BIS - Sound Practices: implications of fintech developments for banks and bank supervisors

The Basel Committee on Banking Supervision today published its Sound Practices on the implications of fintech developments for banks and bank supervisors. The paper assesses how technology-driven innovation in financial services, or "fintech", may affect the banking industry and the activities of supervisors in the near to medium term.

The paper is based on the analysis of various potential future scenarios and draws on surveys with bank supervisors. Five stylised scenarios describing the potential impact of fintech on banks were identified as part of an industry-wide scenario analysis:

• The better bank: modernisation and digitisation of incumbent players
• The new bank: replacement of incumbents by challenger banks
• The distributed bank: fragmentation of financial services among specialised fintech firms and incumbent banks
• The relegated bank: incumbent banks become commoditised service providers and customer relationships are owned by new intermediaries
• The disintermediated bank: banks have become irrelevant as customers interact directly with individual financial service providers
• The paper focuses on three technological developments (big data, distributed ledger technology and cloud computing) and three fintech business models (innovative payment services, lending platforms and neo-banks).

Against this backdrop, current observations suggest that although the banking industry has undergone multiple innovations in the past, the rapid adoption of enabling technologies and emergence of new business models pose an increasing challenge to incumbent banks in almost all the banking industry scenarios considered.

In addition, the Committee surveyed its members' frameworks and practices in relation to fintech matters, and carried out a public consultation in August 2017.

Building on the supportive feedback, the Committee has further specified the nature and scope of its contribution and has enhanced its 10 key implications and considerations on the following supervisory issues:

1. the overarching need to ensure safety and soundness and high compliance standards without inhibiting beneficial innovation in the banking sector
2. the key risks for banks related to fintech developments, including strategic/profitability risks, operational, cyber- and compliance risks
3. the implications for banks of the use of innovative enabling technologies
4. the implications for banks of the growing use of third parties, via outsourcing and/or partnerships
5. cross-sectoral cooperation between bank supervisors and other relevant authorities
6. international cooperation between bank supervisors
7. adaptation of the supervisory skill set
8. potential opportunities for supervisors to use innovative technologies ("suptech")
9. relevance of existing regulatory frameworks for new innovative business models
10. key features of regulatory initiatives set up to facilitate fintech innovation