European banks need to balance fintech strategies

European banks face a financial technology (fintech) balancing act, according to the European Banking Authority (EBA), because there are potential risks for both fintech pioneers and laggards.

With the latest digital technologies, such as mobile apps and application programming interfaces (APIs), in full swing to provide access to financial services, the EBA is advising traditional banks not to miss the boat, but not to head into unknown waters too quickly.

In its latest report, part of its FinTech Roadmap, the EBA put traditional banks into three groups – fintech front-runners, those reactive to the digital technology revolution in the financial services sector, and those passive to it.

The authority said potential efficiency gains and improved customer experience are seen as the main opportunities of fintech, but it warned that there are risks to banks that aggressively pursue fintech models, as well as those that are reluctant to embrace it.

“Potential risks may arise both for incumbents not able to react adequately and timely, remaining passive observers, but also for aggressive front-runners that alter their business models without a clear strategic objective in mind, backed by appropriate governance, operational and technical changes,” said the EBA report.

The EBA said traditional financial services firms need to focus on certain areas to ensure their business models are sustainable. These include the challenges created by legacy IT systems, the operational capacity to implement changes, and retaining and attracting the right staff.

The report found that currently, the preferred model in the sector, which goes some way to avoiding risks, is fintech firms and traditional banks working in partnership – traditional banks have the regulatory approvals and expertise in banking, while fintechs offer the digital tech skills.

The EBA assessed case studies of the use of biometric authentication technology, robo advisers, big data and machine learning for credit scoring, distributed ledgers, mobile wallets using near-field communication (NFC), as well as outsourcing to the public cloud.

The report said security fears are somewhat keeping fintech in check. “No significant implementation of sophisticated technologies has been noted yet by institutions, possibly because of security concerns and filtering the hype around fintech,” it said. “From the prudential risks perspective, there is a growing shift towards operational risk, arising mainly from the accentuation of ICT risks as institutions move towards more technology-based solutions.”

European political institutions have also recognised the opportunities and challenges of fintech to organisations in all sectors. In March, the European Commission said its Fintech Action Plan is intended to align EU rules with rapid advances in new technologies, such as blockchain, artificial intelligence and cloud services.