As they seek to steer a course through the new fintech environment, financial services firms must beware the risks to their business models of both being too passive and too gung-ho in their embrace of new technologies, says a European Banking Authority report.
As part of its new Fintech Roadmap initiative, the EBA has published two reports: one looking into the impact of fintech on incumbents' business models and another on the prudential risks and opportunities arising from fintech.
Credit institutions can be split into three camps, says the EBA: proactive, reactive, and passive.
"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," warns the authority.
The report identifies four main drivers shaping incumbents' attitudes to changing business models: customer expectations and behaviour; profitability concerns; increased competition; and the regulatory framework.
On competition, banks are still keen to collaborate with fintech firms, seeing them as partners rather than threats. However, incumbents are worried about big tech firms, such as Facebook, Google and Amazon stepping on their toes.
Risks to business model sustainability mostly stem from incumbent institutions’ ability and capacity to adapt and their speed of doing so. Says the report: "This is particularly challenging for some large complex incumbents that have a very formal and slow governance structure, further restricted by legacy ICT systems or legacy non-performing assets."
The second EBA report explores seven technology use cases: biometric authentication; the use of robo-advisors; the use of big data and machine learning for credit scoring; the use of DLT and smart contracts for trade finance; the use of DLT to streamline customer due diligence; mobile wallets and NFC; and outsourcing core banking and payment systems to the public cloud.
So far, significant implementations of these sophisticated technologies has been missing, possibly because of security concerns and efforts to filter the fintech hype, says the EBA, adding: "From the prudential risks' perspective, there is a growing shift towards operational risk, arising mainly from the accentuation of ICT risks as institutions move towards more technology-based solutions."