EBA paves the way for tighter scrutiny of digital platforms

EU banking watchdog lays the groundworks for tighter supervision and regulation of digital platforms

by | September 21, 2021 | bobsguide

The European Banking Authority (EBA) laid the groundworks for tighter supervision and regulation of digital platforms on Tuesday, warning “the speed of transformation is raising challenges for supervisors in keeping pace with evolutions in business models and wider market developments.” 

In a report published this morning, the EU’s banking watchdog identified the main areas of concern for both sector players and regulators dealing with the growing digital interconnectedness of the financial services business – setting out priorities that will feed into its formal advice to the European Commission in the first quarter next year.  

“The platformisation of financial services is posing some challenges for competent authorities in monitoring market developments and any risks arising from these interdependencies,” the report said. 

“The reliance of financial institutions on digital platforms for the marketing and distribution of financial services is creating new forms of financial, operational, and reputational interdependencies within the EU’s banking and payments sector,” it warned. 

By platformisation, the EBA means the proliferation of online banking, payment and financial services as well as peer2peer lending and crowdfunding platforms. 

The banking supervisor warned that, at the current stage, the vast majority of national competent authorities (NCAs) lack both the needed visibility on and the understanding of new platform business models – which may affect the way financial firms operate, distribute services and products and raise revenues. 

“Over time, this imperfect understanding of business models could impair the effective monitoring of specific risks, including those arising from financial, operational and reputational interdependencies between financial institutions and technology companies.” 

The report highlighted that poor levels of transparency or information are particularly critical in the context of the growing interdependency between financial services companies and technology companies – which at present fall outside the perimeter of NCAs’ direct supervision, as does the use of digital platforms for cross-border activities. 

Financial firms’ growing headaches with tech providers

The EBA survey shows that the increased reliance on third-party providers for key digital functions was also singled out as a key concern by a large number of financial services firms, which pointed to rising operational and information&communication technology (ICT) risks. 

Respondents also raised concerns on the access, aggregation and use/re-use of data against a backdrop of growing data dependencies between or within firms that leverage the same digital platform.  

Here, the report warned that “Concentration risk may also occur or be exacerbated by platform-based dependencies and potential network effects, should firms leverage access to customer data, distribution and provision of financial services.” 

Another widespread concern was related to the “new forms of reputational and conduct of business risk” stemming from firms’ lack of control over the way third-party platforms manage aspects such as cyber-security, customer data, products and services marketing and information, complaint-handling and redress. 

Financial sector firms were also worried that the current lack of supervision over large technology providers could result in a double compliance burden for those reporting to multiple supervisors – or based on multiple sets of rules – in relation to their use of a digital platform. 

In terms of hurdles to the wider or smoother adoption of digital capabilities, the report highlighted that “several respondents noted concerns about a lack of competition in the context of online advertising, and a lack of transparency in the pricing of advertising, via digital platforms, notwithstanding existing EU law.”  

“A small number of financial institutions reported that they had encountered some issues in accessing digital platforms and enablers on terms they considered fair, taking account of platform providers’ vertical integration,” it added. 

Businesses surveyed by the EBA also highlighted a “make VS buy” dilemma impacting management decision-making on internal tech and legacy systems and on costs versus talent acquisition – with a number of credit institutions “highlighting in particular group consolidation and remuneration rules as impairing their ability to employ highly skilled platform developers.”

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