The Future of Retail Financial Services
In recent years, digitalisation of the economy has accelerated at a steady pace, and retail financial services for households are no exception to this phenomenon. This Task Force defines “retail financial services” as all household financial services, except those involving an investment component. As such, they encompass products as diverse as loans, accounts, payments, car insurance, property insurance, etc. Digital transformation in retail financial services results from the combination of a completely new approach towards data with a new model of interaction between providers and consumers. First, the tremendous growth in available digital data (both financial and personal) and the increasing sophistication in the techniques to exploit this data (big data analytics) are likely to disrupt markedly the traditional models used to collect and exploit data in all phases of the product: advertising, advise, scoring, pricing, prevention, recovery, claims, retention, etc. Secondly, digital platforms that are increasingly user-friendly, personalised and interactive are likely to transform the traditional model of face-to-face interaction with service providers for authentication, advice, assistance, etc. As revealed by several studies (notably by McKinsey in 2015), these disruptions, that are led by FinTech companies and that are increasingly integrated by mainstream banks, affect in particular household lending and payments. Such massive transformation brings numerous opportunities for the financial sector, but also raises a multiplicity of complex regulatory questions.
In the context of the green paper of the European Commission on retail financial services, CEPS-ECRI directed the study for the European Commission, DG FISMA, on “digitalisation, retail financial services and single market”, with two organisations specialised in the analysis of financial innovations: University College Cork and the Luxembourg Institute of Science and Technology (LIST). Specific interviews and focus groups were conducted with market players in order to better appreciate the potential technological developments in the coming years and their possible impact on the single market for retail financial services. As a followup to this study, CEPS-ECRI proposes to organise a Task Force aimed at discussing the policy framework to shape this digital transformation with industry experts, regulators and academics, to culminate in a report with policy recommendations and an action plan that will be addressed to the European regulators (primarily DG FISMA, DG Connect, EBA, ECB and the European Parliament). The objective of the Task Force will be to address the various challenges arising from the digital transformation and possible regulatory responses, notably for peer-to-peer lending platforms, social media data, digital authentication, roboadvisers, blockchain, among others.
A kick-off meeting of the Task Force was held 14 September on “The Future of Retail Financial Services: What policy mix for a balanced digital transformation?”. The study submitted to the European Commission DG FISMA in the context of the green paper was used as an input to the first meeting chaired by Kim Vindberg-Larsen, Senior Consultant, Copenhagen FinTech Innovation and Research. A limited number of individuals were invited for this meeting, to provide for ample opportunity for exchange with the moderator and the speakers. As described below, the agenda had three presentations, followed by interactive discussions with the participants. Mr Salles from the European Commission, DG FISMA, presented the latest developments on the work of the European Commission on FinTech. Mr Bouyon and Mr De Groen presented the key findings of the study submitted to the European Commission, DG FISMA, in the context of the green paper. A third speaker explained the point of view of the market on the digital transformation and the possible regulatory needs. A tentative set of issues to be addressed by the Task Force are listed below. During the kick-off meeting, the Task Force agreed on a priority list of issues to be discussed.
CEPS will bring in its own expertise on digital economy, data protection and financial regulation; other external experts were also invited. The scope of the products to be covered was defined during this meeting (as specified above, it can concern all household financial services, except those having an investment component: loans, accounts, payments, car insurance, property insurance, etc). This CEPS-ECRI Task Force should meet twice or three times between September and February (in addition to this kick-off meeting). The first meeting focused on identifying and conceptualising the key characteristics and challenges of the digital transformation of the retail financial sector. During this meeting, the first elements of an action plan for European policies were discussed. If needed, a second meeting will complete the key findings of the discussion held during the first meeting. Finally, a meeting will be organised to finalise the action plan, based on a broad consensus reached among the Task Force Members. At the end of the Task Force, ECRI will publish and circulate among EU and member state policy circles an authoritative analysis including policy recommendations together with an ECRI Task Force Report, which will also be officially published in the CEPS Task Force Report publication series and relevant international publication schemes. This report will be based on discussions in the meetings supplemented by research carried out by the rapporteur.
List of possible issued to be addressed
Level playing field between mainstream and alternative providers: How and to what extent will alternative providers (such as peer-to-peer platforms) affect the offer of products? Will they substitute for mainstream providers or will they be complementary? Do these new entrants contribute to better competition and enhanced consumer welfare? Is a specific European regulatory framework needed to ensure a better level playing field between both types of providers? (1)
Appropriate collection and use of alternative data: How and to what extent will alternative data (social media data, etc.) shape marketing, scoring, pricing, retention, recovery and prevention for retail financial services? Can social media data help consumers with thin credit files have better access to retail financial services? What are the related risks in terms of data protection, financial inclusion, quality of the scoring and pricing, etc.? (2)
Increasingly sophisticated algorithms that combine both ethics and efficiency: How to ensure that the increasingly sophisticated algorithms continue to find an appropriate balance between ethics and efficiency? What should be the position of European policymakers to maintain this balance: “pro-active” or “wait and see”? (3)
Financial education promoted by digitalisation: How and to which extent can the digitalisation be used to contribute to better financial education of consumers? (4)
Risks and opportunities of increasingly digitalised distribution channels: Will providers be able to completely digitalise the distribution channels of retail financial services? What are the risks and opportunities regarding the different devices (screens, tablets and mobiles), the different phases of the product (advertising, advice, assistance, scoring, pricing, recovery, prevention, retention, etc.), the different segments of products and the different digital technologies (digital authentication, video-calls, robo-advisers, etc.)? What is the most appropriate approach at European level? (5)
Best regulatory approach to boost interoperability within and across countries: What has the eIDAS accomplished so far? Will there be further needs in terms of interoperability (across organisations both within 4 and across countries: digital authentication, electronic signature, document admissibility, etc.)? How could regulators contribute to further interoperability? What about security concerns? What is the best regulatory strategy to boost the interoperability between the stakeholders involved in retail financial services with more complex processes (such as mortgage products that request extensive documentation and the participation of several external stakeholders such as notaries, land administration, etc.)? (6)
Risks and opportunities of blockchain technologies: How might blockchain technology disrupt the market of retail financial services (virtual currencies, “smart contracts”, etc.)? What are the risks in terms of security, capacity, etc.? Should regulators facilitate or not the emergence of blockchain technology? What are the related regulatory needs in terms of standardisation, interoperability, consumer protection, infrastructures, etc.? (7)
More and more regulatory initiatives for payments: What is next for this particular sector?: PSD2, SEPA, AML, PAD and MIF, what is the cumulative effect of all recent regulation for payment/account? With the emergence of mobile payments, will service subscription cost models take over? Data protection in online payments: What are the issues? How can a balance be struck? What would be the most appropriate KYC infrastructure? How can policymakers contribute to facilitate the digitalisation of cash transactions? (8)
1st: 14 September 2016
This ECRI Task Force is principally designed for ECRI members but participation will open to non‐members as well, at a fee. The fee covers participation in all workshops, documentation, lunches and three copies of the final report; upon request, CEPS will mail additional copies of the final report to persons identified by participants
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