The EBA’s report on the fintech impact on business models identifies digital transformation and digital disruption as the two major trends of digitalisation projects being pursued by incumbents. In particular, the report has identified potential risks for institutions that are not able to react adequately to innovative technologies in a timely manner, as well as for aggressive front-runners that alter their business models without a clear strategic objective, backed by appropriate governance, operational and technical changes. The report sets out five factors that may significantly impact on the sustainability of incumbents’ business models, specifically:
∙ strategies pursued to remain in step with a fast-changing environment;
∙ challenges arising from legacy ICT;
∙ operational capacity to implement the necessary changes;
∙ staff retention and hiring; and
∙ increasing competition from peers and other entities.
The EBA’s report on the prudential risks and opportunities arising for institutions from fintech is intended to raise awareness of current and potential fintech applications among supervisors and the industry. It is intended to provide a balanced analysis of associated microprudential aspects without making recommendations, and discusses seven use cases where fintech solutions are applied to existing financial processes, procedures and services, in particular:
∙ biometric authorisation using fingerprint recognition;
∙ robo-advice for investment advice;
∙ use of big data and machine learning for credit scoring;
∙ use of distributed ledger technology (DLT) and smart contracts for trade finance;
∙ use of DLT for customer due diligence;
∙ mobile wallets; and
∙ outsouring core banking and payment systems to the public cloud.
The report may also be applicable to other processes, procedures and services, where the same underlying technologies are used. Overall, the EBA has identified a growing shift towards operational risk, relating to ICT risks, dependency on third-party providers, heightened legal and compliance risks, and conduct risks.
Source: Eva Maydell, Neno Nenov, Policy Advisor to MEP Eva Maydell