The development of the financial technology infrastructure enabled by the technological breakthroughs in the recent last decades, in combination with the significant socio-economic trends and demographic shifts in the population, whereby consumers are now seeking easy access, choice, better control and speed, have led to today’s fast-paced technology-driven environment. These are important forces for credit institutions to rethink the ways they offer banking services and adjust their business models and strategies, combined with the motivation to seek more diversity in protecting and increasing their revenue sources and reducing costs in today’s low interest rate environment.

1. EBA FinTech Knowledge Hub series:
Webinar on the impact of FinTech on incumbent credit
institutions’ business models
Thursday, 11 October 2018
Presenters: Slavka Eley, Andreas Papaetis, Achilleas Nicolaou

2. EBA focus on FinTech
2
Contents
Impact of FinTech on banks’ business models
1
Profitability landscape in the EU banking sector2
Key findings of the EBA thematic report3

3. EBA focus on FinTech
3Impact of FinTech on banks’ business models
1

4. 4
EBA priorities on FinTech
Impact of FinTech on banks’ business models
Taking account the feedback to the EBA's 2017 Discussion Paper on FinTech, and the new mandates for the EBA set
out in the European Commission's FinTech Action Plan, the EBA has published on 15th March 2018 its FinTech
Roadmap setting out its priorities for 2018/2019 along with an indicative timeline for the completion of these tasks.
These priorities are:
 monitoring the regulatory perimeter, including assessing current authorisation and licencing approaches to
FinTech firms, and analysing regulatory sandboxes and innovation hubs in order to identify a set of best
practices to enhance consistency and facilitate supervisory coordination;
 monitoring emerging trends and analysing the impact on incumbent institutions' business models and the
prudential risks and opportunities arising from the use of FinTech in order to enhance knowledge sharing;
 promoting best supervisory practices on assessing cybersecurity and promoting a common cyber threat testing
framework;
 addressing consumer issues arising from FinTech, in particular in the areas of unclear regulatory status of
FinTech firms and related disclosure to consumers, potential national barriers preventing FinTech firms from
scaling up services to consumers across the single market, and assessing the appropriateness of the current
regulatory framework for virtual currencies;
 identifying and assessing money laundering/terrorist financing risks associated with regulated FinTech firms,
technology providers and FinTech solutions.

5. Authorisation and Perimeter Issues
Regulatory sandboxes and innovation hubs
Impact on business models, prudential risks and opportunities
Cybersecurity
Consumer and Conduct Issues
AML/CFT
5
EBA FinTech Roadmap
Impact of FinTech on banks’ business models
Authorisation and Perimeter Issues
Regulatory sandboxes and innovation hubs
Impact on business models, prudential risks and opportunities
Cybersecurity
Consumer and Conduct Issues
AML/CFT
EBA FinTech Roadmap

6. 2017
 Report on Innovative uses of data
 Recommendations on outsourcing to cloud service providers
2018
 Consultation Paper on Guidelines on outsourcing arrangements
 Report on the impact of FinTech on incumbent credit institutions' business models
 Report on the prudential risks and opportunities arising for institutions from FinTech
 Opinion on the implementation of the RTS on strong customer authentication and common
and secure communication
 ESAs report on Big Data
 Joint ESAs Warning on Virtual Currencies
 Joint ESAs Opinion on the use of innovative solutions in the customer due diligence processes
6
EBA work to date

7. 7
EBA FinTech Knowledge Hub
You are invited to register to the EBA FinTech Hub: https://www.eba.europa.eu/financial-innovation-and-fintech/fintech-
knowledge-hub/stakeholder-register/registration-form
Impact of FinTech on banks’ business models

8. Profitability landscape in the EU banking sector
8Impact of FinTech on banks’ business models
2

9. 9
 RoE at 7.2% in Q2 2018 is stable y-o-y, but up from 6% in Q4 2017. However, it is still below banks’ CoE (9-10%).
Dispersion across banks is at its lowest point.
 Main drivers of profitability in H1 2018 were: 1) lower cost of risk and 2) higher fee and commission income. Q2
2018 trends show a significant decrease of trading income y-o-y (one of the main drivers of RoE in 2017).
 Net fee and commission income to total operating income increased for 4 consecutive quarters, at 28.6% (highest
since Dec-14). Increase across all size of banks, but more evident in small size
Source of all charts: (preliminary) RDB data Q2 2018.
Impact of FinTech on banks’ business models
Banks’ profitability improved compared to previous years
RoE developments
-35%
-30%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
Dec-14
Mar-15
Jun-15
Sep-15
Dec-15
Mar-16
Jun-16
Sep-16
Dec-16
Mar-17
Jun-17
Sep-17
Dec-17
Mar-18
Jun-18
Net Fee and Commission income to total operating income

10. 10Impact of FinTech on banks’ business models
but there is pressure on margins…and continuing
pressure on efficiency
Source of all charts: (preliminary) RDB data Q2 2018.
Efficiency development (Cost-to-income ratio)
58%
60%
62%
64%
66%
68%
94
99
104
109
114
Dec-14
Jun-15
Dec-15
Jun-16
Dec-16
Jun-17
Dec-17
Jun-18
Numerator: Costs
Denominator: Net operating
income
1.40%
1.45%
1.50%
1.55%
1.60%
94
96
98
100
102
104
106
108
Dec-14
Jun-15
Dec-15
Jun-16
Dec-16
Jun-17
Dec-17
Jun-18
Numerator: Net interest income
Denominator: Interest earning assets
Net interest margin (rhs)
NII and Net Interest Margin Developments
 Banks core earnings (Net Interest Income) are further decreasing. Net Interest Margin has reached a record
low at 1.43% in Q2 2018.
 There are no signs of improving efficiency. In Q2 2018 costs to income ratio remained stable (y-o-y) at
63.8%.

11. 11Impact of FinTech on banks’ business models
Increased importance on net fees and commission to
increase profitability
 Results of EBA RAQ July 2018, confirm drivers of profitability as net fees and commission income become increasingly
important for banks, as they target this income stream in order to increase profitability in the short term.
0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%
a. Net interest income
b. Net Fees and Commissions income
c. Other operating income
d. Operating expenses / costs reduction
f. Other
June 2018 December 2017 June 2017 December 2016 June 2016 December 2015
Q: What is your primary target for increasing profitability in the next 12 months?

12. But also cost reduction is an important factor
12Impact of FinTech on banks’ business models
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
a. Overhead reduction and staff costs reduction
b. Outsourcing
c. Off-shoring or near-shoring
d. Cutting of non-profitable units.
e. Increasing automatisation and digitalisation
f. Other
June 2018 December 2017 June 2017 December 2016 June 2016 December 2015
 Also cost reduction plays a significant role in banks’ targets for increasing profitability in the near future.
 Banks attempt to increase profitability by reducing overheads but also by heavily investing in digitalisation.
 All banks participating in the EBA RAQ of July 2018, have stated their plans to reduce operating expenses and costs
through increasing automation and digitalisation.
 In the short-term, this comes with a cost in investing heavily in IT infrastructures and increasing investments related
to Financial Technology.
Q: How are you reducing operating expenses/costs?

13. Key findings of the EBA thematic report
13Impact of FinTech on banks’ business models
3

14. 14
EBA thematic report on the impact of FinTech on
incumbent credit institutions’ business models
In July 2018, the EBA has released a thematic report on the impact of FinTech on incumbent credit
institutions’ business models, presenting its current observations and findings on the current (without
foreseeing or intending to model scenarios for potential future development).
This report is based on the following different sources of information, collected within the broader
activities of the EBA FinTech Knowledge Hub:
1) Industry feedback to the EBA’s Discussion Paper on FinTech
2) Discussions/interviews with a sample of credit institutions
3) EBA Risk Assessment Questionnaire (RAR)
4) Discussions/interviews with competent authorities
5) Desk research
Impact of FinTech on banks’ business models

15. Key drivers inducing changes in incumbents’ business models
15Impact of FinTech on banks’ business models
Heightened competition
*Source: VISA
Profitability concerns
3
Regulatory changes
4
1
Customer expectations and behaviour:
2

16. 16
Which business line is mostly affected?
Q: Impact of FinTech firms on banks’ current business lines
Source: EBA RAR H2 2017
Impact of FinTech on banks’ business models

17. Key trends in reacting to FinTech
17Impact of FinTech on banks’ business models
1) Employing new technologies to transform internal
processes – “digital transformation” component
1 1) Rethinking interaction with customers / enhancing
customer experience through the use of innovative
technologies – “digital disruption” component
2

18. 18
Status of adoption of financial technologies by incumbents
 PSD2 is perceived as an opportunity with most institutions currently designing their open banking/API strategy
 Relevant RTS is directly applicable from 14 September 2018
Open Banking
/ APIs
Source: EBA RAQ H2 2018 (preliminary results)
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Cloud computing
Digital/Mobile wallets
Distributed Ledger Technology
Big Data analytics
Biometrics
Artificial Intelligence
Smart contracts
EU banks’ level of involvement in the application of each technology
In use / launched Pilot testing Under development Under discussion No activity
Impact of FinTech on banks’ business models

19. 19
Investing
in new entrant
FinTech firms
Developing
internally
Collaborating
with other
stakeholders
Partnering
with new entrant
FinTech
firms
Current relationship of incumbents with FinTech
Impact of FinTech on banks’ business models

20. 20
Current status: Incumbents favour partnerships with
FinTech firms
Institutions
 Issue with existing IT infrastructure / IT legacy
systems
 Need to develop internal “innovative” culture
and mindset / organisational transformation
 Need to attract and maintain talent and skills
 Customers trust banks compared to new
entrants (mainly due to data protection
concerns)
 Strong on customer relationship providing the
full value chain to customers with respective
customer expectations and behaviour
Partnering
New entrant FinTech firms
• Agile, flexible and familiar with technologies
• Learn and grow through partnerships with
banks
• Through their interaction with banks, they
receive funding, access to customers and
distribution channels, visibility, and banking
expertise (including legal, compliance and
regulatory knowledge)
• Do not currently provide the full value chain to
customers
Impact of FinTech on banks’ business models

21. LEGACY ICT
SYSTEMS
EXECUTION CAPABILITIES
ACCESS AND MAINTENANCE
OF TALENT
COMPETITION
21Impact of FinTech on banks’ business models
Risk factors impacting business models’ sustainability
2
3
4
5
DIGITALISATION STATEGIES1

22. 22
Proactive/ Front-runners
• Ambitious or aggressive innovation strategies, high-targeted transformation projects
accompanied unclear impact and risk assessments (aiming for first-mover advantage)
• Well-thought and comprehensive strategies and targets with strong research orientation
and focus on governance, organisational aspects, operations and risk management
PROACTIVE
Reactive
• ‘Followers’ of technological developments, taking a ‘wait and see’ approach, with carefully
defined strategies and steady-pace on internal changes
• Institutions reacting to peer pressure, taking a ‘go with the flow’ approach in combination
with the concern of staying behind.
Passive
• Lagging behind technological developments due to other significant priorities, slowly trying
to catch up following customer changing expectations
• Conservative/more traditional institutions reluctant to change
In terms of the level of adoption of innovative technologies, engagement with FinTech, current digitalisation/innovation
strategies, along with the respective stage of development, incumbent institutions seem to fall into three groups:
REACTIVE
PASSIVE
Impact of FinTech on banks’ business models
Status of FinTech adoption and engagement

23. 23
EBA FinTech contact details
Website: www.eba.europa.eu/financial-innovation-and-fintech
Email: fintech@eba.europa.eu
Register here for the FinTech Knowledge Hub: www.eba.europa.eu/financial-
innovation-and-fintech/fintech-knowledge-hub/stakeholder-register
Impact of FinTech on banks’ business models

24. EUROPEAN BANKING AUTHORITY
Floor 46, One Canada Square, London E14 5AA
Tel: +44 207 382 1776
Fax: +44 207 382 1771
E-mail: info@eba.europa.eu
http://www.eba.europa.eu