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How FinTech and Digital are Disrupting Banking and Regulation
Hedwige Nuyens, Managing Director,International Banking Federation
Today’s technologies are fuelling innovations that stand to deliver tremendous value to customers. Most FinTech activities leverage technology to provide, what is at its core, a fundamental banking service like lending or making a payment. The term FinTech—often used to describe the convergence of technology and financial services—is now the moniker used for technology-focused start-up companies, but new methods of customer interaction, data analysis, transaction processing and other traditional banking functions must not obscure the underlying reality that this process is inherent in banking.
Technological change not only results in new risks, but also opens up new opportunities for banks and their customers. Indeed banks, service providers, and FinTech firms are increasingly adopting and leveraging advanced technologies such as artificial intelligence, machine learning, advanced data analytics, distributed ledger technology, cloud computing and application programming interfaces.
Banks have adapted their business models significantly in the last five years. They have all become omni-channel, offering their services via traditional bank branches, self-service branches, phone, and online via desktop and mobile devices. They are available 24/7 through helpdesks, chat bots, mail, SMS, videoconference, and other forms of social media.
Banks partner with FinTech in many forms: in-house innovation labs & hubs, joint ventures, and acquisitions. This has fostered a lot of innovations. Lending platforms use crowd funding to underwrite loans and provide credit. Payments are faster and cheaper. Financial markets have evolved significantly due to high frequency trading. And investment is much more accessible with robo-advisors.
But banks have also been changing from the inside.
20 years ago the financial industry was dominated by traditional banks, mostly regulated country by country and supervised at the level of the legal entity of the bank
They reshape themselves to be able to move faster, become more agile and learn to think digital from the start. The innovation cycle must go faster. Automation and cloud solutions can help to reduce costs, offer real time operability and enhance the overall customer experience.
20 years ago the financial industry was dominated by traditional banks, mostly regulated country by country and supervised at the level of the legal entity of the bank.
Since then so called non banks have developed tremendously and FinTech entered the place, fuelled by the development of technology providers and Big Tech.
At first, some banks underestimated the impact of the technological changes and emerging FinTech. Others predicted the end of banks all together. Both groups were wrong. Banks very quickly started to cooperate with technology providers and with FinTech.
Big Tech provides many services such as cloud and distributed ledger technology that are indispensable for financial institutions and FinTech.
The banking industry wants a level playing field among all players, regardless of the kind of legal entity. This is called the ‘same-services/activities, same risks, same rules' principle, keeping high standards for consumer protection, market integrity and financial stability in a level playing field that supports fair competition and innovation. Banks have a longstanding reputation and expertise in managing risks. However, technology and the move to digital can increase some of these risks. There are a few areas in which cooperation across multiple geographic markets can be particularly important: maintenance and enhancement of cybersecurity, combating money laundering and terrorism financing with the aim to prevent risks for our society, and maintaining the strength and security of the international payments system. National regulation must protect client data and customer rights.
Regulators and supervisors are helping FinTech companies develop their activities and starting to regulate services. Regulatory sandboxes allow firms to test innovative products, services, and business models in a live market environment, while ensuring that appropriate safeguards are in place. They support the supervisors’ objective of promoting effective competition in the interest of consumers.
Supervisors are also increasingly using RegTech to increase the efficiency and effectiveness of their own work. Machine readable reporting is a good example of this. It means that Banks or FinTech companies are asked to report in a data format that can be read and processed automatically by a computer and immediately analysed making use of algorithms. This expands significantly the capacity and speed of control.
Regulators around the world are carefully monitoring the development of FinTech and Big Tech and are taking action where necessary. Due to the rapid pace of innovation, flexibility is needed to monitor developments in their market and respond quickly. Premature regulation may impede innovation; it risks failing to accurately capture appropriate activities as the market evolves. Setting the framework right will be essential to create a cross border ecosystem whereby banks and tech companies interact & compete while regulators and supervisors adapt their oversight, leading to better financial services for customers and higher added value for society.