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Controlling the Power of Technology in the Digital Banking Revolution

© Mimi Potter

In recent years, the rapid pace of technology development has given rise to an ecosystem of efficient and reliable solutions that are leading the way toward the complete digitalisation of banking services. However, it is essential that we clarify who is responsible at each stage of the complex value chain. CACEIS experts give us some insight.

Aware of the issues at stake, the banking sector has been taking ownership of digital topics and addressing these priorities for years. For most, it has become a top priority. Looking at the expected benefits from both bankers’ and clients’ perspectives, they are evident. For bankers, it provides an opportunity to differentiate yourself from the competition via customised client experiences, an increase in both operational efficiency and security with cutting-edge technology, and finally a new usage case in digital tools for subscription to products and services. From the clients’ perspective, there’s the time and cost efficiencies, personal monitoring, and an increase in the range of accessible services.

As part of this acceleration and in order to create a harmonised framework to promote the digitalisation of financial markets, the European Commission’s Strategic Plan - A Europe Fit for the Digital Age - the Digital Agenda, was published in September 2020 and sets out 4 main priorities:

  • Removing fragmentation of the Digital Single Market,
  • Adapting the EU’s regulatory framework to facilitate digital innovation,
  • Promote data-driven finance, and
  • Addressing the challenges and risks of digital transformation, including strengthening the digital operational resilience of the financial system.

Arnaud Misset - Chief Digital Officer“We have to face facts, Digital Banking is no longer just a “digital topic”. Look at the developments in financial technology over the past few years, and we can see a clear path to digital banking marked out by a host of powerful and robust digital solutions” says Arnaud Misset, CACEIS Chief Digital Officer.

The range of Fintech products and other digital solutions has never been so large. The entire value chain is now covered digitally, and the Open Finance movement is leading the way to seamless interconnections between all parties involved. Consequently, the question shifts from ‘Who has a solution?’ to ‘Who has the best solution?’ and importantly ‘Who has responsibility for what?’. There is no longer one single developer or service provider, but a fragmented ecosystem. This highlights the risks and compliance issues for any client-facing party. Clearly, end-investors are expecting a seamless digital journey but it gets complicated when we start thinking about data ownership, data protection, and responsibilities throughout that journey.

“From our perspective there are 3 key factors in responding to those questions: transparency, standardisation and regulation” explains Arnaud Misset.

Transparency: Different parts of products or services are today often provided by different parties. Like in other industries, the one playing the leading role takes on responsibility for the overall relationship with the client, and full transparency for other player in the chain is mandatory for monitoring responsibilities. The end-investor must fully understand who has access to and manages his or her data, and which party has responsibility if something goes wrong. Full disclosure and full transparency is also necessary in defining processes between the providers, each party having to know exactly who does what in the chain to deliver the service. Financial tech and the Open Finance movement has disrupted the full in-house model and brought back the classic “best-of-breed” model to the industry.

Standardisation: “Each new tech development brings a competing standard but only a few will go on to define what the industry as a whole uses. Products themselves don’t necessarily need to be standardised but we believe that the tech layers really should be” says Arnaud Misset. Standardisation of technologies and protocols is the best way to avoid issues with data security and service continuity. If one provider in the chain goes out of business, standardised tech layers mean it shouldn’t be too painful to find an alternative solution. However, proprietary models increase the risk of data losses and service interruption. Standardisation also plays a role in improving the ease of performing service audits and monitoring.

Regulation: Regulating the digital ecosystem removes barriers to adoption on a global scale but regulation is always one step behind the fast-paced development of technology. “It is important to keep in mind that technology and regulation are not evolving at the same pace. The ‘sandbox’ approach experimented at European level with the Pilot regime and the establishment of a transitional regime of exemptions to MiFID2, Finality and CSDR can greatly contribute to bridging this gap. By facilitating a large scale “test and learn” logic, regulation should be both the cornerstone and the final piece of the puzzle” completes Eliane Méziani, Senior Public Affairs at CACEIS. Trust, both in the technology and between the partners is underpinned by the regulatory framework that governs the industry and it is an essential element in our increasingly digital-centric future.

Eliane Meziani - Senior Advisor-Public Affairs"Many clarifications are expected on these topics, especially through the regulations on artificial intelligence, on crypto-asset markets and the pilot regime, as well as the legislation on digital markets and services (DMA & DSA). The regulator will have to adopt a very agile policy in order to keep up with the fast-paced digital development, such as the rapid launch of new types of crypto-assets", concludes Eliane Méziani. Regulation governing the Pilot scheme for market infrastructures based on DLT (Distributed Ledger Technology), designed to facilitate the exchange and settlement of financial instruments issued in the form of crypto-assets, is expected to be published during the 2nd quarter of 2022, and come into force in early 2023.

The draft "Market in Crypto Assets" (MiCA) regulation, which should regulate crypto-assets in Europe, was adopted on 14th March by the European Parliament's Economic Affairs Committee, paving the way for the text to come into force by 2024.