EBA takes a snapshot of fintech versus incumbent banks

The development of the financial technology infrastructure enabled by the technological breakthroughs in the recent last decades, in combination with the significant socio-economic trends and demographic shifts in the population, whereby consumers are now seeking easy access, choice, better control and speed, have led to today’s fast-paced technology-driven environment. These are important forces for credit institutions to rethink the ways they offer banking services and adjust their business models and strategies, combined with the motivation to seek more diversity in protecting and increasing their revenue sources and reducing costs in today’s low interest rate environment.

The potential disruption in the provision of financial services from the application of emerging technologies and the entrance of new players into the market appears to be forcing institutions to rethink their business models, as a potentially passive reaction may result in institutions’ current duties being executed and taken over by other, possibly new, players. Currently, four main drivers appear to shape and induce changes in incumbents’ business models, namely (i) customer expectations and behaviour, (ii) profitability concerns, (iii) increased competition and (iv) the regulatory framework.

Among the different digitalization projects pursued by incumbent institutions, the EBA identified two main trends, namely (i) digital transformation and (ii) digital disruption. Digital transformation involves a transformation of internal processes, and it aims to digitalize and optimize operations. Digital disruption is a change to the traditional banking market from its current form through the creation of a new market enabled by the use of innovative technologies, which includes new ways of customer interaction to enhance customer experience.

In embracing this change, incumbent institutions need to consider a number of aspects and consider the changes required in their corporate governance and operating models to implement their strategic goals. Incumbent institutions are at an advanced stage in launching online and mobile banking solutions, while there is an increasing interest and use of cloud computing and biometrics solutions. However, the use of big data, machine learning (and wider artificial intelligence) or blockchain solutions is mostly at an exploratory phase.

New entrants, although putting competitive pressure on incumbent institutions by threatening to reduce revenues primarily in payment and settlement and in the retail banking and business segment, could actually help to facilitate innovation in the banking sector, from stability and integrity perspectives. Incumbent institutions are keen to collaborate and establish relationships with other fintech firms, which is currently the prevailing model among the different ways that incumbents interact with fintech in general. In terms of investment, most incumbent institutions appear to take a rather strategic view when investing in other fintech firms (e.g. fintech start-ups), while investment through venture capital funds seems to prevail over direct acquisitions.

Risks to business model sustainability mostly stem from incumbent institutions’ ability and capacity to adapt and their speed of doing so, from strategic, operational and technological angles, to changing customer expectations and increasing competition, as well as their ability to address profitability concerns and new regulatory requirements. 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. Incumbent institutions consider that big tech firms have the potential to become significant competitors in the provision of financial services, as is evident from their increasing footprint in the financial sector.

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