Directing the power of technology into the digital banking revolution

The European Commission’s Strategic Plan - A Europe Fit for the Digital Age - the Digital Agenda, was published in September 2020 and sets out four main priorities:

• Removing fragmentation in the Digital Single Market,
• Adapting the EU’s regulatory framework to facilitate digital innovation,
• Promote data-driven finance, and
• Addressing the challenges and risks of digital transformation, including strengthening the digital operational resilience of the financial system.

Aware of the issues at stake, the banking sector has been taking ownership of digital topics and addressing these priorities for years. For most, it has become a top priority. Looking at the expected benefits from both bankers’ and clients’ perspectives, they are evident. For bankers, it provides an opportunity to differentiate yourself from the competition via customised client experiences, an increase in both operational efficiency and security with cutting-edge technology, and finally a new usage case in digital tools for subscription to products and services.

From the clients’ perspective, there’s the time and cost efficiencies, personal monitoring, and an increase in the range of accessible services. However, Digital Banking is no longer just a “digital topic”. Look at the developments in financial technology over the past few years, and we can see a clear path to digital banking marked out by a host of powerful and robust digital solutions.

The range of Fintech products and other digital solutions has never been so large. The entire value chain is now covered digitally, and the Open Finance movement is leading the way to seamless interconnections between all parties involved. Consequently, the question shifts from ‘Who has a solution?’ to ‘Who has the best solution?’ and importantly ‘Who has responsibility for what?’. There is no longer one single developer or service provider, but a fragmented ecosystem. This highlights the risks and compliance issues for any client-facing party. Clearly, end-investors are expecting a seamless digital journey, but it gets complicated when we start thinking about data ownership, data protection, and responsibilities throughout that journey.

From our perspective there are three key factors in responding to those questions: transparency, standardisation and regulation.

Transparency

Different parts of products or services are today often provided by different parties. Like in other industries, the one playing the leading role takes on responsibility for the overall relationship with the client, and full transparency for other players in the chain is mandatory to monitor responsibilities. The end-investor must fully understand who has access to and manages his or her data, and which party has responsibility if something goes wrong. Full disclosure and full transparency is also necessary in defining processes between the producers, each party having to know exactly who does what in the chain to deliver the service. Financial tech and the Open Finance movement has disrupted the full in-house model and brought back the classic “best-of-breed” model to the industry.

Standardisation

Each new tech development brings a competing standard but only a few will go on to define what the industry as a whole uses. Products themselves don’t necessarily need to be standardised but we believe that the tech layers really should be. Standardisation of technologies and protocols is the best way to avoid issues with data security and service continuity. If one provider in the chain goes out of business, standardised tech layers mean it shouldn’t be too painful to find an alternative solution. However, proprietary models increase the risk of data losses and service interruption. Standardisation also plays a role in improving the ease of performing service audits and monitoring.

Regulation

Regulating the digital ecosystem removes barriers to adoption on a global scale but regulation is always one step behind the fast-paced development of technology. The sandbox approach has certainly contributed to bridging the gap for the adoption of new solutions, permitting limited “test and learn” facilities at scale. Regulation scope has broadened and forms the cornerstone of the digital finance future. Trust, both in the technology and between the partners is underpinned by the regulatory framework that governs the industry and it is an essential element in our increasingly digital-centric future.

As industry players, we look to regulation for guidance and look forward to clarifications from AI regulation, the MiCA regulation, the Pilot Regime regulation, and the Digital Services & Markets acts.

Caceis are diamond sponsors of IMpower Incorporating FundForum 2022. Find out more about the 2022 event and agenda here >>