Basel Committee on Banking Supervision Issues Consultative Document on Implications of Fintech for the Banking Industry
As waves of innovative financial technology (fintech) continue to reshape the financial services landscape, banking institutions and their supervisors have invested significant effort in analyzing its impact and developing an appropriate response. On August 31, the Basel Committee on Banking Supervision (BCBS), the primary global standard setter for the prudential regulation of banks, weighed in. Through the release of a consultative document, Sound Practices: Implications of fintech developments for banks and bank supervisors, the BCBS identified 10 key observations, accompanied by 10 recommendations, for banks and bank supervisors to address the challenges posed by advances in fintech.
The report summarizes the main findings of a BCBS task force established to analyze developments in fintech and their impact on the banking industry. Quantifying the size and growth of fintech is difficult; among other reasons, most jurisdictions have not formally defined “fintech” (notably, the report includes a glossary of terms and acronyms related to the delivery of fintech products and services, and is the first attempt by the BCBS to provide a common definition in this space). Yet the significant number of financial products and services derived from fintech innovations and the trend of rising investment in fintech companies globally warrants attention. As the BCBS acknowledges, while the impact of fintech on banking remains uncertain, “that change could be fast-paced and significant.”
In its report, the BCBS observes that the rise of fintech innovation has resulted in “a battle for the customer relationship and customer data,” the result of which “will be crucial in determining the future role of banks.” To assess the impact of the evolution of fintech products and services, the BCBS identified five stylized scenarios describing the potential impact of fintech on banks. In addition, the BCBS assessed six case studies focused on specific innovations (e.g., big data, cloud computing, innovative payment services, and neo-banks), in order to understand the individual risks and opportunities of a specific fintech development through the different scenarios. The extent to which banks or new fintech entrants will own the customer relationship varied across each scenario. However, in almost every scenario, the position of the incumbent banks will be challenged. The BCBS finds that “a common theme across the various scenarios is that banks will find it increasingly difficult to maintain their current operating models, given technological change and customer expectations.”
In analyzing fintech’s potential impact, the BCBS analyzes previous waves of innovation in banking, such as ATMs, electronic payments, and the Internet. While each of these have changed the face of banking, the BCBS highlights two key differences as it concerns fintech’s potential impact: the current pace of innovation is faster now than in previous decades and the pace of adoption has also increased. As a result, the Committee warns, “the effects of innovation and disruption can happen more quickly than before, implying that incumbents may need to adjust faster.”
The BCBS stated that banking standards and supervisory expectations “should be adaptive to new innovations, while maintaining appropriate prudential standards.” Against this backdrop, the Committee concluded its report with 10 key observations and recommendations for consideration by banks and bank supervisors.
- The overarching need to ensure safety and soundness and high compliance standards without inhibiting beneficial innovation in the banking sector;
- Key risks for banks related to fintech developments, including strategic/profitability risks, operational, cyber and compliance risks;
- Implications for banks of the use of innovative enabling technologies;
- Implications for banks of the growing use of third parties, via outsourcing and/or partnerships;
- Cross-sectoral cooperation between supervisors and other relevant authorities;
- International cooperation between banking supervisors;
- Adaptation of the supervisory skillset;
- Potential opportunities for supervisors to use innovative technologies ("suptech");
- Relevance of existing regulatory frameworks for new innovative business models; and
- Key features of regulatory initiatives set up to facilitate fintech innovation.
By issuing this guidance, BCBS is prompting global regulators to address technological advancements and novel business models with the same sense of urgency that the banking and fintech industries are employing. It will be incumbent on the financial services industry – traditional and novel business models alike – to work together to inform and shape what those supervisory guidelines will look like.
Comments on BCBS’s consultative document will be accepted through October 31, 2017.