Basel ponders fintech threat to incumbent banks

The Basel Committee on Banking Supervision has acknowledged the ‘fluid’ implications of fintech for the financial sector and offered a series of recommendations in a consultation paper released on Thursday.

The 49-page document, Sound Practices: Implications of fintech developments for banks and bank supervisors, is the result of a BCBS-mandated task force analysing financial technology innovations globally and emerging business models in the banking sector.

The paper presents the main findings from the work conducted, highlights 10 key observations and recommendations for banks and supervisors and calls for comment before the end of October.

“Although fintech is only the latest wave of innovation to affect the banking industry, the rapid adoption of enabling technologies and emergence of new business models pose an increasing challenge to incumbent banks in almost all the scenarios considered,” the BCBS said in a statement.

In recent years, sizeable investments have been made by both banks and venture capital funds, indicating the expectations for substantial change.

“As fintech developments remain fluid, the impact on banks and their business models is uncertain,” the consultation paper noted.

“While some market observers estimate that between 10–40 per cent of revenues and 20–60 per cent of retail banking profits are at risk over the next 10 years, others claim that banks will be able to absorb the new competitors, thereby improving their own efficiency and capabilities.”

Customer battle

A common theme across the various scenarios in the consultation paper is that banks will find it increasingly difficult to maintain their current operating models, given technological change and customer expectations.

“Industry experts opine that the future of banking will increasingly involve a battle for the customer relationship,” it states. “To what extent banks or new fintech entrants will own the customer relationship varies across each scenario. However, the current position of incumbent banks will be challenged in almost every scenario.”

The task force identified 10 key observations and related recommendations on the following supervisory issues for consideration by banks and bank supervisors:

  1. The overarching need to ensure safety and soundness and high compliance standards without inhibiting beneficial innovation in the banking sector;
  2. The key risks for banks related to fintech developments, including strategic/profitability risks, operational, cyber and compliance risks;
  3. The implications for banks of the use of innovative enabling technologies;
  4. The implications for banks of the growing use of third parties, via outsourcing and/or partnerships;
  5. Cross-sectoral cooperation between supervisors and other relevant authorities;
  6. International cooperation between banking supervisors;
  7. Adaptation of the supervisory skillset;
  8. Potential opportunities for supervisors to use innovative technologies ("suptech");
  9. Relevance of existing regulatory frameworks for new innovative business models; and
  10. Key features of regulatory initiatives set up to facilitate fintech innovation.

To read the report in full, click here. The Committee welcomes comments on all aspects of the consultative document and these should be uploaded by Tuesday 31 October 2017.

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