27 March 2018 (updated 13 November 2019)
For many of us, it’s now quite normal to pay for a coffee or transfer money using our smartphones. To provide these innovative services, banks make use of fintech.
Fintech – short for financial technology – is an umbrella term for any kind of technological innovation used to support or provide financial services. It is leading to many changes in the financial sector, giving rise to a range of new business models, applications, processes and products.
Fintech firms put technology-driven innovation at the core of their business. They may be particularly active in areas such as payment services, credit scoring and automated investment advice, using artificial intelligence, big data or blockchain.
Some new banks have business models that rely heavily on fintech. What sets these banks apart from traditional banks is the central role played by technology, the fact that they often have only a digital presence, and their innovative ways of reaching and interacting with customers. Automated loan approval, easy-to-use mobile apps, modern designs and a strong social media presence are some of the tools that these banks use.
At the same time, many existing banks are also exploring how they can use fintech. In some cases, they are partnering with – or even acquiring – fintech firms to transform their profile and provide innovative services and products.
With fintech, banks aim to improve the customer experience by providing enhanced products and services. Fintech can also help banks improve their internal processes.
All banks – traditional ones and those that use fintech – are exposed to various forms of risk. In principle, new technologies could improve the efficiency and resilience of both new and more established banks’ infrastructures, offering varied products and services to a wider spectrum of consumers. However, they could also accentuate certain existing risks.
It is the responsibility of the banks themselves – regardless of the business model – to put in place adequate risk management processes to address the risks they face. This includes emerging fintech-related risks. Supervisors will then take these into account when assessing banks.
The ECB and national supervisors follow a single overarching principle: “same business, same risks, same supervision”. In other words, we supervise euro area banks that use fintech in the same way as traditional banks. We are neutral about the technology used by banks, focusing instead on the specific risks involved.
The ECB is closely following technological innovation in the financial sector and any implications for banking supervision. In this context, we are assessing the impact of fintech and of competition from non-banks on banks’ business models.
Any entity that wishes to offer banking services within the euro area, regardless of its business model, must apply for a banking licence. Banking licences in the euro area are granted by the ECB.
Given the rising number of fintech firms applying for licences, in 2018 the ECB published a guide to assessments of fintech bank licence applications. The guide clearly explains how licences are assessed and helps supervisors to assess specific aspects of fintech business models. It should be read alongside the general ECB guides to assessments of licence applications and fit and proper assessments.