Response to discussion on Approach on financial technology (Fintech)
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The current regulatory framework does not apply equally to all FinTech firms. Some firms might not be subject to a regulatory regime whilst others are/will be. We believe that the regulatory treatment of FinTech firms engaging in similar activities with similar risks in any EEA-country should essentially be the same. We encourage EBA to promote such level playing field. However, we do not believe it would be beneficial to introduce new categories of financial services licenses specifically for FinTech firms.
We further suggest to not only assess the features of sandboxing regimes etc, but formulate best practices across the EU. We would support the development of an ‘EU regulatory sandbox’ to ensure a consistent approach and help FinTech firms innovate faster and eliminate (potential) barriers at national level.
The current regulatory framework for credit institutions sometimes proves to be too rigid to fit in specific business developments. A clear definition of activities that are considered cross-border provision of services would be very helpful. Developments in the area of the electronic provision of services are going faster than regulation. In particular we notice a grey area between (or overlap of) cross-border provision of services and provision of services by way of a local establishment (branch office). A multichannel (or hybrid) approach both by a physical presence and digitally/online in some cases provides the best solution for a customer friendly approach, but it can require both a cross-border notification and a branch office notification. Institutions would be helped by either a less stringent approach by supervisory authorities and/or a regulatory framework that leaves room for such hybrid models.
The biggest challenge to the banking business model however is digitalisation. ING views that much more than FinTechs platforms (Google, Facebook, Amazon, WeChat) are the leading digital disrupters of today. It is these digital companies, the technology companies that are setting the standard. There are important characteristics of platforms that are relevant for the bank of the future. First of all these “marketplaces” are digital, there is zero marginal cost to grow, even cross-border. Also they have reached a critical mass of producers and consumers creating a virtuous circle, where more producers attract more consumers, and vice versa, thereby increasing the value for all participants. This critical mass of users comes a huge amount of data. Successful platforms have superior data collection capacity, superior data analytical capacity, superior data translation capacity. Data science is their core competency. For banks, it’s a way of understanding customers’ needs and expectations. It’s necessary for building deep and lasting relationships.
Another defining characteristic of platforms is that users can take on multiple roles; users can be both creators and consumers of content, or both buyers and sellers at the same time. The fluid nature of these platform participants only increases the potential network effects and they’re open to the individual users and producers, open to third-parties that provide complementary goods and services and open to competition. So banks can learn from the FinTechs and platforms in offering a differentiating customer experience, that is crucial for the future of banking.
• FinTech has definitely stepped into the needs of the underserved customer by offering a better experience. Generally speaking, FinTech focuses on a specific customer need to offer a better experience. These FinTech competitors have forced incumbents to offer “incremental” improvements to the existing products / services offered, but not yet to change the underlying business models.
• Technological developments such as in the area of distributed ledger technology however do force incumbents to change their business models. Here, FinTechs bring in technology - e.g. blockchain - to enhance efficiency in the value chain and drive the cooperation between banks to co-develop technology with FinTechs.
• Other disruptive developments are initiated by the so called 8 BIGtechs: network giants like US based Alphabet, Facebook, Apple and Amazon and Asian giants like Tencent, Alibaba, WeChat and Baidu are disintermediating the customer relationship between incumbents and financial institutions. In response, incumbents have to change their linear ‘producer to consumer’ business model into a platform, network business model where many producers and consumers interact with each other in different and ever changing settings.
The proposed way forward by holding interviews and develop a thematic report could indeed provide more insights in the changes incumbents expect to make to their current business models. However, keep in mind that the World Economic Forum already presented an in-depth analysis about this subject this summer.
More and more banking products are commoditised because of technology-enabled financial innovation. Via partnerships, incumbents can leverage on the technology and new business models of FinTechs where FinTechs can leverage on the geographic coverage and client base of the incumbents. Incumbents should embrace FinTechs and their growth in number to help fulfil their customers’ needs and society at large. The latter will also help incumbents to identify innovative ideas without the need to actually validate the idea in the market since it’s already proven by the FinTechs.
It is also important to stress that innovations are indeed valued differently depending on the different countries' authorities. EBA could fulfil a certain role in this: cases in which different countries’ authorities ruled differently should be brought to the attention of EBA and EBA could give an opinion on the matter.
Given that in the digital space the boundaries among sectors are unclear and new business models appear constantly, a prerequisite is to ensure that consumers are protected and that the financial stability is ensured, irrespective of who the provider is. A level playing field should be guaranteed. It is of paramount importance to adopt an activity based approach regardless of the channel or the institution offering it. The principle of “same services/activities, same risks, same rules and same supervision” should apply, otherwise, users of the same financial service could end up being subject to different levels of protection and that will ultimately undermine the trust in the financial sector.
Finally, careful consideration should be given how to achieve the right level of consumer protection, as merely indicating the regulatory perimeters of referred firms might not provide retail consumers with sufficient knowledge to properly assess the risks.
The proposed way forward should provide insight into the possibilities to address the key issues identified by the EBA. Whilst there may be additional issues in this field, the suggested approach will likely review any additional issues.
FinTech firms should have similar consumer protection requirements. Both from a consumer protection perspective as from a FinTech side a further harmonisation of the supervisory activities should lead to a more transparent market and level playing field, between FinTechs start-ups and incumbent financial service providers.
From a consumer protection perspective, there is no level playing field when services are provided on a cross-border basis as the local authorities regarding market conduct supervision may have a set of (additional) local legal requirements. For a FinTech, it is difficult to manage and implement different sets of requirements in different countries while it is the same product that is offered in different countries. We suggest EBA to promote similar consumer protection requirements for regulated FinTech activities.
As incumbents are more and more cooperating with FinTechs (direct and indirect) and their business models move more and more to platform business models were many (non-banks) contribute to the customer experience, the possibility to centrally control a period of resolution will diminish. The more financial institutions become part of a wider networked platform to offer relevant services, the more difficult this will be.
Another issue which should be considered to be addressed by EBA is the situation that due to AML leglislation it is not always possible to develop non-banking related products for banks. This is not a level playing field. I.e. the AML says: when you are a bank, you qualify as an obliged entity and you therefore need to adhere the AML leglislation. Guidance in which it is made clear that it is possible for obliged entities to develop products, without worrying about AML leglislation, when the product has no AML/TF risks. Such a risk assessment should obviously need proper evidence by the obliged entity.
Banks and other financial services providers should be able to use UBO registers in the various member states for identification and (in low risk cases: ) verification of UBO’s and should have on-line access to these data from UBO registers
The EU should encourage the creation of central data depositories (CDD Utilities) for storage of CDD data concerning companies, which can be used for identification and (in low risk cases) verification of companies, partnerships, trusts and other legal entities and financial services providers should have on-line access to these data from such CDD Utilities for purposes of the fulfilment of CDD obligations.
Question 1: Are the issues identified by the EBA and the way forward proposed in section 4.1 relevant and complete? If not, please explain why.
We believe that the issues identified by the EBA and the way forward proposed are relevant. Whilst there may be additional issues in this field, the suggested approach will likely review any additional issues.The current regulatory framework does not apply equally to all FinTech firms. Some firms might not be subject to a regulatory regime whilst others are/will be. We believe that the regulatory treatment of FinTech firms engaging in similar activities with similar risks in any EEA-country should essentially be the same. We encourage EBA to promote such level playing field. However, we do not believe it would be beneficial to introduce new categories of financial services licenses specifically for FinTech firms.
We further suggest to not only assess the features of sandboxing regimes etc, but formulate best practices across the EU. We would support the development of an ‘EU regulatory sandbox’ to ensure a consistent approach and help FinTech firms innovate faster and eliminate (potential) barriers at national level.
Question 2: Are the issues identified by the EBA and the way forward proposed in subsection 4.2.1 relevant and complete? If not, please explain why.
We believe that the issues identified by the EBA and the way forward proposed are relevant, but not complete.The current regulatory framework for credit institutions sometimes proves to be too rigid to fit in specific business developments. A clear definition of activities that are considered cross-border provision of services would be very helpful. Developments in the area of the electronic provision of services are going faster than regulation. In particular we notice a grey area between (or overlap of) cross-border provision of services and provision of services by way of a local establishment (branch office). A multichannel (or hybrid) approach both by a physical presence and digitally/online in some cases provides the best solution for a customer friendly approach, but it can require both a cross-border notification and a branch office notification. Institutions would be helped by either a less stringent approach by supervisory authorities and/or a regulatory framework that leaves room for such hybrid models.
Question 3: What opportunities and threats arising from FinTech do you foresee for credit institutions?
The differentiator of the future in banking will not be products and services, but rather a superior customer experience. The standard we need to meet is the personal, relevant, instant and seamless experience customers are accustomed to from the leading digital platforms they use today. To achieve this, we’re developing our own strong internal innovation culture, as well as partnering with FinTechs to speed up the pace of our transformation. We now have around 100 strategic FinTech partnerships. Those partnerships include a wide variety of activities amongst which in the area of financial markets, payments, data analytics, cybersecurity robo-advice and online lending platform for small and medium-sized businesses (SMEs). Our FinTech investments are strategic, in support of our purpose and our customer promise. They have to support our innovation priorities. Innovation is related to automation and digitization and FinTechs give a boost in adopting IT capabilities that offer ING the opportunity to expand and enhance the business propositions to the customer base. Whilst ING embraces the opportunities available to further increase operational excellence (automation, digitization, process improvements), existing laws and regulations are not yet aligned with the speed of innovation. Within INGs global world we see that different regulators in the various jurisdictions we operate in have different views on how the existing requirements could be interpreted in a digital world.The biggest challenge to the banking business model however is digitalisation. ING views that much more than FinTechs platforms (Google, Facebook, Amazon, WeChat) are the leading digital disrupters of today. It is these digital companies, the technology companies that are setting the standard. There are important characteristics of platforms that are relevant for the bank of the future. First of all these “marketplaces” are digital, there is zero marginal cost to grow, even cross-border. Also they have reached a critical mass of producers and consumers creating a virtuous circle, where more producers attract more consumers, and vice versa, thereby increasing the value for all participants. This critical mass of users comes a huge amount of data. Successful platforms have superior data collection capacity, superior data analytical capacity, superior data translation capacity. Data science is their core competency. For banks, it’s a way of understanding customers’ needs and expectations. It’s necessary for building deep and lasting relationships.
Another defining characteristic of platforms is that users can take on multiple roles; users can be both creators and consumers of content, or both buyers and sellers at the same time. The fluid nature of these platform participants only increases the potential network effects and they’re open to the individual users and producers, open to third-parties that provide complementary goods and services and open to competition. So banks can learn from the FinTechs and platforms in offering a differentiating customer experience, that is crucial for the future of banking.
Question 4: Are the issues identified by the EBA and the way forward proposed in subsection 4.2.2 relevant and complete? If not, please explain why.
ING beleives that the issues identified by the EBA and the way forward proposed are correct. In addition to this we would like to add that –learning from PSD(1) implementation that NCA’s often initially focussed on compliance with the largest, most systemically relevant parties only in the first three years – thus creating an un-level playing field that favoured smaller parties that were not as intensely scrutinised in the early years. This created not only a competitive disadvantage for incumbents but also created additional risks as the smaller parties often were not the most rigorous ones in applying all of the PSD(1) regulations. We would like to stress the importance of rigorous testing upfront of all new and existing PIs and EMIs.Question 5: What opportunities and threats arising from FinTech do you foresee for payment institutions and electronic money institutions?
We strongly believe that FinTech has a role to play in coming up with new, innovative solutions for businesses and consumers. With the breaking up of the value chain we also see an important risk however: No single party has overall grip on and responsibility for the payments chain and in case of disruption no single accountable party is left, creating both confusion for end-users as well as potentially more disruption (as is also evident in industries like rail transport or utilities in many countries after infrastructure was separated from servicing end-users commercially). This could potentially negatively impact public trust in and overall service levels of key payments servicesQuestion 6: Are the issues identified by the EBA and the way forward proposed in subsection 4.3.1 relevant and complete? If not, please explain why.
The issues identified are relevant but not complete.• FinTech has definitely stepped into the needs of the underserved customer by offering a better experience. Generally speaking, FinTech focuses on a specific customer need to offer a better experience. These FinTech competitors have forced incumbents to offer “incremental” improvements to the existing products / services offered, but not yet to change the underlying business models.
• Technological developments such as in the area of distributed ledger technology however do force incumbents to change their business models. Here, FinTechs bring in technology - e.g. blockchain - to enhance efficiency in the value chain and drive the cooperation between banks to co-develop technology with FinTechs.
• Other disruptive developments are initiated by the so called 8 BIGtechs: network giants like US based Alphabet, Facebook, Apple and Amazon and Asian giants like Tencent, Alibaba, WeChat and Baidu are disintermediating the customer relationship between incumbents and financial institutions. In response, incumbents have to change their linear ‘producer to consumer’ business model into a platform, network business model where many producers and consumers interact with each other in different and ever changing settings.
The proposed way forward by holding interviews and develop a thematic report could indeed provide more insights in the changes incumbents expect to make to their current business models. However, keep in mind that the World Economic Forum already presented an in-depth analysis about this subject this summer.
Question 7: What are your views on the impact that the use of technology-enabled financial innovation and/or the growth in the number of FinTech providers and the volume of their business may have on the business model of incumbent credit institutions?
Customer behaviour and the expectations consumers and organisations have about the products / services offered by incumbents (omni-channel, highly personalised, relevant and well-priced) is rapidly changing. Clients will adapt technological solutions when they see the benefit. Tech developments increase the competition, not only direct (solution, pricing), but also in experience and perception. As industries are blurring, so do experiences and perceptions.More and more banking products are commoditised because of technology-enabled financial innovation. Via partnerships, incumbents can leverage on the technology and new business models of FinTechs where FinTechs can leverage on the geographic coverage and client base of the incumbents. Incumbents should embrace FinTechs and their growth in number to help fulfil their customers’ needs and society at large. The latter will also help incumbents to identify innovative ideas without the need to actually validate the idea in the market since it’s already proven by the FinTechs.
Question 8: Are the issues identified by the EBA and the way forward proposed in subsection 4.3.2 relevant and complete? If not, please explain why.
ING believes that the issues identified by the EBA and the way forward proposed are correct. We would like to add the risk that third party access to the payments infrastructure could be more beneficial to existing large Tech companies than new innovative FinTechs. These large Tech companies rely primarily on data monetization and do not have to make a direct return on the payments services offered. Moreover, as opposed to smaller FinTech start-ups, these companies have a large existing customer/user base which will make it a lot harder for small start-ups to have a viable business model that attracts sufficient customers to become relevant and stay financially sound whereas other parties may offer these services essentially for free. This effect is enhanced by the fact that we see many FinTechs being clones of each other – esp. in International Money transfer, Mobile POS solutions etc. where the sheer number of clones makes it hard if not impossible for any one of them to succeed and reach sufficient scale.Question 9: What are your views on the impact that the use of technology-enabled financial innovation and/or the growth in the number of FinTech providers and the volume of their business may have on the business models of incumbent payment or electronic money institutions?
ING believes that the issues identified by the EBA and the way forward proposed are correct. We would like to add the risk that third party access to the payments infrastructure could be more beneficial to existing large Tech companies than new innovative FinTechs. These large Tech companies rely primarily on data monetization and do not have to make a direct return on the payments services offered. Moreover, as opposed to smaller FinTech start-ups, these companies have a large existing customer/user base which will make it a lot harder for small start-ups to have a viable business model that attracts sufficient customers to become relevant and stay financially sound whereas other parties may offer these services essentially for free. This effect is enhanced by the fact that we see many FinTechs replicating each other – esp. in International Money transfer, Mobile POS solutions etc. where the sheer number of replications makes it hard if not impossible for any one of them to succeed and reach sufficient scale.Question 10: Are the issues identified by the EBA and the way forward proposed in subsection 4.4.1 relevant and complete? If not, please explain why.
The establishment of a clear regulatory perimeter will be a positive step towards solving the problem of customers not being able to determine who they are dealing with, who is responsible and liable for which product or service and where they could file a complaint when something went wrong. How are their rights protected in the digital space where it is unclear who exactly is responsible for the various offered services through various digital channels.It is also important to stress that innovations are indeed valued differently depending on the different countries' authorities. EBA could fulfil a certain role in this: cases in which different countries’ authorities ruled differently should be brought to the attention of EBA and EBA could give an opinion on the matter.
Given that in the digital space the boundaries among sectors are unclear and new business models appear constantly, a prerequisite is to ensure that consumers are protected and that the financial stability is ensured, irrespective of who the provider is. A level playing field should be guaranteed. It is of paramount importance to adopt an activity based approach regardless of the channel or the institution offering it. The principle of “same services/activities, same risks, same rules and same supervision” should apply, otherwise, users of the same financial service could end up being subject to different levels of protection and that will ultimately undermine the trust in the financial sector.
Finally, careful consideration should be given how to achieve the right level of consumer protection, as merely indicating the regulatory perimeters of referred firms might not provide retail consumers with sufficient knowledge to properly assess the risks.
Question 11: Are the issues identified by the EBA and the way forward proposed in subsection 4.4.2 relevant and complete? If not, please explain why.
We believe that the issues identified by the EBA and the way forward proposed are correct. Moreover, it should be considered to what extent FinTechs (or any other financial institution giving the level playing field need) can comply with the duty of care when it comes to the customer really understanding the purchased product or service when for example it was bought with explanation and terms and conditions in another language than the customers’ language.The proposed way forward should provide insight into the possibilities to address the key issues identified by the EBA. Whilst there may be additional issues in this field, the suggested approach will likely review any additional issues.
FinTech firms should have similar consumer protection requirements. Both from a consumer protection perspective as from a FinTech side a further harmonisation of the supervisory activities should lead to a more transparent market and level playing field, between FinTechs start-ups and incumbent financial service providers.
Question 12: As a FinTech firm, have you experienced any regulatory obstacles from a consumer protection perspective that might prevent you from providing or enabling the provision of financial services cross-border?
FinTechs trying to operate cross-border face a practical impediments due to the lack of passporting facilities.From a consumer protection perspective, there is no level playing field when services are provided on a cross-border basis as the local authorities regarding market conduct supervision may have a set of (additional) local legal requirements. For a FinTech, it is difficult to manage and implement different sets of requirements in different countries while it is the same product that is offered in different countries. We suggest EBA to promote similar consumer protection requirements for regulated FinTech activities.
Question 13: Do you consider that further action is required on the part of the EBA to ensure that EU financial services legislation within the EBA’s scope of action is implemented consistently across the EU?
As per the above answers, yes, we do. However, the proposed way forward should provide more insight into which actions are desirable.Question 14: Are the issues identified by the EBA and the way forward proposed in subsection 4.4.3 relevant and complete? If not, please explain why.
We agree that consumer protection is a very important topic and acknowledge the fact that EBA is - amongst other things - tasked to act in the field of consumer protection when this is necessary to ensure the effective and consistent applications of the several EU Directives and Regulations that fall in EBA’s scope of action. However, due to the lack of harmonised legislation at the EU level, we believe it does not fall under the responsibility of EBA to provide (additional) guidelines/recommendations etc, as this should be left to the European Commission.Question 15: Are the issues identified by the EBA and the way forward proposed in subsection 4.4.4 relevant and complete? If not, please explain why.
Yes, especially very positive to see as one of the steps forward to conduct an in-depth review of EU legislation requirements that may restrict digitalisation (physical presence, paper copies, handwritten signature, etc.). ING deems it necessary to move fast on taking out impediments to digitalization in Europe.Question 16: Are there any specific disclosure or transparency of information requirements in your national legislation that you consider to be an obstacle to digitalisation and/or that you believe may prevent FinTech firms from entering the market?
-Question 17: Are the issues identified by the EBA and the way forward proposed in subsection 4.4.5 relevant and complete? If not, please explain why.
The issues identified are the way forward.Question 18: Would you see the merit in having specific financial literacy programmes targeting consumers to enhance trust in digital services?
We have specific financial literacy programs (financieel fit in ING NL), not to enhance trust in digital services but to empower customers to take better financial decisions. Financial literacy and trust in digital services are different elements in our view.Question 19: Are the issues identified by the EBA and the way forward proposed in subsection 4.4.6 relevant and complete? If not, please explain why.
-Question 20: Are the issues identified by the EBA and the way forward proposed in section 4.5 relevant and complete? If not, please explain why.
The issues raised are very relevant and complete for now. A deep-dive will be important as a next step.As incumbents are more and more cooperating with FinTechs (direct and indirect) and their business models move more and more to platform business models were many (non-banks) contribute to the customer experience, the possibility to centrally control a period of resolution will diminish. The more financial institutions become part of a wider networked platform to offer relevant services, the more difficult this will be.
Question 21: Do you agree with the issues identified by the EBA and the way forward proposed in section 4.6? Are there any other issues you think the EBA should consider?
With regard to no. 132, the EBA has mentioned the precipitated issues with regard to financial institutions’ ability to carry out customer identification and verification remotely and through digital means. We would like to see that the EBA would encourage FinTechs to come with proper and good solutions to allow remote identification. It should be encouraged that the FI´s and FinTechs develop their own Identification and verification procedures, where a key element is that those procedures need documentary evidence that the fraud and AML risks are equal to the face to face identification process.Another issue which should be considered to be addressed by EBA is the situation that due to AML leglislation it is not always possible to develop non-banking related products for banks. This is not a level playing field. I.e. the AML says: when you are a bank, you qualify as an obliged entity and you therefore need to adhere the AML leglislation. Guidance in which it is made clear that it is possible for obliged entities to develop products, without worrying about AML leglislation, when the product has no AML/TF risks. Such a risk assessment should obviously need proper evidence by the obliged entity.
Question 22: What do you think are the biggest money laundering and terrorist financing risks associated with FinTech firms? Please explain why.
FinTechs can also be developed by criminals or terrorists. When it is not made clear what the product exactly (technically) does, what is done with the data, etc. it will be possible that, due to the fact that there is no supervision needed, criminals or terrorists will infiltrate in the financial system, without knowing this. Therefore, it should be made mandatory to FinTechs to at least perform a proper risk assessment on the AML-TF risks. Perhaps guidance by supervisors on the most common associated risks would help.Question 23: Are there any obstacles present in your national AML/CFT legislation which would prevent (a) FinTech firms from entering the market, and (b) FinTech solutions to be used by obliged entities in their customer due diligence process? Please explain.
For on-boarding processes, digital means of identifying and verifying the identity of the client should be allowed across EU on the basis of best available technical solutions.Banks and other financial services providers should be able to use UBO registers in the various member states for identification and (in low risk cases: ) verification of UBO’s and should have on-line access to these data from UBO registers
The EU should encourage the creation of central data depositories (CDD Utilities) for storage of CDD data concerning companies, which can be used for identification and (in low risk cases) verification of companies, partnerships, trusts and other legal entities and financial services providers should have on-line access to these data from such CDD Utilities for purposes of the fulfilment of CDD obligations.