Basel Committee predicts significant change for banks as fintech takes hold

In a new consultation document (49 page / 1,005KB PDF) analysing the current and possible future environment for banks, the committee concluded it will be increasingly difficult for banks to maintain their current operating models, given technological change and customer expectations.

The document includes 10 observations and recommendations which the committee said should be considered by banks and regulatory authorities to adapt to the changing environment.

The committee said the nature and scope of banking risks “may significantly change” over time as fintech is increasingly adopted, and the sector should consider how it balanced ensuring the safety and soundness of the system with minimising the risk of inhibiting innovation. 

Fintech expert Charlie Clarence-Smith of Pinsent Masons, the law firm behind Out-Law.com, said it was important to identify not only the perceived opportunities but also the inherent risks of new technologies such as distributed ledger technologies and artificial intelligence, particularly in relation to data protection and cybersecurity.

“There is no doubt that these technologies will have a significant impact on financial markets in the future,” said Clarence-Smith.

According to the Basel committee, the key risks associated with fintech are strategic/profitability risks, operational, cyber and compliance risks, which banks should mitigate through effective governance and risk management processes. This includes having appropriate due diligence processes to monitor operations sourced to third parties including fintech companies.

The committee recommended that bank supervisors should cooperate with other authorities responsible for oversight of functions related to fintech, in order to develop standards and regulatory oversight of the provision of banking services by banks or fintech companies. This cooperation should also be international as some fintech companies already operate in several countries.

The consultation document noted that supervisory authorities could also benefit from new technology such as artificial intelligence or cloud computing to improve their own methods and processes.

“Consideration also needs to be given to the continuing evolution of financial markets infrastructure,” said banking law expert Tony Anderson of Pinsent Masons. “Banks, bank supervisors, fintech companies and infrastructure providers are all being challenged to deliver workable solutions to the threats and opportunities now presented by fintech.”

The Basel committee is not the only body to be examining the potential impact of fintech on the banking sector. Last month the European Banking Authority also launched a consultation into fintech, following an EU-wide mapping exercise to improve its understanding of activity in the sector.

However the World Economic Forum, in a report published a fortnight ago, said technology firms like Amazon and Google had had more impact on banking systems than fintech to date.