Regulation driving banking transformation – The data economy, Fintech and Bigtech in finance and crypto assets

In the second edition of Deutsche Bank’s report into regulation driving banking transformation, Linklaters partner and Global Co-Head of Fintech, Julian Cunningham Day contributes to the whitepaper which recommends that a regulatory environment that supports the safe and robust development of the data economy, the emergence of FinTech and BigTech firms and the growth of the crypto-assets market is essential for banking transformation

Here is a brief summary of the report’s key themes and conclusions:

Changing business, changing markets

Disruption and innovation today is easier, better, strong and faster. Technology is not just disrupting the service and products provided by banks, it is changing and challenging the fundamental structures of financial markets themselves.

For crypto-assets to be trusted and used, the report suggests that the regulators central banks and the industry will all need to address the issue in a coordinated and aligned fashion.

Navigating and embracing such potentially tectonic shifts is never easy – but existing processes and rules are being challenged by changing customer behaviours. Looking the other way and with the hope that this a fleeting trend is a mistake that financial institutions and regulators cannot afford to make.

Data is the new oil, and clients own the rights to the crude

Open banking has changed the landscape of Big Data – banks are no longer the only custodian of clients’ financial data and the owners of that data, the client’s themselves, need to be invited to the party so that they can influence its use and commercialisation.

Big data fuels the so-called “data economy” – a digital ecosystem where data is collected, analysed an exchanged between governments, companies or other parties for the purposes of creating value for businesses and individuals. Big Data is the basis upon which advanced analytics operate, which in turn can drive insights and improved client experience, uplifting the provision of financial services.  However, as explored in more detail in the report, data localisation requirements, the restricted scope of open banking sharing requirements and the impact of data privacy requirements create regulatory challenges for this new economy.

BigTech in financial services

As BigTech companies turn their attention to financials services – using deep pools of customer data to craft bespoke solutions – the industry faces a potential game-changer. With deep pockets and an even deeper understanding of the needs of digital native clients, they raise the bar of what is expected from banking services.

The report highlights that BigTechs and incumbent banks are not only competitors but are also mutually reliant on each other for service infrastructure whether this be payment rails or cloud services for instance. This interaction plays a precious role in the financial industry, driving competition, innovation and improved client services – all priority areas for regulators. Yet the very distinct business models employed by BigTech in financial services (which rely on the “data-network-activity-loop”) also trigger regulators’ vigilance around potential gaps, particularly when it comes to competition and data protection rules.

Crypto uptake

Without a marked change in regulatory direction, the report considers that it appears unlikely that we will see a widespread uptake of crypto-assets any time soon. This is particularly pressing issue for the type of crypto-assets that strive to become an alternative  global payment method.

The report concludes that the long term benefits of crypto-assets remain compelling. Yet although some jurisdictions are moving in the right direction (in Europe there has already been major regulatory progress to clarify in which instances a crypto asset should be treated as a financial instrument), the regulatory certainty enjoyed by traditional assets is not are reality for all types of crypto-assets which makes dealing it them subject to uncertain risks. Additional steps need to be taken not only by the regulators, but by the industry itself.

Click here to read the full report