Canadian banks are some of the most technologically advanced globally and have been rapidly partnering with FinTech firms, as well as adopting their own innovations. As Canada’s resolution authority, CDIC stays current with and considers the implications of FinTech developments in banking.
The Basel Committee on Banking Supervision (BCBS) has set up a task force on FinTech, aimed at following developments, providing insights and exploring its implications for supervisors and banks’ business models. The BCBS task force’s “Sound Practices” paper considers potential scenarios and how they may impact the future of the banking industry—and has led to 10 key observations about the impact of FinTech on the banking industry and recommendations on supervisory issues:
- The nature and scope of banking risks will change with the growing adoption of FinTech. With both new risks and new opportunities for banks and bank supervisors, both groups should maintain a balance between ensuring the safety of the banking system and minimizing the risk of inhibiting innovation.
- Key FinTech-related risks for banks include strategic risk, operational risks, cyber-risk, and compliance risk. To manage and monitor these new risks, banks should ensure they have effective governance structures and risk management processes in place.
- Banks, service providers, and FinTech firms are increasingly adopting new technologies to deliver innovative products and services. Effective IT and risk management processes are critical for ensuring the risks of these technologies are addressed.
- Banks have increasingly been outsourcing operational support for FinTech services to third-party providers. Banks should ensure they have processes for due diligence, risk management, and ongoing monitoring of any operations outsourced to third parties, with processes in place that hold them to the same standard as operations conducted within the bank itself.
- FinTech developments will raise issues beyond the scope of traditional bank supervision. Supervisors will need to cooperate with other public authorities responsible for regulatory oversight related to issues such as data privacy, data and IT security, consumer protection, competition and anti-money laundering compliance.
- Several FinTech firms already operate in multiple jurisdictions and will likely continue to expand cross-border operations, especially in the area of wholesale payments. International cooperation between supervisors on cross-border FinTech activities is essential.
- FinTech has the potential to change traditional bank business models, with implications for supervisors. Current supervision models should be assessed to ensure continued effective oversight, including to ensure that the knowledge, skills, and tools of their staff remain relevant.
- Financial technologies can improve supervisory efficiency and effectiveness. Supervisors should explore and share technologies to improve methods and practices.
- Legacy regulatory frameworks may create the risk of unintended regulatory gaps when new business models emerge or result in unintended barriers to entry. Supervisors should review frameworks to ensure they appropriately balance safety and soundness with mitigating the risk of inadvertently raising barriers to entry.
- Jurisdictions/agencies have implemented strategies to improve interaction with innovative financial players and to facilitate new technologies and business models. Supervisors should share experiences and best practices and consider implementing these approaches or practices.
As always, CDIC must be vigilant in finding emerging risks and analyzing how they could impact Canadian depositors. As part of maintaining a high level of preparedness, CDIC will continue to actively monitor the increasing profile of FinTech and any risks to our member institutions that may be associated. The emergence of FinTech presents a new challenge for CDIC that will require cooperation with both domestic safety-net agencies, as well as foreign authorities.
The full BCBS FinTech task force paper is available on the BIS website.