Fintechs: risks and their impact on credit institutions’ business models

European Banking Authority (EBA)

The EBA published two reports on Fintechs on July 3rd. Both documents are the products of the EBA's FinTech Knowledge Hub and report on key issues in the Fintech sector. The first is a report on the impact of Fintech on incumbent credit institutions' business models, and the second is the EBA Report on the prudential risks and opportunities arising for institutions from Fintech.

Report on its impact on business models

Society has gone through huge technological change, which has had a direct impact on the banking industry. Above all, it has led to higher expectations and new behavior patterns among clients, tighter profit margins, increased competition and required amendments in the regulatory framework.

The report highlights two trends when tackling digitization programs: digital transformation, understood as a transformation of the internal processes that enable transactions to be optimized; and digital disruption, involving the creation of a new market using innovative technologies that includes new ways of interacting with the client in order to improve their experience.

Furthermore, according to the EBA, there are five factors that could have a significant effect on the industry's business models from the perspective of sustainability: the aptitude of the digitization and innovation strategies that well-established institutions pursue to survive in a constantly changing environment, the challenges arising from legacy ICT systems, the operational capabilities to implement the necessary changes, concerns about access to and retention of talented staff and, finally, increased competition from new entrants.

Report on the risks and opportunities of Fintechs

To illustrate the risks and opportunities implicit in the use of new technologies, the paper analyzes seven user-cases applicable to financial services: biometric authentication using fingerprint recognition, investment advice using robo-advisors, the use of big data and machine learning for credit scoring, Smart contracts for trade finance, using Distributed Ledger Technology (DLT) to streamline customer due-diligence processes, mobile wallets and uploading core banking onto the cloud.

The report concludes that although the commitment to Fintech involves potential risk that must be assessed and managed exhaustively, such risks could also turn out to be potential opportunities.