The views expressed below are his own and do not necessarily reflect those of the ECB
Would you like to tell our readers a bit about yourself and your professional journey to-date?
I think that I cannot consider my professional journey as linear. With a background in mathematics, a masters’ degree in computer science and more recently an MBA with a thesis on Distributed Ledger Technologies (DLT/blockchain), my first contact with banking was during the exciting period of the euro adoption, at a treasury back-office. After the Basel II adoption, I moved to positions related to operational risk management, AML and regulatory compliance, before passing to banking prudential supervision in a central banking environment.
My main duties were IT supervision and auditing of credit institutions, but also policy work and international taskforces, with a focus on retail payments and the innovations happening at that period, what we would today call ‘fintech’ – financial technology. In 2015, the next step was the European Central Bank, working on a big pan-European project of internal models, and then in 2018 continuing to the exciting world of fintech supervision.
How would you define fintech and how does the ECB supervise banks that use fintech?
Fintech – technological innovation used to support or provide financial services – has already become an integral part of our everyday life. It is now quite normal to apply and get instant approval for a loan on your mobile phone, even during a taxi ride that will be paid for using the same device. Behind the scenes, innovative technologies based on artificial intelligence (AI), big data and DLT/blockchain are gaining momentum.
In tandem with innovative regulatory initiatives such as the revised Payment Services Directive (that we usually call PSD2), these technologies are transforming banking and are improving the experience of customers. However, the use of innovative technologies by banks goes hand in hand with new risks, which need to be properly addressed. For instance, banks may use AI-based models for credit scoring, enabling better decision-making and access to a wider customer base, including previously underbanked/unbanked segments of society. These models can lack transparency, leading to the “black-box effect”.
Supervisors must therefore strike a balance: we should neither stifle innovation, nor let it run wild
We need to monitor the landscape, identify and assess new risks and then tackle them, while adhering to the core principle of “same business, same risks, same supervision”. In other words, regardless of whether banks use innovative or traditional methods, they should be subject to appropriate supervision, proportionate to their individual risk profile.
We remain neutral with regard to the specific technology that banks use, focusing instead on the risks involved and how to address them as effectively as possible. At the same time, we are closely following technological innovation in the financial sector as a whole, also assessing the impact on banks’ business models and competition from non-banks. The ongoing digital revolution provides opportunities for the development of new and innovative financial services by the private and the public sectors, but also brings potential risks to the financial system.
Talking about digital revolution, you have also been involved in policy work for both the Payment Services Directive (PSD) and the PSD2 since 2010. How does the PSD2 affect fintech?
The revised Payment Service Directive refers to payment services and payment service providers, aiming to improve the security of payment transactions, enhance consumer protection, foster innovation and also increase competition. For retail banking, the year 2019 was in practice a game-changer. With the last technical standards being implemented last September, customers can choose how and when to share their data with other competitor banks, but also with non-bank third party providers.
In theory, you could use just one mobile application to check the balance of all your European payment accounts and even initiate a payment from any of these. At the same time, technological developments have made big data, cloud services and artificial intelligence algorithms more accessible, increasing the value of these data. Banks are not the only payment providers in Europe, but for sure are important market players, with payments being a significant income source. Banks are pushed to innovate to stay competitive and avoid losing their contact with customers.
Against this background, we are adapting our supervisory approach towards banks to take on board the new landscape that PSD2 has enabled, also in anticipation of possible future developments. After all, innovation in payments can be considered a mature fintech area and has always been an integral part of central banking.
There is currently a discussion on central bank digital currencies (CBDCs), as part of the financial technological innovation and an increasingly cashless economy. What are your views?
Since we discussed about innovation in payments, the next logical step one could think would be to also evolve the means of payments. The technological progress and innovations in the financial industry have mobilised central banks and academics to analyse the merits of CBDCs that are accessible to the broad public. CBDC could allow citizens to use electronic central bank money directly in their daily transactions. It is evident that many central banks around the world, including the ECB, are exploring the potential costs and benefits of CBDCs.
A Eurosystem taskforce on CBDC is analysing opportunities and challenges of potential designs, including practical experiments in a simulated environment, and the findings are expected to be presented to the Governing Council soon. So far, there is no final answer on the purpose of CBDC for the specific situation of the euro area. CBDC issuance could be considered only if it serves a clear purpose for the public and the Eurosystem’s objectives. We must be ahead of the curve because there is clearly a demand out there that we must respond to.
How is the COVID-19 pandemic affecting fintech in banking?
Numerous predictions have been made over the years about when and how an increasingly digital society could provoke the technological transformation of traditional banks. The current pandemic has fast-forwarded us to the future. We have seen that banks have adjusted their operations, ensuring business continuity. It is evident that the crisis is acting as a catalyst to accelerate their already planned digitalisation efforts as well as the further transformation of their business models. It is still too early to tell how the post-pandemic landscape will look like.
Nevertheless, this crisis also clearly raises additional challenges for banks. As they transfer their processes to contingency environments, their exposure to cyber threats increases, as does the risk of IT failures. Banks’ IT systems must be resilient enough to withstand the current heavy reliance on remote working and servicing. The euro area central banks and supervisors are closely monitoring how technological change and innovation affect financial markets and banks.
We will continue to engage with the banking industry, in order to adequately tailor our approach and the goal remains: to ensure that the euro area banking sector is sound, competitive and ready for the future.
It is up to banks however to face this new reality, to shift to greater digitalisation of operations and step up their innovation efforts in order to meet changing customer demands, with adequate risk management procedures in place. If banks innovate responsibly, this would help them face the increased competition, and become more cost efficient, maintaining the sustainability of their business models.
Your areas of work for the ECB include, inter alia, Regulatory Technology (regtech). What are the benefits for the parties involved and what is the supervisory focus with regard to regtech?
Indeed, regtech is a subset of fintech. Among the multiple ways that banks use fintech solutions, regtech can facilitate the delivery of regulatory requirements and reporting, support compliance and enhance risk management. The compliance requirements for banks are numerous and across several areas. At the same time, regulatory changes are more than frequent. Banks implement regtech solutions to be more cost efficient, flexible, as well as to reach better decision making, among others via visualisation and enhanced analytics.
Our analysis on regtech focuses on the risks that banks could face and the aspects that we as supervisors should take note of. Banks may rely on regtech solutions provided by external providers. While this is not problematic as such, concentration risks could appear and banks should nevertheless maintain internal expertise to be able to fulfil their compliance requirements. Banks with activities in many jurisdictions might find it challenging having a suitable solution for all countries, compliant to the respective national regulatory frameworks. Coordination among supervisors could level the playing field, increase the clarity for market participants and enable economies of scale.
Where do you see the future of fintech a few years from now?
I would take my last point on international cooperation for regtech and say that it also applies more widely to fintech. Supervisors are ready to step up their game to tackle the new challenges arising from fintech. To reinforce its supervisory approach, we are pursuing an ongoing strategy, which involves adapting to new developments, receiving feedback from the industry and cooperating with regulators and other stakeholders.
As supervisors, wepay close attention to the impact of new technologies on banks’ business models and the related risks. The world is becoming increasingly digital and this is accelerated by the pandemic crisis. I believe that the spread of electronic identification technologies (eID) in the context of financial services, the growing interconnection of fintech applications with daily human activities, especially through the Internet of Things (IoT), the extensive use of innovative technologies by the supervisors themselves (Supervisory Technology – SupTech), regulatory sandboxes, but also the developments in quantum computing, will be some of the issues that will concern us more in the near future.
At the same time, the European Commission will soon publish the new five-year FinTech Action Plan, as well as several relevant legislative initiatives. Forward-looking banks and supervisors recognise that fintech is not merely a technology but a new banking reality that needs to be properly supervised. The aim is to ensure that the euro area banking sector is sound, competitive and ready for the future.