RegTech, DLT and the evolution of smart payments

European financial institutions are facing an ever-evolving set of regulations aimed at maintaining stability, competition, and innovation in the digital economy. As a result, regulatory compliance increasingly necessitates a significant investment of resources toward updating internal processes and IT systems. This can have the effect of limiting the resources spent in other areas that generate bank revenue. In order to help banks overcome this challenge, a new subset of FinTechs (known as RegTechs) have begun working with financial institutions to facilitate more efficient and effective compliance processes. RegTechs leverage emerging technologies such as AI, machine learning, and distributed ledger technology (DLT) to lower costs, increase speed, and free up resources to enable deeper analysis of data. In addition, RegTech offerings can also help improve overall data quality, which can benefit both financial institutions and their customers. Ultimately, leveraging RegTech to improve compliance processes can enable financial institutions to better serve their clients and remain competitive in the digital economy.

The EBA’s Cryptotechnologies Working Group (CTWG) sees RegTech as an attractive area for the use of cryptotechnologies such as DLT and blockchain. The technology’s potential in improving the transparency, automation, speed, and resiliency of compliance processes within and between financial institutions and regulatory authorities mean that it may be suitable to helping banks overcome compliance challenges. This is particularly important for financial institutions today as margins tighten, and new regulations such as the revised Payment Services Directive (PSD2) and General Data Protection Regulation (GDPR) are already in force. In 2018, CTWG members from leading European financial institutions and software vendors explored how cryptotechnologies could improve two areas of vital importance to regulatory compliance: KYC checks and regulatory reporting. By enabling banks to more easily access and exchange customer information and automate regulatory reporting, cryptotechnologies could provide financial institutions with the flexibility that allows them to meet current and future regulatory challenges and continue to innovate and compete in a safe and secure way.

Evolving technology, regulations, and consumer expectations are not just affecting how banks approach regulatory compliance. Indeed, these changes are threatening banks’ overall business models and customer relationships. Increased automation in the economy, coupled with the rise of new technologies such as DLT and AI, are moving society in a direction where autonomous devices increasingly interact with each other without manual intervention. In the sphere of payments and banking, this trend (often referred to as the “Internet of Things” or IoT) will require financial institutions to develop mechanisms that enable automated, instant payments, particularly micropayments. Today’s banking infrastructure is not yet suited for the growing “smart” economy, and European banks are struggling with strategies to transform their IT and business models to embrace this change.

By exploring the world of smart payments, the EBA can build on the progress of the CTWG and help its member institutions define an approach to leverage emerging technologies to transform themselves into digital players in the “smart” economy. Achieving this will require an understanding of the elements that a smart payments landscape would need to have to make it work, including infrastructure, standards, cryptographic security, identity, access, and currency. By collaboratively exploring these topics and defining the mechanisms and needs for banks to enable a smart economy, the EBA can make a forward-looking contribution to payments in an era where financial institutions are fighting to retain customers and stay relevant in the digital economy.