracts for trade finance
- use of DLT to streamline customer due diligence processes
- mobile wallets with the use of near-field communication, and
- outsourcing core banking/payment systems to the public cloud.
While the EBA believes that few financial technologies appear to be widely spread across the financial services sector, it notes there is significant and growing interest in FinTech. The EBA believes that institutions do not seem to trust new FinTech solutions, probably owing to security concerns. The EBA also notes regulatory and supervisory uncertainties around emerging technologies. When it comes to moving towards more technology-based solutions, the EBA believes the principal risks relate to dependencies on third party providers, a growing shift towards operational risk and the accentuation of IT risks (including cybersecurity and digital fraud).
Following publication of the Reports, the EBA will continue to monitor FinTech developments, carrying out additional work where appropriate. In relation to incumbents’ business models, the EBA is considering expanding its analysis to cover the wider FinTech ecosystem.
This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.