The European Banking Authority (EBA) has published two reports on financial technology (FinTech) in order to raise awareness on the potential prudential risks and opportunities from current and potential FinTech applications.

One report focuses on the impact of FinTech on incumbent credit institutions' business models, and the other on the prudential risks and opportunities arising for institutions from FinTech.

The EBA categorizes incumbent credit institutions as proactive, reactive, and passive, depending on the level of adoption of advanced technologies and their overall engagement with FinTech.

“Potential risks may arise both for incumbents not able to react adequately and timely, remaining passive observers, but also for aggressive front-runners that alter their business models without a clear strategic objective in mind, backed by appropriate governance, operational and technical changes,” the EBA said.

The first EBA report calls upon incumbent credit institutions to partner with fintech firms, which it believes would be a "win-win" situation.

In its second report, the EBA assesses seven use cases – the application of new technologies to existing financial processes, procedures, and services. This includes the use of biometric authentication using fingerprint recognition; use of robo-advisors for investment advice; use of big data and machine learning for credit scoring; use of distributed ledger technology (DLT) and smart contracts for trade finance; and use of DLT to streamline customer due diligence processes; among others.

The report noted that there has not been any significant implementation of sophisticated technologies by institutions so far, adding that this may be due to “security concerns and filtering the hype around FinTech.”

“From the prudential risks' perspective, there is a growing shift towards operational risk, arising mainly from the accentuation of ICT risks as institutions move towards more technology-based solutions,” the EBA said. “Dependencies on third-party providers, heightened legal and compliance risks and negative impact on conduct risk add to the overall increased operational risk. The potential efficiency gains and improved customer experience are currently the predominant potential opportunities while the changing customer behaviour is an important factor triggering institutions' interest towards FinTech.”