The European Banking Authority (EBA) published the first products of its FinTech Roadmap, namely (i) a thematic report on the impact of FinTech on incumbent credit institutions’ business models and (ii) a thematic report on the prudential risks and opportunities arising for institutions from FinTech. Both reports fall under the wider context of the newly established EBA FinTech Knowledge Hub and aim to raise awareness within the supervisory community and the industry on potential prudential risks and opportunities from current and potential FinTech applications and understand the main trends that could impact incumbents’ business models and pose potential challenges to their sustainability.
Report on the impact of FinTech on incumbent credit institutions’ business models
Based on the EBA’s observations, incumbents are categorised into (i) proactive/front-runners, (ii) reactive and (iii) passive in terms of the level of adoption of innovative technologies and overall engagement with FinTech. Potential risks may arise both for incumbents not able to react adequately and timely, remaining passive observers, but also for aggressive front-runners that alter their business models without a clear strategic objective in mind, backed by appropriate governance, operational and technical changes.
The report sets out five factors that might significantly affect incumbents’ business models from a sustainability perspective: (i) digitalisation/innovation strategies pursued to keep up with the fast-changing environment, (ii) challenges arising from legacy ICT 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.
The report concurs that currently the predominant type of relationship between incumbents and FinTech is partnership with FinTech firms, which is considered a “win-win” situation.
Report on the prudential risks and opportunities arising for institutions from FinTech
The report assesses seven use cases, where new technologies are applied or considered to be applied to existing financial processes, procedures and services. The report aims to provide both competent authorities and institutions with useful guidance on such applications. It focuses on micro-prudential aspects, setting out potential prudential risks and opportunities that may arise from each use case:
- 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 and smart contracts for trade finance;
- Use of distributed ledger technology to streamline customer due diligence processes;
- Mobile wallet with the use of near-field communication;
- Outsourcing core banking/payment system to the public cloud;
No significant implementation of sophisticated technologies has been noted yet by institutions, possibly because of security concerns and filtering the hype around FinTech. From the prudential risks’ perspective, there is a growing shift towards operational risk, arising mainly from the accentuation of ICT risks as institutions move towards more technology-based solutions.
Dependencies on third-party providers, heightened legal and compliance risks and negative impact on conduct risk add to the overall increased operational risk. The potential efficiency gains and improved customer experience are currently the predominant potential opportunities while the changing customer behaviour is an important factor triggering institutions’ interest towards FinTech.
Legal basis and next steps
Article 9(2) of the EBA’s Founding Regulation mandates the Authority to monitor new and existing financial activities. This obligation extends to all areas of the EBA’s competence, including in the field of activities of credit institutions, financial conglomerates, investment firms, payment institutions, and electronic money institutions.
The EBA will continue monitoring the developments in line with the pace of employment of new technologies in financial services and, where appropriate, it will perform additional work to enhance supervisory consistency and facilitate supervisory coordination.