|Alan Bainbridge||The banking industry continues to experience unprecedented levels of disruption and technological innovation is part of that, although it is giving rise to opportunities and challenges. Today Victoria is going to help us demystify some of the question around FinTech and how the banking industry is responding in that sector. Victoria, how are the banks – why is it working for them and why are they engaged so much in FinTech over the last recent years?|
|Victoria Birch||Well I think banks have also been very receptive to technological developments, whether it was the introduction of ATMs or the use of electronic data interchange or, more recently, some of the changes in online banking. I think, at bottom, a bank’s key infrastructure and assets are its IT and data and so it’s hardly surprising that technology developments would be so attractive to them. But what is so significant at the moment is that there are a number of key new technologies that have come to the fore that many people believe have the potential to fundamentally change both banking operations and the way in which banking services are provided and now, in particular, what I’m thinking about here are some of the developments in things like artificial intelligence, big data, smart contracts and distributed ledger technology. When you look at some of the purported benefits of these technologies, it’s eye-catching, whether we’re talking about things like increased operational efficiency, cost savings or significant improvements to the customer journey and the experience they have when dealing with banks.|
|Alan Bainbridge||What are the key trends that we’re seeing on the banking side?|
|Victoria Birch||Well, we’re seeing use cases being developed across the whole range of banking operations and services. It is probably fair to say that a number of these use cases are still very much at the proof of concept stage and we’re probably looking at another 18 months or even longer to see wider deployment. However, that said, we are already starting to see live and operational platforms so, for example, we’re seeing AI used in stress testing in the worlds of risk management, credit risk assessment and also in improving interactions with customers so, for example, the robo advisory models. Similarly in the distributed ledger world we’re also starting to see live platforms in the worlds of trade finance, supply chain and also post trade settlement.|
|Alan Bainbridge||How is that being implemented in practice?|
|Victoria Birch||Well the way banks are approaching fintech is actually one of the most interesting trends in this area, so it’s fair to say that internal R&D remains strong but we’re also seeing banks develop bespoke investment arms, looking to invest in FinTech businesses. We’re also seeing a number of collaborative joint ventures and partnerships with FinTech businesses and we’re also seeing banks get involved at a much earlier stage in a FinTech business’ life cycle so we’re seeing much more investment at an early stage in start-ups, for example. But moving to the other end of the spectrum, one of the other recent developments has been the development of industry-wide consortium. Now these are often made up of large numbers of banks who are traditional competitors coming together to build an industry-wide solution.|
|Alan Bainbridge||Do you see that trend continuing, given development?|
|Victoria Birch||The consortium model is an interesting one and there certainly are a number of key benefits to it, particularly in terms of risk and cost sharing. It’s also fair to say that if you are looking to build an industry-wide solution it is key to getting the main players in that market to come together to buy in to the platform as soon as possible in order that it gets marketability, scalability and credibility, which are often the ultimate goals, but you’re absolutely right, there are a number of risks with the consortium model which are becoming much more significant, particularly in the antitrust space. There are also concerns around the ownership models used, particularly in respect of things like IP, so it is fair to say that in a number of cases we are seeing interest tail off in the consortium model and it may become less prevalent in the next couple of years.|
|Alain Bainbridge||What are the key legal and practical issues for the banks to consider when they are establishing a FinTech platform?|
|Victoria Birch||Well, probably the main challenges are in terms of the lack of legal and regulatory precedent in this area and also the fragmented approach that regulators are taking across the globe to the technology. As we said, some regulators are more advanced than others and it’s common for banks to be actively involved in the various consultation processes that are currently underway. It’s also increasingly common for banks to even participate in some of the FinTech regulatory sandboxes that have sprung up in various countries. Banks will need to look at how the use of this technology will fit within their existing contractual and insurance framework. The use of the technology can change where liability sits in both a supply chain and also an operational process and the contractual framework in which it operates may need to be amended accordingly, and there may be new risks that arise that need to be insured.|
|Alain Bainbridge||Ok, so what you’re saying is there’s no ‘one size fits all’ that’s been adopted now globally by the banking industry and you’ve got to think continually about the recurring theme of legal and regulatory risk right at the outset?|
|Victoria Birch||Yes, that’s exactly right and I think one of the issues here is that often a solution will be developed by a technology or an operational team who may not be fully aware of some of the legal and compliance risks that need to be addressed. However, if you have the legal teams involved from the outset, it may be possible to include mitigants, or build into the actual design of the platform, ways in which these risks can be addressed before they materialise. This is what is known as ‘compliance by design’. It’s also very important to ensure that the design has suitable governance and audit mechanisms in place. This is to ensure that the platform remains fit for purpose throughout its lifespan and also, if any changes are required, that those can be addressed. For example, there may be a change in law or regulation or there may be a change in the commercial output that you’re looking for, so I think at bottom, the key here is that while these technologies have the potential to provide fundamental changes and significant benefits to banking organisations, it is very important that you continue to involve humans in the process to ensure that they remain suitably robust throughout their operational lifespan.|
Welcome to Banking horizons. With insights and commentary from across our global banks group, the series will explore some of the hot topics that we see as being front of mind for our bank clients.
The first episode sees Alan Bainbridge, partner and global head of banks, and Victoria Birch, FinTech partner, demystify some of the questions around FinTech and explore how the banks are responding to this issue.