July 08, 2019

EBA published a thematic report on the impact of fintech on the business models of payment and electronic money institutions in EU. The report focuses on the current trends and drivers; the different approaches to fintech, including their interaction with bigtech firms; and the level of implementation of innovative technologies. The report is in line with the priorities listed in the FinTech Roadmap and is based on information and data collected by EBA through its engagement with the supervisory community and the industry, including the broader activities of the EBA FinTech Knowledge Hub.

The report highlights that business models of payment and electronic money institutions are shaped and adjusted as a result of four key drivers: customer expectations/behavior, competitive pressure, technological developments, and regulatory changes. The current strategy of most institutions appears to be the expansion of their products and services and entrance to new markets by leveraging cross-border services, requesting credit institution or third-party provider licences, and/or embracing the new services provided under the revised Payment Services Directive or PSD2.  While there is a slight trend toward the internal development of products and services using fintech, without necessarily involving external partners, a significant number of institutions partner with fintech firms and technology providers for the development of innovative products.

Moreover, a number of bigtech firms have already obtained payment or electronic money institution licenses and the existing players expect them to participate more actively in the EU payments sector. Nevertheless, many institutions provide payment/e-money services to bigtech firms or acquire technology services and expertise from them for the development of innovative products. With bigtech firms posing a potential threat to the sustainability of the business models of payment and electronic money institutions, institutions are planning to focus on strengthening customer loyalty in case of increased participation of bigtech firms. The outlook of the payments sector is quite positive in terms of revenues and profitability, with an overall expectation for increased customer base and new or revamped products, accompanied by an increase in internal fintech developments and IT spending.

In terms of the level of implementation of innovative technologies, many institutions appear to mostly leverage cloud services and the development of digital or mobile wallets, with an increasing interest in the use of artificial intelligence, big data analytics, and biometrics. The rapid development of technology and use of data create new dynamics, such as the growing importance of a large customer base for network effects and big data analytics. Distributed ledger technology is still at an early stage of development, with the exception of crypto-assets applications, and appears to have potential applications in the area of money remittance and real-time payments. Notably, some institutions have concluded that this technology may not necessarily fit their products and services.

Furthermore, a comparison with the respective report on credit institutions, published by EBA in July 2018, may suggest a relationship between the growth of the payments sector and the disintermediation in banking, taking into account that incumbent credit institutions reported a negative impact on their payment-related revenues. Institutions face different threats and challenges, depending on their business models. The potential impact of active participation of bigtech firms, the uncertain impact of Brexit, and the key dependencies on banks and card processors are observed to be the key threats to the sustainability of institutions’ business models. In addition, a number of key challenges that need to be addressed relate to operational resilience and ICT security, operational capacity, regulatory changes, customer education, and acquisition and retention of skills and talent.

 

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Keywords: Europe, EU, Banking, PMI, Fintech, Business Models, Artificial Intelligence, Bigtech, Cyber Risk, EBA

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