EBA, as the first products of its fintech roadmap, published a thematic report on the impact of fintech on incumbent credit institutions' business models and 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.
Report on the impact of fintech on incumbent credit institutions' business models. Based on the observations of EBA, incumbents are categorized 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. The report highlights that 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 concurs that currently the predominant type of relationship between incumbents and fintech is partnership with fintech firms, which is considered a "win-win" situation. The report sets out five factors that might significantly affect incumbents' business models from a sustainability perspective:
- Digitalization/innovation strategies pursued to keep up with the fast-changing environment
- Challenges arising from legacy Information and Communication Technology (ICT) systems
- Operational capacity to implement the necessary changes
- Concerns over retaining and attracting staff
- Increasing risk of competition from peers and other entities
Report on the prudential risks and opportunities arising for institutions from fintech. The report assesses seven use cases, under which new technologies are applied or considered to be applied to the existing financial processes, procedures, and services. The report aims to provide both competent authorities and institutions with useful guidance on such applications. The report found that 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 risk perspective, there is a growing shift toward operational risk, arising mainly from the accentuation of ICT risks as institutions move toward 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 the predominant potential opportunities while the changing customer behavior is an important factor triggering institutions' interest toward fintech. The report 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
- Press Release
- Report on Impact of Fintech on Business Models (PDF)
- Report on Risks and Opportunities from Fintech (PDF)
Keywords: Europe, EU, Banking, Fintech, Fintech Roadmap, Fintech Knowledge Hub, EBA
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