Can regulations keep up with major transformation in banking sector, driven by technology’s disruption? What is needed to be a winner in the digital economy? Graham Buck talks to Polina Evstifeeva, Head of Regulatory Strategy, New Ventures for Deutsche Bank’s Corporate Bank, who will present Deutsche Bank’s latest white paper on regulation driving banking transformation at Sibos London 2019
The transformation driven by new technologies in the financial services sector is relentless. It requires regulation to respond promptly to market developments, such as Facebook’s planned 2020 launch of its own global cryptocurrency, Libra. The way in which regulators respond will define the trajectory of such change and define the shape of an emerging new financial industry. Knowing the next turn that regulation will take helps in keeping abreast of such a fast-moving environment.
Deutsche Bank’s white paper, “Regulation driving bank transformation” was published in October 2018 and is now supplemented by the just-published second edition. Its lead author, Polina Evstifeeva will discuss the latest report’s findings at a panel discussion on day one of Sibos 2019.
The data economy
The first edition of this paper released in 2018, outlined the regulatory environment – and the challenges within it – pertaining to the use of artificial intelligence (AI), open application programming interfaces (APIs), cloud and blockchain. These technologies were selected for their potentially transformative effect on financial services – much of which can be attributed to their ability to enable more effective collection, storage and analysis of the vast and rapid flow of data.
The second edition suggests that realising the potential of these technologies will rely on rich and relevant data sets (BigData) being available, as well as winning the trust of clients who must be comfortable in sharing their personal data with service providers. Regulations play an important role in unlocking the potential of Big Data in banking, which fuels the so-called “data economy” – the first topic of this year’s edition.
This year’s report notes that data localisation requirements and the confinement of clients’ data to individual services providers are a clear hindrance for the financial industry. “Where data sets about the same client are spread across various institutions, their consolidation for analytics is highly problematic,” says Evstifeeva. “Although Open Banking and GDPR, are a step in a right direction, they have their limitations as none of these currently provide a universal approach to enabling the subjects of data to transfer all data sets about them from one institution to another”.
Another trend that is going to impact financial industry is the emergence of FinTechs and BigTechs. With massive balance sheet strength and access to an extensive client base, BigTechs “may prove equally as disruptive as FinTechs”, particularly as they both challenge and ignore established workflows in the financial sector in their readiness “to force tectonic shifts in business models”.
The latest report comments that it is unsurprising the emergence of FinTechs and BigTechs in financial services has drawn the attention of regulators, given their potential for radically transforming the financial markets. Authorities around the world have demonstrated that they intend to support the innovation in financial industry driven by these new entrants, through the introduction of regulatory sandboxes, innovation hubs and a range of licensing regimes that allow the provision of selected financial services without a need for a full banking licence.
While regulators are upbeat in terms of their plans for fostering further innovation in financial services through supporting new participants, the report notes that they are also vigilant to potential risks. One of such examples appearing on the regulatory radar is the trio of data analytics, network externalities and interwoven activities – dubbed ‘DNA’ by the Bank for International Settlements (BIS) – which underpin BigTech’s distinct and unique business models. As Evstifeeva explains: “The concern centres on whether the current regulatory environment accounts for such business models; or rather if there is a regulatory gap open to exploitation when it comes to competition and data protection.”
Another example lies in the area of use of cloud by financial institutions, driving concerns with regulators about the dependence on a small number of critical suppliers. At the same time, the report suggests, the introduction of any regulation should be aligned with that concerning the provision of cloud services to other industries, so as not to put the financial services industry at a disadvantage.
The third trend covered by this year’s edition of the white paper is crypto-assets. Not surprisingly, these have also moved onto the regulatory agenda as there are now more than 2,000 and the top 10 cryptocurrencies have an estimated market capitalisation of nearly US$230bn – a twentyfold increase in less than six years. “Regulators have made a major effort to provide clarity on crypto-assets, but uncertainty and gaps remain,” says Evstifeeva. “This has, inevitably, persuaded many market participants to adopt a “wait and see” strategy.”
The road ahead
The report concludes that all these trends could alter incumbent players’ business models and even financial market structure, promising a new era for the financial industry. Its players should not wait for regulators to show their hand –the industry will need to adapt to these new realities immediately by leveraging innovative technologies to create bespoke solutions and bring additional value to clients. With high levels of client trust and years of financial service experience, banks are well-placed to take on this challenge.
Evstifeeva adds: “Our Sibos panel session will be covering a lot of ground in just 30 minutes and David Bannister, a senior analyst from Aite Group’s wholesale banking and payments team, is also presenting his group’s findings on the impact of bank digital transformation.” The session will be moderated by Brian Caplan, editor of The Banker magazine.
Polina Evstifeeva is speaking 13:00 to 13:30 on 23 September at Sibos London 2019 which takes place at the ExCel Centre.
Head of Regulatory Strategy, New Ventures for Deutsche Bank’s Corporate Bank
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