European Banking Authority Publishes First Outputs from Its FinTech Roadmap
07/03/2018Following the publication of its FinTech Roadmap in March 2018, the European Banking Authority has published two reports contemplated by the Roadmap.
The first report sets out the results of a thematic review of the impact of FinTech on the business models of incumbent credit institutions. The second report outlines the perceived benefits and potential prudential risks of seven FinTech use cases.
The EBA has also established a FinTech Knowledge Hub for the sharing of information and experience and promotion of emerging trends among EU national regulators.
The Thematic Report is designed to provide an overview of the current FinTech landscape and changes that the EBA has observed in incumbent institutions' behavior in adopting financial technologies. The EBA also intends that the Thematic Report will help raise awareness and share knowledge of the main trends affecting business models and assist supervisors and other stakeholders in identifying and understanding the potential challenges to the sustainability of incumbents' business models. In the Thematic Report, the EBA analyzes in depth the main factors driving digitalization and technological innovation in incumbent institutions and identifies the four key drivers as: (i) rapidly evolving customer expectations and behavior; (ii) profitability concerns (driven largely by the low interest rate environment); (iii) increased competition from new entrants (such as digital-based institutions), other FinTech firms (such as FinTech start-ups) and technology providers, which are together impacting a number of business lines, in particular payment, settlement and retail banking business lines; and (iv) regulatory changes, in particular the revised Payment Services Directive and the General Data Protection Regulation.
The Thematic Report provides a high-level overview of the extent to which incumbents have so far adopted technology-enabled financial innovations, such as biometrics, open banking/API strategies, cloud, machine learning/big data and blockchain. It considers the changes to incumbent credit institutions' strategies, internal organization and operations that innovation requires. It explores how incumbents interact with FinTech in a range of ways, from investing directly into new entrant FinTech firms to in-house development of technological solutions. Finally, the Thematic Report sets out five key risk factors that may affect the sustainability of incumbents' business models. These are: (i) digitalization strategies that incumbent institutions pursue to keep pace with a 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 FinTech firms.
The Prudential Risks and Opportunities Report has been prepared by the EBA with an objective to raise awareness and share information within the supervisory community. It does not make any recommendations and the EBA stresses that the report should not be considered as favoring or discouraging the application of any particular technology. The report provides an analysis of seven selected FinTech use cases, outlining for each the current landscape, underlying technologies, potential benefits and the potential microprudential risks that engagement with the technology might generate. While ICT risk is prevalent through many use cases and could be perceived as the key risk, the use of innovative technologies can potentially create new microprudential risks and amplify others. In varying degrees, depending on the use case, these include third-party risk through dependencies on third-party providers, ICT-outsourcing risk, ICT security and data integrity risks and legal, compliance, reputational and conduct risks. Some use cases also give rise to data privacy and data protection concerns. The report does not purport to provide an exhaustive list of prudential risks. The seven use cases considered are:
(i) Biometric authentication using fingerprint recognition.(ii) Use of robo-advisors for investment advice.
(iii) Use of big data and machine learning for credit scoring.
(iv) Use of Distributed Ledger Technology and smart contracts for trade finance.
(v) Use of DLT to streamline Customer Due Diligence processes.
(vi) Mobile wallet with the use of Near Field Communication technology.
(vii) Outsourcing core banking/payment system to the public cloud.
The EBA will continue to monitor FinTech developments in line with its Roadmap and further outputs can be expected as its work progresses.
View the Thematic Report.
View the Prudential Risks and Opportunities Report.
View the EBA's FinTech Knowledge Hub.
View details of the EBA's FinTech Roadmap.
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