The emergence of fintech, the flourishing data economy, the growth of the crypto-assets market, and the rapid entrance of bigtech firms in the banking space are setting the stage for a new era in the finance world. But in order for these key trends and technologies to be exploited to their full potential, a regulatory environment that supports their safe and robust development is essential, according to Deutsche Bank.
In the second edition of its Regulation driving banking transformation whitepaper, the bank addresses the need for proper regulation in the rapidly evolving financial technology landscape, tackling some of the most urging topics in the financial services industry right now.
Here are five key takeaways from Deutsche Bank’s newly released whitepaper.
Big Data to fuel the data economy
The data economy, which refers to a digital ecosystem where data is collected, analyzed and exchanged between governments, companies, or other parties for the purpose of creating value for businesses and individuals, is set to bring many benefits to the financial services industry, including a better understanding of and response to customers’ needs, enhanced cybersecurity and reduced risk.
With data emerging as the new oil, the winners of the data economy will be those that excel in utilizing Big Data technologies to bring benefits to clients, while improving their businesses and saving money.
“Banks will go head-to-head with bigtech firms that have already made significant moves to harvest data from their non-financial services operations as a shot-in-the-arm for their ambitions in financial services,” Deutsche Bank predicts.
New regulatory challenges arise
In the data economy, regulators will have to marry the competing demands for further opening-up of data with those for data privacy. The goal here will be to satisfy industry participants’ growing appetite for data collection, all the while figuring out how best to ensure the ethical use of data, and avoid data privacy breaches and anti-competitive behaviors.
This will require a delicate approach, and the creation of a regulatory environment that builds trust in data sharing and usage, the paper says.
Bigtechs and incumbent banks are mutually reliant on each other
The large established tech companies, or bigtechs, have recently begun entering the financial services industry, and though it is often said that they represent the largest threat to incumbents, banks and bigtechs actually need one another.
Currently, partnerships are particularly prominent in the field of payments, but are also visible in the supply chain finance (SCF) space. Cooperation also takes place with respect to data storage and analytics.
Furthermore, even though some of the largest bigtech companies such as Facebook, Google and Amazon, already offer financial services, they still often require the services of traditional, licensed banks to help facilitate this.
“Dependencies will grow in both directions. Just as banks will increasingly turn to technology specialists to provide solutions to underpin their operations, so fintech and bigtech will remain dependent on incumbents, with traditional bank accounts and payment systems remaining at the core of how they build their financial products offering,” the report says.
Competition will drive innovation
The evolving landscape of collaboration, reciprocal service dependency and competition between incumbent banks, bigtechs and fintechs promotes the drive towards digitalization in the industry. This dynamic will spur innovation, leading to greater efficiency, convenience, as well as improved client service. Clients will be the ultimate winners.
“The role of fintech and bigtech in the financial industry will only gather momentum,” the report says. “The interactions between incumbent banks and new entrants will continue to deepen, driving further innovation in the banking sector and enhanced services to clients.”
Crypto-assets unlikely to become mainstream any time soon
Although crypto-assets have the potential to support innovation and drive efficiency, it is unlikely that these will become mainstream any time soon. Part of the reason for that is regulation.
“The long-term benefits of crypto-assets remain compelling,” the paper says. “Yet, though some jurisdictions are moving in the right direction, the regulatory certainty enjoyed by traditional assets is still not a reality for all types of crypto-assets. This makes dealing in them subject to uncertain risks. Additional steps need to be taken not only by the regulators, but the industry itself. We are therefore only at the beginning of the journey.”
