Banks have clearly opted for financial technology, or fintech, to take on their new rivals, be they small startups or internet giants. However, the use of these technologies is more limited than it might appear. According to a study by the European Banking Authority (EBA), currently the majority of banks are focused on two lines of actions: biometrics for the identification and authentication of customers and the launch of mobile payment systems using NFC technology.
The EBA’s recent report analyzed the risks and opportunities of five fintech technologies: biometrics, machine learning, automated advice, DLT technologies and mobile payments.
The conclusions of the report are clear: despite the launch of a number of initiatives based on these technologies, their actual use is still not a reality in many cases. The EBA distinguishes three types of banks: those that have taken the lead with aggressive strategies, followers who have taken a wait-and-see stance and passive, or laggard, banks that have dragged their feet on change.
The EBA identifies a number of opportunities for banks offered by fintech, particularly in the area of customer experience. Financial technology also improves the competitiveness of institutions against more innovative players.
The report also covers the potential risks that these technologies entail. “The actual impact on the risk profile of institutions would significantly depend on the type of underlying technology and its implementation as well as the processes and business models adopted around them,” the report says.
Risks and opportunities of 5 key technologies for banks
- Biometrics. The EBA report specifically studied fingerprint identification of customers for mobile banking applications and concluded that the factors driving its use are user experience and security.
- ‘Machine learning’. The EBA notes that one of the main uses banks make of this technology is for credit scoring of customers. Its use can help risk management by banks but can also give rise to issues deriving from the unauthorized use of customer data and consumer protection.
- Automated advice. Banks are testing the area of robo-advisors by leveraging the use of algorithms in the niche market of retail banking customers previously without access to investment advice. Among the opportunities this technology affords, the EBA points to the speed and quality of service provided for customers. The risks lie in dependency on third parties and legal vacuums in its use among others.
- DLT technologies. The EBA notes initiative and pilots in the use of these technologies and blockchain in trade operations. DLT technologies help simplify bureaucratic processes such as contracts. The EBA also points to legal uncertainty as one of the factors in the way of its wider use. While the use of DLT technologies for customer identification and authentication helps speed up process, it comes with risks of a legal nature and those that have to do with customer privacy.
- NFC technology for mobile payments. The main benefit of this technology, one of those most adopted banks, is to offer customers easier means of payment, the EBA notes while warning of the dependency it creates on mobile phone manufacturers.