The opportunity to comply and compete
In 2009, Paul Volcker, former chairman of the United States Federal Reserve System, said that the only relevant financial innovation in the previous 20 years had been the ATM machine. These days, when the Chinese digital bank Ant Financial is able to grant consumer credit in three minutes without human intervention, Volcker surely won’t think that’s true. The digital revolution wave has added a good number of disruptive technologies to the financial industry: advanced data analysis, artificial intelligence (in its machine learning and natural language processing applications), Blockchain, cloud services, application programming interfaces, cryptography, biometry…
Their level of maturity is variable, but all of these technologies have an unquestionable potential or actual impact in the relationship of financial entities with customers and in their business model.
The consequence (or, in some cases, the cause) is the advent of new competitors, which, under the labels of Fintech (an acronym for Financial Technologies that describes a new business ecosystem in the sector) and Bigtech (major technology companies), are changing the rules of the game.
Along with these transformations related to technology, the global financial crisis, which started in 2008, has brought on a deep reflection on the effectiveness of supervision policies and a substantial reform of the sector’s regulatory architecture. Within a relatively short time, the Basel Conventions (in versions III and IV) have been approved with a global scope, along with the Capital Requirements Regulation and Directive (also with different versions), the Bank Resolution and Recovery Directive, the Single Supervisory Mechanism and the Single Resolution Mechanism in Europe, among other initiatives.
The process has culminated in 2018 with the coincidence of the effectiveness of new regulations on financial conduct (the MiFID 2 directive), data protection (the GDPR regulation), payment services (the PSD 2 directive) and accounting (IFRS 9 standard), which has caused much tension among financial entities, both due to the imperative of complying with new standards on time, under penalty of suffering sanctions, and due to the high consumption of technical, human and economic resources required. This confluence of new regulations, which are not always coherent, and their consequent impact to the supervisory ecosystem, has caused the appearance of new derivations of the fintech acronym, such as Regtech (the combination of regulation and technology) and Suptech (supervision and technology). We could say that the new technologies are even invading the dictionary. This document is a laboratory of ideas on the intersection of regulation and technology in the banking industry to calibrate its transformative effect in different business-related aspects: supervision, payment methods, financial conduct, financial crimes and digital regulation, all concerned with issues that plague cybersecurity and data management and protection. The results of this reflection, which may condition the immediate future of the financial industry, are the following:
· Emerging technologies open financial entities to many possibilities, but their deployment is still scarce and uncertain. Their level of maturity is diverse and their application to banking continues to be complex. Not all technologies (not even the most promising ones, such as Blockchain) can be used for everything and credit institutions must still explore the market, test new practical applications and critically select the solutions that are the most adequate to each need. In this process of trial and error, it is essential for regulators and supervisors to support the application of advanced technologies with flexible initiatives that allow for the risk-free identification of the best international practices, as is the case of sandboxes (innovation areas free from ordinary regulatory requirements).
· New technologies can be a major ally to enable compliance with new regulations. Functions such as aggregating data on risks (necessary to comply with capital and liquidity requirements, as well as those of regulatory reporting), scenario analysis (indispensable in stress tests), or the automation of communication treatment (essential in customer protection standards) are performed in a much more efficient manner with the help of proper technological solutions. The advantages go both ways.
· From the banking standpoint, emerging technologies reduce costs, mitigate risks and free up capital that can be used for more productive and profitable purposes. From the regulatory standpoint, these technologies offer greater information and analysis quality, which may be extracted in a faster and more efficient manner, consequently reducing systemic risks.
· The strictness of a few recent regulations generates friction in the relationship between financial entities and their customers, and new technologies help smooth out these issues. Let us consider, for instance, the nuisances that may be caused by processes related to the Know Your Customer (KYC) data collection, which supposes a significant increase in requirements, or the surveillance that companies have to perform regarding customer operations to avoid illegal transactions. Technologies such as machine learning, robotics, biometry, Blockchain or Big Data make the customer’s life easier, at a time in which the customer is no longer a passive player and has taken the reins in relationships with companies.
· Furthermore, customer experience is a competitive factor of the highest order, especially because consumers no longer compare exclusively financial entities, but rather consider the ease of use and the top-tier service offered by major technology companies. The combination of regulation and advanced technologies generates room for innovation, facilitating the organization of financial entities from a strategic standpoint, and is an instrument to increase their productivity, rendering the decision-making process more efficient and improving business management. A clear example of this is the payment market, one that is most affected by the regulatory change.
· The advent of new non-financial competitors (such as Amazon, Alipay and Apple), which base their business on the management and exploit of their database, hinders the maintenance of the banking model, but is also an incentive for traditional credit institutions to employ emerging technologies to make customer data become profitable and discover new entry flows into a new era, characterized by open banking.
· Normative novelties are also an opportunity to create a more efficient internal governance structure, with a non-fragmented vision of the regulatory landscape and a focus on risk management based on better-quality information.
Peter Drucker, one of the main thinkers of business technology, said: “The greatest danger in times of turbulence is not the turbulence — it is to act with yesterday’s logic.” It is not about predicting the future, but rather about how to contribute to its creation.