As outlined in Part 1 and Part 2 of this series of posts giving updates on the European FinTech regulation agenda, there is a political will to create a comprehensive and harmonized regulatory framework for financial innovation within the Single Market. Part of the Road Map to a regulatory framework is a FinTech Knowledge Hub, which is meant to facilitate the exchange of information between European and national regulators, innovators and technology providers. The Knowledge Hub will foster a better understanding of the innovative landscape within the financial market.
Three and a half months after laying out its FinTech Road Map, EBA delivers first products that form part of the FinTech Knowledge Hub.
The two documents published on 3 July 2018 are reports on the impact of FinTech on incumbent credit institutions’ business models and on the prudential risks and opportunities arising for institutions from FinTech . Both reports contain an analysis of the impact of FinTechs on the current financial landscape and aim to raise awareness within the supervisory community and the financial industry of potential prudential risks and opportunities from current and potential FinTech applications. EBA wants to convey an understanding of the main trends that could impact incumbents‘ business models and pose potential challenges to their sustainability.
The first report, on the impact of FinTech on incumbent credit institutions’ business models, is an overview of the current market situation. It identifies four drivers for changes in current business models which are i. customer expectations and behaviour, ii. profitability concerns in the current low interest rate environment, iii. increasing competition and iv. regulatory changes such as PSD2 and GDPR. EBA identifies two main trends among the different digitalisation projects of the established institutions, namely digital transformation of internal processes and digital disruption by use of innovative technologies that aim to enhance customer experience. In the current FinTech ecosystem the prevailing model of interaction between FinTechs and incumbent institutions is one of collaboration and establishment of new relationships. In this way FinTechs can provide knowledge and ideas incumbent institutions have yet been too reluctant or too slow to establish themselves.
The second report, on prudential risks and opportunities arising for institutions from FinTech, is intended to raise awareness of and to share information on current and potential FinTech applications. The report focuses on seven use cases without making recommendations. The seven use 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 wallet with the use of Near Field Communication (NFC),
- Outsourcing core banking/payment systems to a public cloud.
EBA focuses mainly on operational risk aspects, but also considers opportunities that may arise from the seven applications. The report is informative and provides a good overview for competent authorities and institutions alike of the current landscape and the inherent prudential risks that the market should be aware of.