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Webinar on the impact of FinTech on incumbent credit institutions’ business models

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The development of the financial technology infrastructure enabled by the technological breakthroughs in the recent last decades, in combination with the significant socio-economic trends and demographic shifts in the population, whereby consumers are now seeking easy access, choice, better control and speed, have led to today’s fast-paced technology-driven environment. These are important forces for credit institutions to rethink the ways they offer banking services and adjust their business models and strategies, combined with the motivation to seek more diversity in protecting and increasing their revenue sources and reducing costs in today’s low interest rate environment.

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Webinar on the impact of FinTech on incumbent credit institutions’ business models

  1. 1. EBA FinTech Knowledge Hub series: Webinar on the impact of FinTech on incumbent credit institutions’ business models Thursday, 11 October 2018 Presenters: Slavka Eley, Andreas Papaetis, Achilleas Nicolaou
  2. 2. EBA focus on FinTech 2 Contents Impact of FinTech on banks’ business models 1 Profitability landscape in the EU banking sector2 Key findings of the EBA thematic report3
  3. 3. EBA focus on FinTech 3Impact of FinTech on banks’ business models 1
  4. 4. 4 EBA priorities on FinTech Impact of FinTech on banks’ business models Taking account the feedback to the EBA's 2017 Discussion Paper on FinTech, and the new mandates for the EBA set out in the European Commission's FinTech Action Plan, the EBA has published on 15th March 2018 its FinTech Roadmap setting out its priorities for 2018/2019 along with an indicative timeline for the completion of these tasks. These priorities are:  monitoring the regulatory perimeter, including assessing current authorisation and licencing approaches to FinTech firms, and analysing regulatory sandboxes and innovation hubs in order to identify a set of best practices to enhance consistency and facilitate supervisory coordination;  monitoring emerging trends and analysing the impact on incumbent institutions' business models and the prudential risks and opportunities arising from the use of FinTech in order to enhance knowledge sharing;  promoting best supervisory practices on assessing cybersecurity and promoting a common cyber threat testing framework;  addressing consumer issues arising from FinTech, in particular in the areas of unclear regulatory status of FinTech firms and related disclosure to consumers, potential national barriers preventing FinTech firms from scaling up services to consumers across the single market, and assessing the appropriateness of the current regulatory framework for virtual currencies;  identifying and assessing money laundering/terrorist financing risks associated with regulated FinTech firms, technology providers and FinTech solutions.
  5. 5. Authorisation and Perimeter Issues Regulatory sandboxes and innovation hubs Impact on business models, prudential risks and opportunities Cybersecurity Consumer and Conduct Issues AML/CFT 5 EBA FinTech Roadmap Impact of FinTech on banks’ business models Authorisation and Perimeter Issues Regulatory sandboxes and innovation hubs Impact on business models, prudential risks and opportunities Cybersecurity Consumer and Conduct Issues AML/CFT EBA FinTech Roadmap
  6. 6. 2017  Report on Innovative uses of data  Recommendations on outsourcing to cloud service providers 2018  Consultation Paper on Guidelines on outsourcing arrangements  Report on the impact of FinTech on incumbent credit institutions' business models  Report on the prudential risks and opportunities arising for institutions from FinTech  Opinion on the implementation of the RTS on strong customer authentication and common and secure communication  ESAs report on Big Data  Joint ESAs Warning on Virtual Currencies  Joint ESAs Opinion on the use of innovative solutions in the customer due diligence processes 6 EBA work to date
  7. 7. 7 EBA FinTech Knowledge Hub You are invited to register to the EBA FinTech Hub: https://www.eba.europa.eu/financial-innovation-and-fintech/fintech- knowledge-hub/stakeholder-register/registration-form Impact of FinTech on banks’ business models
  8. 8. Profitability landscape in the EU banking sector 8Impact of FinTech on banks’ business models 2
  9. 9. 9  RoE at 7.2% in Q2 2018 is stable y-o-y, but up from 6% in Q4 2017. However, it is still below banks’ CoE (9-10%). Dispersion across banks is at its lowest point.  Main drivers of profitability in H1 2018 were: 1) lower cost of risk and 2) higher fee and commission income. Q2 2018 trends show a significant decrease of trading income y-o-y (one of the main drivers of RoE in 2017).  Net fee and commission income to total operating income increased for 4 consecutive quarters, at 28.6% (highest since Dec-14). Increase across all size of banks, but more evident in small size Source of all charts: (preliminary) RDB data Q2 2018. Impact of FinTech on banks’ business models Banks’ profitability improved compared to previous years RoE developments -35% -30% -25% -20% -15% -10% -5% 0% 5% 10% 15% 20% Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Net Fee and Commission income to total operating income
  10. 10. 10Impact of FinTech on banks’ business models but there is pressure on margins…and continuing pressure on efficiency Source of all charts: (preliminary) RDB data Q2 2018. Efficiency development (Cost-to-income ratio) 58% 60% 62% 64% 66% 68% 94 99 104 109 114 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 Jun-18 Numerator: Costs Denominator: Net operating income 1.40% 1.45% 1.50% 1.55% 1.60% 94 96 98 100 102 104 106 108 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 Jun-18 Numerator: Net interest income Denominator: Interest earning assets Net interest margin (rhs) NII and Net Interest Margin Developments  Banks core earnings (Net Interest Income) are further decreasing. Net Interest Margin has reached a record low at 1.43% in Q2 2018.  There are no signs of improving efficiency. In Q2 2018 costs to income ratio remained stable (y-o-y) at 63.8%.
  11. 11. 11Impact of FinTech on banks’ business models Increased importance on net fees and commission to increase profitability  Results of EBA RAQ July 2018, confirm drivers of profitability as net fees and commission income become increasingly important for banks, as they target this income stream in order to increase profitability in the short term. 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% a. Net interest income b. Net Fees and Commissions income c. Other operating income d. Operating expenses / costs reduction f. Other June 2018 December 2017 June 2017 December 2016 June 2016 December 2015 Q: What is your primary target for increasing profitability in the next 12 months?
  12. 12. But also cost reduction is an important factor 12Impact of FinTech on banks’ business models 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% a. Overhead reduction and staff costs reduction b. Outsourcing c. Off-shoring or near-shoring d. Cutting of non-profitable units. e. Increasing automatisation and digitalisation f. Other June 2018 December 2017 June 2017 December 2016 June 2016 December 2015  Also cost reduction plays a significant role in banks’ targets for increasing profitability in the near future.  Banks attempt to increase profitability by reducing overheads but also by heavily investing in digitalisation.  All banks participating in the EBA RAQ of July 2018, have stated their plans to reduce operating expenses and costs through increasing automation and digitalisation.  In the short-term, this comes with a cost in investing heavily in IT infrastructures and increasing investments related to Financial Technology. Q: How are you reducing operating expenses/costs?
  13. 13. Key findings of the EBA thematic report 13Impact of FinTech on banks’ business models 3
  14. 14. 14 EBA thematic report on the impact of FinTech on incumbent credit institutions’ business models In July 2018, the EBA has released a thematic report on the impact of FinTech on incumbent credit institutions’ business models, presenting its current observations and findings on the current (without foreseeing or intending to model scenarios for potential future development). This report is based on the following different sources of information, collected within the broader activities of the EBA FinTech Knowledge Hub: 1) Industry feedback to the EBA’s Discussion Paper on FinTech 2) Discussions/interviews with a sample of credit institutions 3) EBA Risk Assessment Questionnaire (RAR) 4) Discussions/interviews with competent authorities 5) Desk research Impact of FinTech on banks’ business models
  15. 15. Key drivers inducing changes in incumbents’ business models 15Impact of FinTech on banks’ business models Heightened competition *Source: VISA Profitability concerns 3 Regulatory changes 4 1 Customer expectations and behaviour: 2
  16. 16. 16 Which business line is mostly affected? Q: Impact of FinTech firms on banks’ current business lines Source: EBA RAR H2 2017 Impact of FinTech on banks’ business models
  17. 17. Key trends in reacting to FinTech 17Impact of FinTech on banks’ business models 1) Employing new technologies to transform internal processes – “digital transformation” component 1 1) Rethinking interaction with customers / enhancing customer experience through the use of innovative technologies – “digital disruption” component 2
  18. 18. 18 Status of adoption of financial technologies by incumbents  PSD2 is perceived as an opportunity with most institutions currently designing their open banking/API strategy  Relevant RTS is directly applicable from 14 September 2018 Open Banking / APIs Source: EBA RAQ H2 2018 (preliminary results) 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Cloud computing Digital/Mobile wallets Distributed Ledger Technology Big Data analytics Biometrics Artificial Intelligence Smart contracts EU banks’ level of involvement in the application of each technology In use / launched Pilot testing Under development Under discussion No activity Impact of FinTech on banks’ business models
  19. 19. 19 Investing in new entrant FinTech firms Developing internally Collaborating with other stakeholders Partnering with new entrant FinTech firms Current relationship of incumbents with FinTech Impact of FinTech on banks’ business models
  20. 20. 20 Current status: Incumbents favour partnerships with FinTech firms Institutions  Issue with existing IT infrastructure / IT legacy systems  Need to develop internal “innovative” culture and mindset / organisational transformation  Need to attract and maintain talent and skills  Customers trust banks compared to new entrants (mainly due to data protection concerns)  Strong on customer relationship providing the full value chain to customers with respective customer expectations and behaviour Partnering New entrant FinTech firms • Agile, flexible and familiar with technologies • Learn and grow through partnerships with banks • Through their interaction with banks, they receive funding, access to customers and distribution channels, visibility, and banking expertise (including legal, compliance and regulatory knowledge) • Do not currently provide the full value chain to customers Impact of FinTech on banks’ business models
  21. 21. LEGACY ICT SYSTEMS EXECUTION CAPABILITIES ACCESS AND MAINTENANCE OF TALENT COMPETITION 21Impact of FinTech on banks’ business models Risk factors impacting business models’ sustainability 2 3 4 5 DIGITALISATION STATEGIES1
  22. 22. 22 Proactive/ Front-runners • Ambitious or aggressive innovation strategies, high-targeted transformation projects accompanied unclear impact and risk assessments (aiming for first-mover advantage) • Well-thought and comprehensive strategies and targets with strong research orientation and focus on governance, organisational aspects, operations and risk management PROACTIVE Reactive • ‘Followers’ of technological developments, taking a ‘wait and see’ approach, with carefully defined strategies and steady-pace on internal changes • Institutions reacting to peer pressure, taking a ‘go with the flow’ approach in combination with the concern of staying behind. Passive • Lagging behind technological developments due to other significant priorities, slowly trying to catch up following customer changing expectations • Conservative/more traditional institutions reluctant to change In terms of the level of adoption of innovative technologies, engagement with FinTech, current digitalisation/innovation strategies, along with the respective stage of development, incumbent institutions seem to fall into three groups: REACTIVE PASSIVE Impact of FinTech on banks’ business models Status of FinTech adoption and engagement
  23. 23. 23 EBA FinTech contact details Website: www.eba.europa.eu/financial-innovation-and-fintech Email: fintech@eba.europa.eu Register here for the FinTech Knowledge Hub: www.eba.europa.eu/financial- innovation-and-fintech/fintech-knowledge-hub/stakeholder-register Impact of FinTech on banks’ business models
  24. 24. EUROPEAN BANKING AUTHORITY Floor 46, One Canada Square, London E14 5AA Tel: +44 207 382 1776 Fax: +44 207 382 1771 E-mail: info@eba.europa.eu http://www.eba.europa.eu

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