BASEL, Switzerland—The Basel Committee on Banking Supervision has released a report that outlines implications of fintechs on the banking industry.
Titled Sound Practices: implications of fintech developments for banks and bank supervisors, the report, notes Lexology, outlines 10 key implications:
The nature and scope of banking risks may change as new technologies emerge: Though bank supervisors must ensure they remain vigilant in maintaining the safety of the banking system, they should also be alert to the possible opportunities offered by beneficial innovations in the financial industry, the report states.
Key risks for both incumbents and new fintech entrants include strategic risk, operational risk, cyber risk and compliance risk: Supervisory programs will enhance bank governance structures and risk management processes in relation to fintech including associated new business model applications, processes or products.
Banks, service providers and other fintech firms are increasingly utilizing innovative technologies to deliver innovative financial products and services: These technologies, such as artificial intelligence, distributed ledger technology and cloud computing, are also new sources of risks. As such, banks should ensure they have risk management processes and control environments in place, the report says.
While banks may increasingly rely on third-party service providers for operational support of technology-based financial services, the risks and liabilities remain with the banks: Banks should implement supervisory programs to ensure that banks have appropriate risk management practices and controls over these outsourced services.
Fintech developments will impact other sectors beyond banking: Banks should communicate with the relevant regulators and public authorities to ensure compliance with laws and regulations, the report advises.
Many fintechs, particularly those engaged in payments have cross-border operations: Banks can enhance global safety and stability by improving supervisory coordination and information-sharing where appropriate.
Fintech has the potential to change traditional banking business models and the delivery of financial services: Bank supervisors should reassess their current supervisory models and resources, including staffing and training programs in relation to new technologies and innovative business models, the report states.
Technologies that offer efficiencies and opportunities for fintech firms and banks can also be utilized for the improvement of supervisory efficiency and effectiveness: Supervisors should investigate and explore the potential of new technologies to improve their methods and processes.
Current regulatory, supervisory and licensing frameworks predate the emergence of technology-enabled innovation: Where appropriate, current supervisory frameworks should be reviewed in light of new and evolving fintech risks, the report advises.
Some jurisdictions have improved fintech interaction through innovation hubs, accelerators and regulatory sandboxes: Information sharing and learning from various approaches and practices could be used when deciding whether to implement similar approaches or practices, the report concludes.