EBA warns banks of obvious threat from fintech
We kind of all know it but the European Banking Authority (EBA) has released its roadmap which warns banks to wake up to the threat from fintech.
In two publications, “Report on prudential risks and opportunities arising for institutions from fintech”, and “Report on the impact of fintech on incumbent credit institutions’ business models”, the EBA has assessed the risks and opportunities.
It says: “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.”
So do you want really. Be passive or aggressive. Both have risks in its view.
The report sets out five factors that might “significantly” affect incumbents’ business models from a sustainability perspective.
These are: (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.
In terms of opportunities, it says: “Currently the predominant type of relationship between incumbents and fintech is partnership with fintech firms, which is considered a ‘win-win’ situation.”
A lot of banks already know this. The number of stories we have published concerning banks working with fintechs is considerable.
As one example, and just reported today (4 July), London-based finance app Asto is out to help SMEs and will be launching in beta soon – with the backing of Santander.
Anyway, the EBA says: “No significant implementation of sophisticated technologies has been noted yet by institutions, possibly because of security concerns and filtering the hype around fintech.”
It notes that “dependencies on third-party providers, heightened legal and compliance risks and negative impact on conduct risk add to the overall increased operational risk”.
In addition, the EBA says: “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.”
Its next steps don’t seem very dramatic. It says Article 9(2) of the EBA’s Founding Regulation mandates it to monitor new and existing financial activities.
If you want to read all the details, the 39-page and 56-page EBA reports can be accessed here. Have fun.
(For example, in the “Report on prudential risks and opportunities arising for institutions from fintech”, it covers a lot of ground. This includes biometric authentication; robo-advisors for investment advice; distributed ledger technology and smart contracts for trade finance; and outsourcing core banking and payment systems to the public cloud.)
