The Basel Committee on Banking Supervision (BCBS) has argued banks need to prepared for the possible implications of fintech saying that, despite the plethora of opportunities technological change could bring, they also present strategic, cyber and liquidity-related risks to the banking sector.
The consultative document, Implementations of Fintech Developments for Banks and Bank Supervisors, said banks and banking supervisors have a responsibility to maintain the same level of risk management control standards, despite of their increasing reliance on fintech.
The paper focused on forward-looking scenarios and industry predictions about emerging fintech. Drawing from the collection of evidence, the Basel Committee warned that the industry faces risks and “needs to ensure safety when considering compliance standards that do not inhibit beneficial innovation”.
However, the document also alludes to the new opportunities fintech can also bring, not only for consumers, banks, the banking system and bank supervisors, but also for consumer protection, allowing for greater transparency and tighter controls over spending and budgeting.
That said, there is plenty of uncertainty in terms of managing and monitoring risks brought about by recent and rapid fintech developments. The document suggests that fintech will likely lead to more competition for banks, which, given the aftermath of the 2007 financial crisis, could be a bad turning point for the industry.
According to BCBS, one risk is that “existing financial institutions stand to lose a substantial part of their market share or profit margin if new entrants are able to use innovation more efficiently and deliver less expensive services.”
Cyber risk is also likely to increase in all future estimations. The report said: “New technologies and business models can increase cyber risk if controls do not keep pace with change, the paper discusses.”
The document went on: “Although liquidity can increase efficiency, it can also affect customer loyalty and increase the volatility of deposits. This in turn could lead to higher liquidity risk for banks.”
Elsewhere, the fintech element of distributed ledger technology (DLT), which is arguably still in its infancy, could be a concern, as some solutions still display limited scalability and a lack of data privacy and industry standards.
In light of these risks, BCBS suggested that there is an increased need for cooperation across the sector.
The paper recommended: “Banks should ensure they have effective IT and other risk management processes that address the risks of the new technologies and implement the effective control environments needed to properly support key innovations.”
Banks should also “ensure they have effective IT and other risk management processes that address the risks of the new technologies and implement the effective control environments needed to properly support key innovations”.
The report also suggested that more cooperation within the industry would only increase stability and security.
“This coordination may provide more consistent and effective supervision related to areas such as consumer protection, data protection, competition and cyber-security”, it said.
The committee also stressed the importance of supervision of third-party service providers, stating some are guilty of a “degree of oversight”.
It said: “Third parties that provide critical services to large numbers of financial institutions may pose systemic risk to the financial sector and raise the concerns of bank supervisors as to the safety and soundness of their operations.”
Finally, BCBS found that, while some bank supervisors had supervision programmes in place, the majority only supervise third-party service providers “under limited circumstances”.
BCBS proposed that it is paramount for future stability in the sector for supervisors to share information on policies and practices among regulators, not just among themselves.
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