12 July 2018

EBA reports on FinTech’s risks, opportunities and impact on incumbent businesses

The European Banking Authority (EBA) published two FinTech-related reports in July 2018. The reports are the first output of the EBA’s FinTech Roadmap (see this June In context article). They address two of the roadmap’s priorities: prudential risks and opportunities arising for institutions from FinTech, and FinTech’s impact on incumbent credit institutions’ business models. These reports are meant to enhance knowledge development and knowledge sharing among competent authorities and other stakeholders. This work falls under the EBA’s broader activities of the EBA FinTech Knowledge Hub.

Even though no guidelines or recommendations have been issued yet, clients should be aware of these reports as the EBA expects institutions to assess the potential impact of FinTech use cases on their risk profiles and to appropriately balance the prospective benefits.

Report on the impact of Fintech on the business models of incumbent credit institutions

This report focuses on the current landscape, trends and main FinTech-related factors affecting business models. It does not include model scenarios for future developments.

The EBA finds that currently the predominant type of relationship between incumbent institutions and FinTech is one of collaboration, as there is a shared interest in embracing emerging technologies. Incumbents provide FinTech firms with capital and funding, banking expertise, brand visibility and a broad customer base. In turn, FinTech firms bring innovative ideas, a more customer-centred approach, and familiarity with emerging technologies.

The EBA notes that FinTech firms do not seem to directly compete with incumbent institutions, despite many FinTech firms reaching maturity in terms of scale of operation and profitability.

Based on the collected information, the EBA has identified the following five factors as potentially affecting the sustainability of incumbent institutions’ business models:

  • digitalisation/innovation strategies that incumbent institutions pursue to keep up with a fast-changing environment
  • challenges arising from legacy ICT systems
  • operational capacity to implement the necessary changes
  • concerns over attracting and retaining staff
  • increasing risk of competition from peers and other entities. The quality of the digitalisation and innovation strategies that incumbent institutions have rolled out in an effort to jump on the FinTech bandwagon, and the incumbents’ ability to properly implement those strategies in a timely manner, are considered to be the most important factors in determining whether the current challenges will be successfully embraced.

Report on the prudential risks and opportunities arising for institutions from Fintech

The second EBA report aims to raise awareness, within the supervisory community and the industry, of current and potential FinTech applications and the associated prudential risks and opportunities. It intends to inform competent authorities or institutions without making recommendations.

In this report, the EBA discusses the application of seven use cases, setting out their potential prudential risks and opportunities. The EBA finds that institutions are currently not widely implementing financial technologies. Possible reasons for this may be caution over security concerns, regulatory and supervisory uncertainties around emerging technologies, and incumbents filtering the marketing and hype around FinTech.

Another observation by the EBA is that from the prudential risks’ perspective, there is a shift towards operational risk following the overall increase in change brought about by the development and use of FinTech. The initial phase of the introduction of new technology faces hiccups, including a lack of technical skills, shortage of expert staff, and the inadequacy of technology infrastructures; all of which could be contributing to this potential shift in operational risk. And as institutions move towards more technology-based solutions, ICT risk increases accordingly. Finally, dependence on third-party providers (also see this month’s In context article on outsourcing  touching on the single point of failure leading to amplified ICT outsourcing risk), heightens legal and compliance risks, and a negative impact on conduct and reputation risk add to the overall increased operational risk.

However, the EBA also sees potential opportunities, such as efficiency gains and improved customer experience. Together with changing customer behaviour, these two opportunities also appear to be the key drivers that trigger institutions’ interest in FinTech.

What’s next?

In line with its roadmap, the EBA will continue to monitor FinTech developments and, taking into consideration the public feedback received on its FinTech Discussion Paper, perhaps expand the focus of its analyses to cover the wider FinTech ecosystem.

The link to both reports, the press release and related information can be found here.