Incumbent banks with bad loans and legacy systems risk being left behind by less encumbered challengers, according to the European Banking Authority (EBA).

The European banking watchdog assessed FinTech risks and opportunities in the sector, stating that problems are “particularly challenging for some large complex incumbents” which have “a very formal and slow governance structure, further restricted by legacy ICT systems or legacy non-performing assets”.

The report divided banks into three baskets: proactive front-runners with aggressive strategies, reactive followers which take a ‘wait and see’ approach, and passive ‘reluctant to change’ lenders which risk getting left behind while whittling down stockpiles of bad loans.

“Incumbent institutions consider that BigTech firms have the potential to become significant competitors in the provision of financial services, as is evident from their increasing footprint in the financial sector,” the report noted, referring to fears around Amazon or Google making a financial services play.

“The competition among incumbents appears to be growing as a result of the fast-paced technological development and many institutions competing to achieve the first-mover advantage,” the EBA stated, adding: “At this point, the predominant type of relationship between incumbent institutions and FinTech is partnership and collaboration with FinTech firms.”

The report identified four main drivers shaping incumbents' attitudes to changing business models: customer expectations and behaviour, profitability concern, increased competition, and the regulatory framework.

A second EBA report explored seven technology use cases: biometric authentication, the use of robo-advisors, the use of big data and machine learning for credit scoring, the use of distributed ledger technology (DLT) and smart contracts for trade finance, the use of DLT to streamline customer due diligence, mobile wallets, and outsourcing core banking and payment systems to the public cloud.

So far, there have been no significant implementations of these technologies, possibly because of security concerns and efforts to filter FinTech hype, according to the EBA.

“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 report read.

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