Regulation for the new era of banking must balance innovation with risk - whitepaper

The flourishing data economy, the emergence of fintech and BigTech companies in the traditional banking space and the growth of the crypto-assets market all promise a new era for the financial industry, bringing new competition, improved client service and innovative financial products. More fundamentally, these trends could also alter incumbent players’ business models and even financial market structure, says Deutsche Bank’s second edition of its whitepaper, “Regulation driving banking transformation”, which includes contributions from experts across the banking, technology and legal industries.

The first edition of the paper, released in October 2018, outlined the regulatory environment pertaining to the use of artificial intelligence (AI), open application programming interfaces (APIs), cloud and blockchain.

The latest edition notes that the capabilities of these technologies will not be exploited to their full potential without rich and relevant data sets, nor without clients having sufficient trust to share their data with their service providers. While Open Banking initiatives have helped greater data sharing in the financial industry, they omit from scope data stored with other private companies which could otherwise enrich the analytics and, ultimately, the provision of banking services.

The paper assesses the potentially game-changing implications of BigTech companies, which are advanced in consolidating, analysing and using clients’ data, now turning their attention to financial services. While this drives competition, innovation and improved client services, the very distinct business models employed by BigTechs 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.

The third transformative trend assessed in the paper is the evolution of the crypto-assets market. Although the volumes of initial coin offerings (ICOs) or payments in crypto-assets still pale in comparison to traditional methods of capital-raising or payments facilitation, forward-thinking regulators have already made their moves to provide regulatory clarity to set the path for the market’s development.