1. 1. Technological innovation in the financial sector and implications for supervision Janko Gorter FIN-FSA Conference Helsinki, 4 October 2016 1
2. 2. What is FinTech? No common definition but consensus about key characteristics Organisations combining innovative business models and technology to enable, enhance and disrupt financial services Technologically enabled financial innovation that could result in new business models, applications, processes with an associated material effect on financial markets and institutions Computer programs and other technology used to support or enable banking and financial services The use of technology and innovative business models in financial services 2 Innovation in financial services, whether that means new products from new startups, or the adoption of new approaches by existing players where technology is the key enabler.
3. 3. Digital disruption: is financial services next to be overhauled by BigTech companies? 3 N E X T ? Uber, the worlds largest taxi company, owns no vehicles Facebook, the worlds most popular media provider, creates no content Alibaba, the worlds most valuable retailer, has no stock inventory Airbnb, the worlds largest accomodation provider, owns no real estate Spotify, the worlds most popular music service, owns no music rights
4. 4. Agenda Dutch FinTech landscape today Scenarios for the future Actions by supervisors/regulators 4
5. 5. FinTech players Alt. Finance Payments Asset management Data analytics Cryptocurrency Source: HollandFinTech 5 Insurance Compliance Personal finance Dutch FinTech landscape: rapidly expanding and already great diverse Risk management Identity Security Bank platforms
6. 6. 6 Omnichannel proposition (online, mobile and in shop) Global service via credit card networks, 150+ currencies accepted 250+ payment methods, including all major card schemes, mobile wallets such as Apple Pay and Android Pay, PayPall, and all other local methods. Data products that proactively inform Adyens merchants on revenue optimization Dutch FinTech case study: Adyen #19 Global FinTech list Traditional payment chain Adyens model
7. 7. DNB-AFM InnovationHub: variety of new FinTech propositions in the pipeline Based on first 3 months of Dutch InnovationHub (1 June 1 September) 7 Source: DNB 1 4 8 7 2 8 10 Type of businesses Bank (1) Insurance (4) Payment service provider (8) Platform (7) Investment (2) Other (8) For other supervisor - AFM (10) 18 3 10 9 Type of questions Interpretation regulation on new concepts (18) Business model (3) For other supervisor - AFM (10) Other (9)
8. 8. Lesson from previous tech-driven waves of innovation: beware of the hype cycle Failure rate of start-up FinTechs likely to be very high, comes with innovation 8 Source: Gartner
9. 9. 9 Looking ahead: three possible scenarios Source: DNB
10. 10. 10 Scenario1Adoption byincumbent Scenario2 FinTech Scenario3 BigTech Partnerships Acquisitions Own innovation Incumbent domestic Specialization Focus on specific parts Whole value chain Focus on whole chain Incumbent foreign Looking ahead: three possible scenarios 10
11. 11. How are the scenarios unfolding in practice? Some very preliminary views Asia: BigTech already dominating large parts of financial services - Alibaba Alipay: 450 million active users, 175 million transaction per day - Alibaba Yu'E Bao Fund: 260 million active users, +- 100 $bn. Assets under management - Alibaba/Ping an ZhongAn P&C insurance: users >370 million policyholders - Tencent WeChat payments: 700 million active users, 2nd in mobile payments after Alipay Scenario2 FinTech Scenario3 BigTech Scenario1 Incumbent Globally: Incumbents pick up pace adopting FinTech - ING/Scotiabank/Santander partnership with Kabbage - BBVA (minority) acquisitions of Simple, Atom, and Holvi - Ping An China controlling share in P2P-lender Lufax #11 global list Globally: Thousands FinTech startups founded in past years, boosted by VC money - FinTech startups have comparative advantages and disadvantages - Strengths: innovative, agile, built from scratch, scalable, for next generation, etc. - Challenges: regulation / risk management new, costly customer acquisition 11
12. 12. FinTech brings opportunities & risks: Supervisors need to strike the right balance Financial SectorBetter products, more choices, and lower prices due to competition Efficiency Increased diversity within financial sector reduces systemic risks Diversity Financial risks Lower profitability can give rise to solvency problems; liquidity risk (automatic funds allocation) Operational challenges in applying innovations in existing systems (for incumbents) Operational risks Data security (cyber risk), privacy risks, money laundering (bitcoin) Integrity risks Procyclicality, concentration risk Macro-prudential risks Risks beyond supervision Development of new activities outside of supervisory framework Opportunities Existing risks New risks 12
13. 13. How to strike the right balance between innovation and risks? By talking (more) to FinTech firms By allowing for (some) experimentation (e.g. Sandbox) By thinking carefully about potential risks By ensuring regular international coordination between supervisory authorities By working with other market authorities in your own jurisdiction (e.g. competition, privacy) 13