On August 31, the Basel Committee on Banking Supervision (BCBS) released a consultative document that presents “a forward looking perspective” on fintech and its potential impact on the banking industry. The report, titled “Sound Practices: Implications of fintech developments for banks and bank supervisors,” summarizes the findings of a BCBS task force established to analyze the implications of fintech’s development, particularly for supervisors and banks’ business models. The report explores future potential scenarios, summarizes several possibilities for risks and opportunities, and includes case studies focusing on “enabling technologies” and “fintech business models.” The report also outlines ten key observations and recommendations related to supervisory issues banks and bank supervisors should consider. These include the following:

  • While new technology and business model opportunities may arise due to the adoption of fintech, banks and bank supervisors should consider a “balanced approach” to ensure safety and soundness, consumer protection, and compliance standards (including adherence to anti-money laundering and countering financing of terrorism (AML/CFT) regulations) “without unnecessarily hampering beneficial innovations in financial services, including those aimed at financial inclusion”;
  • Banks must implement appropriate, effective governance structures and risk management processes to address key risks that may arise due to fintech developments, including strategic, profitability, operational, consumer protection, data protection, and AML/CFT risks, among others;
  • Banks should implement effective IT and other risk management processes that address the risks and implications of using new enabling technologies;
  • When using third parties, whether through partnerships or outsourced operational support, banks should maintain “appropriate processes for due diligence, risk management and ongoing monitoring” of that third party relationship;
  • Bank supervisors should cooperate with public authorities responsible for the oversight of fintech-related regulatory functions that are outside the purview of prudential supervision;
  • Bank supervisors should coordinate international cooperation between banking supervisors when fintech firms expand cross-border operations;
  • Bank supervisors should ensure that the knowledge, skills, and tools of their staff respond to the changes in technology, including by incorporating specialized skills as necessary to ensure effective oversight and supervision of new technologies;
  • Bank supervisors should study the ways new technologies can “improve supervisory efficiency and effectiveness”;
  • Bank supervisors should review existing frameworks (regulatory, supervisory and licensing) and consider whether they will strike the appropriate balance between “ensuring safety and soundness and consumer protection expectations” and “mitigating the risk of inadvertently raising barriers to entry for new firms or new business models”; and
  • Bank supervisors should evaluate the initiatives and frameworks established by their counterparts in other jurisdictions to determine whether similar approaches or practices would be appropriate.

Comments on BCBS’s consultative document will be accepted through October 31, 2017.