the eu fintech agenda; challenges and opportunities for banks · 31 january 2019 1st digital...

31 January 2019 1st Digital Banking & Payments Conference 1

The EU Fintech agenda; challenges and opportunities for banks

Marios Katsavras

Officer

Supervision Division

Central Bank of Cyprus

Overview

• Fintech Definition• The European Commission (EC)• The European Central Bank (ECB)• The European Banking Authority (EBA)• Challenges and opportunities for banks


Fintech Definition

FinTech is defined as “technology-enabled innovation in financial services that could result in new business models, applications, processes or products with an associated material effect on the provision of financial services”

(EBA Glossary for financial innovation - FSB)


European Commission - DSM


Source: European Commission

European Commission

COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE AND

THE COMMITTEE OF THE REGIONS

Fintech Action Plan: A more competitive and innovative European financial market

• Enable innovative firms and solutions to emerge/scale-up accross the EU• Support the uptake of new technologies and innovation• Enhance security and resilience of the financial sector

(COM(2018) 109 Final – 8.3.2018)


European Commission

Enable innovative firms and solutions to emerge/scale-up accross the EU

• Clear and converging licensing requirements => more coordinated approaches acrossthe EU/immediate gap for crowdfunding and peer-to-peer lending; crypto assets, ICOs

• Common/interoperable standards => cooperation/competition between marketparticipants

• Innovation facilitators => financial services legislation requirements challengeinnovative firms/innovation challenges supervisors => Stronger coordination by theESAs and ECB


European Commission

Support the uptake of new technologies and innovation

• Suitability review/technology neutrality of the existing EU framework

• Remove obstacles to the use of cloud services by financial providers/outsourcedactivities

• Blockchain: map and assess challenges in the EU; Blockchain Observatory & Forum

• Build capacity and knowledge of supervisors; EU FinTech Lab


European Commission

Enhance security and integrity of the financial sector

• Information sharing on cyber threats

• ICT security and governance requirements in all sectors

• Cyber resilience testing framework


European Central Bank

ECB approach / roles

• Oveerseer and policy maker• Operator/issuer of fiat currency• Supervisor (SSM)




In March 2018, following a publicconsultation, the ECB published a Guide toassessments of fintech credit institutionlicence applications. This ensures thatapplications are assessed in the samemanner across the entire euro area andthat specific risks will be assessedappropriately and proportionately

https://www.bankingsupervision.europa.eu/ecb/pub/pdf/ssm.201803_guide_assessment_fintech_credit_inst_licensing.en.pdf


ECB - Guide to assessments of fintech credit institution licenceapplications:

• Suitability of the members of the management body• Suitability of shareholders• Structural organisation (IT Risk etc)• Programme of operations• Capital, liquidity and solvency



ECB - Guide to assessments of fintech credit institution licenceapplications:

Structural organization:

• The assessment of IT-related risks• The assessment of outsourcing (cloud outsourcing)• The assessment of data governance


EBA: Fintech priorities 2018/19

EBA

Monitoring the regulatory perimeter.

Promoting best supervisory practices on

assessing cybersecurity

Identifying and assessing ML/TF risks

Addressing consumer issues

arising from FinTech

Monitoring emerging trends and

analysing the impact

Source: EBA


EBA – Published work15 March 2018:

• EBA’s Fintech Roadmap (Conclusions From The Consultation On The EBA’s Approach ToFinancial Technology (Fintech)

3 July 2018:

• EBA’s Report on the Impact of Fintech on Incumbent Credit Institutions’ BusinessModels

• EBA’s Report on the Prudential Risks and Opportunities arising from Fintech

7 January 2019:

• Joint report with ESMA & EIOPA - Fintech: Regulatory sandboxes and innovation hubs

9 January 2019:

• EBA’s Report with advice for the European Commission on crypto-assets


EBA - Cybersecurity


Source: EBA

EBA FinTech Roadmap (March 2018)


Source: EBA

EBA FinTech Knowledge Hub


Source: EBA

EBA – Penetration of new technologies in banks


Source: EBA

PSD2 is perceived as an opportunity with most institutions currently designing their open banking/API strategy

Relevant RTS is directly applicable from 14 September 2018

Open Banking /

APIs

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Cloud computing

Digital/Mobile wallets

Distributed Ledger Technology

Big Data analytics

Biometrics

Artificial Intelligence

Smart contracts

EU banks’ level of involvement in the application of each technology

In use / launched Pilot testing Under development Under discussion No activity

Use of big data and machine learning for credit scoring


• Artificial intelligence (AI): “the theory and development of computer systems able to perform tasks that traditionally have required human intelligence” (FSB*)

• Machine learning (ML): “a method of designing a sequence of actions to solve a problem, known as algorithms, which optimize automatically through experience and with limited or no human intervention” (FSB*)

• Big data (BD): the collection, storage and analysis of large and/or complex data sets, using a variety of techniques, including AI and ML algorithms.

Definitions

• Upscaling – by leveraging on a much larger pool of data, banks can provide credit scores for clients with limited or no credit history.

• Consistency – automation eliminates human bias.• Cost efficiency – helps banks to make more efficient use of big data.• Capital use efficiency – better customer value insight, targeting and

management due to increase of model accuracy, data deployment and analytics

Business Model Advantages

Use of robo-advisors for investment advice


• Robo-advisory is defined by the Basel Committee on Banking Supervision (BCBS) as: “applications that combine digital interfaces and algorithms, and can also include machine learning, in order to provide services ranging from automated financial recommendations to contract brokering to portfolio management to their clients, with limited human intervention or none. Such advisors may be standalone firms and platforms, or can be the in-house applications of incumbent financial institutions”.

Definitions

• Scope for increasing revenues – robo-advice services are often open to clients with a much smaller investable capital, especially when compared to more traditional private banking services.

• Lower cost of operations – robo-advisors often invest in Exchange Traded Funds or mutual funds which enable the construction of worldwide diversified portfolios.


Use of cloud computing


• Cloud computing is defined by National Institute of Standards and Technology (NIST) as a model for enabling “ubiquitous, convenient, on-demand network access to a shared pool of configurable computing resources (e.g. networks, servers, storage, applications and services) that can be rapidly provisioned and released with minimal management effort or service provider interaction”

Definitions

• Potential for cost reductions – turning a large capital expenditure into an ongoing operational expenditure.

• Flexibility and scalability – allowing banks to meet increasing and decreasing demand more efficiently.

• Cyber-security – cloud service providers could prove to offer more efficient and resilient IT systems than incumbent banks.

• Better client relationships – could improve banks’ ability to handle large volumes of data.


Reaction of banks

Impact of FinTech on banks - reaction:

(i) reduce costs, incl closing unprofitable units,(ii) increase digitalization, transformation or disruption(iii) outsourcing(iv) off-shoring or near-shoring, and(v)other, incl changes in governance, culture


Risk factors to business model

i. digitalisation strategies that they pursue to keep up with the pace of a fast-changing environment,

ii. challenges arising from legacy ICT systems, iii. operational capacity to implement the necessary

changes, iv. concerns over retaining and attracting staff, and v. increasing risk of competition from peers and

other FinTech firms.


The EBA identified five factors, that might significantly affect banks’ business models from a sustainability perspective. These relate to:

Interaction of banks with FinTech

Four different approaches have been identified on how banks approach and relate to FinTech:


Investing in new entrant FinTech firms

Developing internally

Collaborating with other

stakeholders

Partnering with new entrant

FinTech firms

Plus:i. Servicing new entrant FinTech

firms (banking)ii. Do nothing.

Relationship of incumbents with FinTech

Partnering with FinTech firms to embrace new technologies and transform their business

Both incumbents and FinTech firms are keen into forming partnerships, as currently it appears to be a “win-win” situation with the significant majority of incumbents formcommercial partnerships or participate in non-commercial partnerships (such as research or knowledge sharing) with FinTech firms.

Investing in FinTech firms either through venture capital investments or direct acquisitions

Collaborating with other stakeholders to develop and test new technologies

Developing in-house FinTech solutions

1

Incumbents invest in new entrant FinTech firms: i) via venture capital funds and ii) direct acquisitions. The majority appears to have a rather strategic view when theyinvest into FinTech firms as such investments do not seem to be short-hold. The EBA RAQ H2 2017 findings support the current trend of incumbents favouringpartnerships with FinTech firms compared to direct acquisitions.

2

Collaboration with peers and participation in/form of consortia is another way on how incumbents approach FinTech. This also includes engagement with academicand research institutions. Given the nature and status of the FinTech development, certain technologies such as blockchain require the collaboration of a number ofstakeholders to be effective, resulting to the creation of consortia.

3

With the aim of organic reinvestment and setting the grounds for embracing emerging technologies and new technology-based solutions, many incumbents haveinitiated a cross-business transformational process through increased ICT investments and digitalisation projects. Moreover, dedicated teams, digital labs,innovation incubators and sandboxes have been established in many incumbents in an effort to trigger internal motivation, bring closer business and IT functionsand leverage the technological development.

4

Source: EBA31 January 2019 1st Digital Banking & Payments Conference 25

FinTech key players

Regulators and Supervisors

INVESTORS

Source: EBA


Key forces changing banks’ business models

Heightened competition: The financial technology infrastructure created by the technological developmentsis leveraged by a number of new entrants (such as digital-based institutions, FinTech start-ups and technologyproviders) to design and provide financial services in innovative ways, adds competitive pressure onincumbent institutions and facilitate innovation in the banking sector.

Profitability concerns: In today’s low-interest rate environment, banks are seeking more ways toincrease their revenue sources and reduce costs through the use of new technologies.

3

Regulatory framework: The current regulatory landscape, with the recent implementation of GDPR and

PSD2, raises data protection and customer consent as key topics to be respected by all institutions. These poseanother multi-dimensional challenge for institutions from a technology, operational and strategy perspective.

4

1

Customer expectations and behaviour: Significant socio-economic trends and demographic shifts in the population,where consumers are now seeking easy access and speed. The best example is the “millennials” who are moving quicklytowards digital banking rather than walking into their banks' traditional branches.

2

Source: EBA


Proactive/ Front-runners

• Ambitious or aggressive innovation strategies, high-targeted transformation projects accompaniedunclear impact and risk assessments (aiming for first-mover advantage)

• Well-thought and comprehensive strategies and targets with strong research orientation and focuson governance, organisational aspects, operations and risk management

PROACTIVE

Reactive

• ‘Followers’ of technological developments, taking a ‘wait and see’ approach, with carefullydefined strategies and steady-pace on internal changes

• Institutions reacting to peer pressure, taking a ‘go with the flow’ approach in combination with theconcern of staying behind.

Passive

• Lagging behind technological developments due to other significant priorities, slowly trying tocatch up following customer changing expectations

• Conservative/more traditional institutions reluctant to change

In terms of the level of adoption of innovative technologies, engagement with FinTech, current digitalisation/innovation strategies, along with the respective stage of development, incumbent institutions seem to fall into three groups:

REACTIVE

PASSIVE

Status of FinTech adoption and engagement

Source: EBA31 January 2019 1st Digital Banking & Payments Conference 28

Thank you

Office address : 80 Kennedy Avenue, CY-1076 Nicosia, CYPRUSMail: P.O. Box 25529, CY-1395 Nicosia, CYPRUS

tel: +357 22714216Website: http://www.centralbank.cy

E-mail: [email protected]


the eu fintech agenda; challenges and opportunities for banks · 31 january 2019 1st digital...

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