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IBM considers that the issues identified by the EBA are relevant at this point in time; the proposed work to be carried out will no doubt highlight further issues to be addressed.
The EBA has identified a comprehensive set of issues. IBM does however have some reservations with the issues around competitive pressures raised in para 79. The emergence of more user friendly, quicker and cheaper services offered by FinTechs can only benefit consumers and businesses, assuming of course that the service providers are supervised and regulated by the relevant authorities. The FinTechs will hopefully incite the incumbents to review and improve their services, processes, ITC systems and customer channels, and potentially integrate Fintech technology into their own systems. Incumbent financial institutions are today increasingly cooperating with and funding FinTechs to leverage new technologies.
The threats have been comprehensively addressed by the EBA. IBM believes that FinTechs and innovative technologies such as AI, cloud, etc. can significantly improve customer relationship, risk management, real-time KYC and business operations, as well as reduce costs.
To comply with the increased volume and complexity of financial regulation, the ability for cognitive intelligence to ingest financial regulations and apply the rules directly to new solutions on behalf of FIs and service providers, and develop integrated mechanisms to ensure compliance and reducing risk will enable cost effective, compliant, risk tolerant solutions. RegTech also enables earlier identification of non-compliance due to system changes and/or regulatory change.
In addition to the range of planned EBA work (para 91), IBM recommends the launch of industry sandboxes, building on the success of regulatory sandboxes, such as the FCA’s initiative in the UK. Industry Sandboxes are described in the Innovate Finance paper (“Industry Sandbox Consultation Report 2017”) to which IBM was an active contributor. Certainly the participation of regulators to gain insight into new technologies and provide regulatory guidance in both Regulatory Sandboxes and Industry Sandboxes is invaluable.
In addition to the benefits listed under Q3 for credit institutions, FinTech solutions enable real-time AML/CFTC and sanctions screening, as well as the opportunities offered by DLT for sharing data end-to end, providing a single source of truth and avoiding reconciliations. Although there are still strong reservations about the scalability of DLT implementations for clearing and settling large volumes of payments, DLT is now progressing beyond POC’s to live implementations, particularly for remittances and to improve financial inclusion.

IBM announced on 16 October 2017 a new DLT banking solution that will help financial institutions address the processes of universal cross-border payments, designed to reduce the settlement time and lower the cost of completing global payments for businesses and consumers. Using IBM Blockchain, and in collaboration with technology partner Stellar.org and KlickEx Group, the solution is intended to improve the speed in which banks both clear and settle payment transactions on a single network in near real time.

The solution is already processing live transactions in 12 currency corridors through leading banks across the Pacific Islands and Australia, New Zealand and the United Kingdom. Using a distributed ledger, all appropriate parties have access and insight into the clearing and settlement of financial transactions. It is designed to augment financial flows worldwide, for all payment types and values, and allows financial institutions to choose the settlement network of their choice for the exchange of central bank-issued digital assets.
IBM agrees that the main issues have been identified.
FinTechs do not carry the burden of old legacy systems and current business models and thus can be more agile in addressing clients’ needs, and leverage new technologies and analytics to further compete for clients' business.

We believe that unless established Credit Institutions finds ways to become more client centric in a flexible and agile way we would expect FinTechs to take market share away from them.
IBM considers that the issues identified by the EBA and the proposed way forward are appropriate; the proposed work will however no doubt highlight further issues to be addressed.
FinTechs attract customers by offering user friendly services and faster availability of funds at lower cost. The incumbent payment institutions are reacting:
• To improve availability of funds, several Instant Payment and Mobile Payment schemes are operational or planning to go live shortly across the EU, progressing from P2P, to P2B and B2B.
• For crossborder/crosscurrency payments, the SWIFT gpi (global payments initiative), focusing on B2B payments, provides: same day use of funds within the timezone of the receiving gpi member, transparency of fees, end2end payment tracking and unaltered transfer of remittance information.
To remain competitive, the incumbents will however need to review their business and revenue models, as well as their processes and ITC to reduce costs.

PSD2 compels incumbent banks and PSPs to share customer data with third parties through APIs. Some banks are already positioning themselves to acquire data from competitors to act as ‘concentrating’ bank for cash management applications and to anticipate demands for funding with predictive analytics, thereby impacting the customer relationships and revenues of the institution providing the data. Transparency will be key when seeking customer approval and implementing agreements on giving third parties access to customer data. Contractual assurances on the data to be shared and with whom, its intended use, and possible financial terms for monetising it can create competitive advantage.

The expanding cooperation between banks and FinTechs and developments around APIs is leading to transaction banking being gradually ‘salami-sliced’. More and more institutions are positioning themselves as platforms, combining in-house with externally sourced applications, products and services.
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On point 118d, IBM suggests that AI and learning systems could be used to analyse large amounts of complaints data, identify issues frequently raised and persistent offenders, as well as point to eventual compliance breaches through RegTech systems.
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Whilst we agree that the issues are relevant, we would highlight that leveraging big data & analytics will provide the regulators with an audit trail on how credit decisions have been made, which should help address the risks mentioned in 4.4.6
We would highlight that AI and analytics can not only help predict when incidents might happen, but also can serve to support the resolution process.

IBM has itself used technology for dispute resolution in our Global Financing business. By leveraging blockchain technology IBM Global Financing saved as much as 75% of capital tied up in transaction disputes with its network of more than 4,000 partners and suppliers. The blockchain network provides a comprehensive visibility across the entire transaction lifecycle allows stakeholders to prevent or speed the resolution of disputes.
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Jean-Marc Leclerc, Government and Regulatory Affairs Executive
+32 472 71 77 38