EBA assesses risks and opportunities from FinTech and its impact on incumbents’ business models

18 July 2018

On 3 June 2018, the European Banking Authority (EBA) published two reports on:

  • the impact of FinTech on incumbent credit institutions’ business models
  • the prudential risks and opportunities arising for institutions from FinTech

Both reports  aim to raise awareness  on potential prudential risks and opportunities from current and potential FinTech applications and understand the main trends that could impact incumbents’ business models and pose potential challenges to their sustainability.

Specifically, the first report, on the impact of FinTech on incumbent credit institutions’ business models, highlights key EBA’s observations.

Incumbents are categorised into:

  • proactive/front-runners;
  • reactive; and
  • passive (in terms of the level of adoption of innovative technologies and overall engagement with FinTech).

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.

In addition, the report sets out five factors that might significantly affect incumbents’ business models from a sustainability perspective:

  • digitalisation /innovation strategies pursued to keep up with the fast-changing environment,
  • challenges arising from legacy ICT systems;
  • operational capacity to implement the necessary changes;
  • concerns over retaining and attracting staff; and
  • increasing risk of competition from peers and other entities.

The second report, on the prudential risks and opportunities arising for institutions from FinTech,  assesses seven use cases, where new technologies are applied or considered to be applied to existing financial processes, procedures and services.

It focuses on micro-prudential aspects, setting out potential 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.

The report aims to provide both competent authorities and institutions with useful guidance on the above applications.

For additional information, read the complete EBA press release here.