The Bank for International Settlements (BIS) recently set up a task force to consider new technologies and its impact on current banking models. In its latest consultative report, it called on banks to cooperate with each other and with public authorities in order to keep abreast with technological developments and minimize potential threats.
The report notes that the current position of incumbent banks will be challenged in almost all scenarios. Consequently, they will find it more and more difficult to maintain their current operating models due to customer expectations and technological change.
The report points out that a 2015 research by McKinsey & Company estimated that between 20 percent and 60 percent of profits and between 10 percent and 40 percent of revenues from retail banking could be put at risk by fintech startups in the next 10 years. However, some market observers viewed this as a positive development.
The BIS report advises banks to avoid the risk of losing clients to fintech startups by investigating and exploring new technologies with a view to improving their efficiencies. Notably, the report points out that financial technology has the potential to lead to or increase operational, strategic, compliance and cyber risks. Banks should, therefore, invest in strong governance and risk management processes while at the same time not stifling innovation in the sector.
Financial institutions should also vet all outsourcers thoroughly because they stand to bear the blunt of any liability incurred during operations. To achieve the best outcomes, banks should work cooperatively with public authorities across borders because fintech developments will definitely raise issues that go beyond prudential supervision to public policy areas like consumer protection and data privacy.
The report has the following fintech scenarios for the future;
Digitization of incumbent banks
Banks have the opportunity and capability to modernize and digitize their operations by adopting technologies such as cloud computing, distributed ledger technology, and artificial intelligence.
Replacement of incumbent banks
It is possible for new players to be too agile in their ability to push the boundaries of technology. In such a case, fintech startups or other tech companies with banking branches could successfully carve out some market share.
Coexistence of incumbent banks with fintech startups
Both incumbents and startups could carve out their own niche so that consumers choose which services to get from either. The consumers could decide to have multiple financial services providers and not stick with one institution for all their needs.
The rise of relegated banks
Technology companies and fintech startups could offer a variety of financial services from diverse groups of providers through the use of front end customer platforms. They could use incumbent banks for their banking licenses and provide core commoditized banking services such as deposit taking and lending. In such a case, the relegated bank may keep a balance sheet risk of the activities or not keep one at all depending on the contractual relationship.