Strong governance key to banks’ fintech adoption, says BCBS

As fintech gains ground on traditional institutions, Basel group makes recommendations for how banks could preserve their customer relationships

Effective governance and risk management measures are key for banks to safeguard customer relationships amid the rise of fintech, according to a major new report from the Basel Committee on Banking Supervision (BCBS).

Based at the Bank for International Settlements, the Committee has trained its lens on the potential effects of fintech at a time when traditional institutions are forging ever-closer ties with new-wave financial technologies – whether hatched by external developers or created in-house.

At the heart of the report, the BCBS imagines five, potential scenarios of how fintech could affect the banking industry over the coming years – some of which hint at changes that could have significant impacts upon banks’ customer bases.

In brief, those scenarios are:

1. ‘Better bank’ Incumbents revamp their legacy systems with modern, digital client-interface platforms;
2. ‘New bank’ Incumbents are unable to survive the disruption, and are replaced by challenger banks built to operate in the digital environment;
3. ‘Distributed bank’ Financial services fragment among existing banks – whether incumbents or challengers – and specialist fintech organisations. That fragmentation will pave the way for numerous joint ventures;
4. ‘Relegated bank’ Incumbent banks have become commoditised service providers, while a cluster of new intermediaries own the customer relationships; and
5. ‘Disintermediated bank’ Banks have become irrelevant, as customers interact directly with individual financial services providers – for example, via distributed ledger technology.

“A common theme across the various scenarios,” the report points out, “is that banks will find it increasingly difficult to maintain their current operating models, given technological change and customer expectations.

“Industry experts opine that the future of banking will increasingly involve a battle for the customer relationship. To what extent banks or new fintech entrants will own the customer relationship varies across each scenario.”

However, it adds, “the current position of incumbent banks will be challenged in almost every scenario.”

With that in mind, the report recommends a number of steps that banks should put in place as fintech becomes more intrinsic to how they operate.

It says: “Banks should ensure that they have effective governance structures and risk management processes in order to identify, manage and monitor risks associated with the use of enabling technologies,” and the emergence of new business models and market entrants from the fintech sector.

Those structures and processes should include:

• robust strategic and business-planning procedures that allow banks to adapt their revenue and profitability plans, in light of the potential impact of new market entrants and technologies;
• sound, new product-approval and change-management measures that will appropriately address the evolution not only of technology, but of business processes, too;
• implementation of the BCBS’s Principles for the Sound Management of Operational Risk (PSMOR), with due consideration to emerging fintech developments; and
• monitoring and reviewing compliance with applicable regulations – such as those related to a) consumer protection, b) data protection and c) anti-money laundering/combating the financing of terrorism obligations – when introducing new products, services or channels.

On the question of outsourcing – which could become a much larger force in banking, as institutions hire greater numbers of contractors from the fintech realm – the report adds: “Banks should ensure they have appropriate processes for due diligence, risk management and ongoing monitoring of any operation outsourced to a third party, including fintech firms.

“Contracts should outline the responsibilities of each party, agreed service levels and audit rights. Banks should maintain controls for outsourced services to the same standard as the operations conducted within the bank itself.”

Read the full report here