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Financial regulations 05 Mar 2018

10 considerations for fintech supervision

Top global banking regulators have shared their insights into the potential impact of fintech on the financial industry. A report by the Basel Committee on Banking Supervision analyzes how fintech can impact the banks and supervisors. This is something that, at least in the short term, may have been overstated. “Despite the significant number of financial products and services derived from fintech innovations, volumes are currently still low relative to the size of the global financial services sector,” says the report.

However, “banking standards and supervisory expectations need to adapt to accommodate these innovations, while observing appropriate prudential standards,” says the Basel Committee in its report titled “Sound Practices: Implications of fintech developments for banks and bank supervisors.“ The Committee sets forth 10 considerations that banks and supervisors should take into account when addressing the fintech sector.

1. The need to guarantee safety, soundness and high compliance standards without hampering innovation in the financial industry.

2. Greater consideration of the risks for banks brought about by fintech developments, including strategic, operational, cyber and compliance risks.

3. Implications for banks resulting from the use of innovative technologies.

4. Implications for banks of their increasing reliance on third-party service providers, through partnerships or the outsourcing of certain services.

5. Cross-sectorial cooperation between banking supervisors and relevant authorities from other sectors.

6. International cooperation between banking supervisors.

7. Adaptation of current supervisory skills to the new environment.

8. Possible opportunities for supervisors in connection with the use of innovative technologies (‘suptech’)

9. The adaptation of existing regulatory frameworks to accommodate new innovative business models.

10. Characteristics of the regulatory initiatives established to facilitate fintech innovation (for example, regulatory sandboxes).

The ‘fintech’ effect

Basel keeps a close watch over the quick development of fintech solutions in the financial industry. Not in vain, fintech investments keep increasing, especially in the U.S. market, where they reached $5.8 billion in the fourth quarter of 2017, according to KPMG.  Another report, also by KPMG, estimated the total investment in EU fintech at €1.4 billion during the third quarter of 2017.

The Basel Committee’s report concludes that, although the banking sector has undergone past episodes of great innovation, the fast adoption of enabling technologies and the rise of new commercial models pose an increasingly daunting challenge for the financial industry. However, according to Reuters, it doesn’t seem like the regulatory framework is going to be modified to help banks face this changes anytime soon.

The report takes into account the comments received by the Basel Committee on the previous version of this same document, which was open to public consultation in August 2017. In this initial version, the Committee already recommended banks to adopt balanced approaches to innovation.

Also, Basel recognizes that fintech offers an excellent opportunity to expand access to financial services, improve the banking service portfolio and lower their costs for customers. A the same time, the Basel Committee identifies a series of risks linked to the fintech phenomenon, including cyber-threats, data privacy and security breaches.