EBA Report on the Use of Digital Platforms in the EU Banking and Payments Sector

The EBA Report points out that this “platformisation” creates opportunities for financial institutions, but also that some risks arise from new financial, operational and reputational interdependencies.

The EBA also identified steps to strengthen the supervisory capacity to monitor market developments.

Background

Digital platforms offer credit, payment and e-money institutions significant potential to transform their business models.

Their use can facilitate access to domestic and cross-border markets for financial products and services.

As part of its Digital Finance Strategy, the European Commission (EC) had given a mandate to the European Supervisory Authorities (ESAs) to assess the need for changes to the supervisory perimeter to capture risks arising from platform and financial services provided by technology firms and from ‘techno-financial’ conglomerates and groups.

The EBA Report is the product of the analysis undertaken by the EBA following the EC mandate.

How has the EBA defined the digital platform?

For the purposes of the Report, the EBA has adopted a broad definition of ‘digital platform’ as:

“a technical infrastructure that enables at least one financial institution directly (or indirectly using a regulated or unregulated intermediary) to market to customers, and/or conclude with customers’ contracts for financial products and services, with the exception of the following, which are excluded from scope:

• mobile banking apps or online banking tools
• platforms used only by (and for) ‘crowdfunding service providers’
• platforms used only by (and for) P2P lending
• platforms that provide only account information services (AISs).”

Why did the EBA draft the report?

The EBA’s objective is to ensure that the regulatory and supervisory framework is technology neutral and effective in the digital era.

It notes that, considering the "search for convenience" of customers driving the trend towards "platformisation" across all sectors of the EU economy, the use of digital platforms - based on third-party technologies - is a strategic move by financial institutions.

The EBA has also observed a sharp acceleration in this trend in response to the pandemic.

The EBA claims that the marketing/distribution of financial services through digital platforms is creating new forms of financial, operational, and reputational interdependencies with technology companies within the EU banking and payments sector.

The EBA considers that many National Competent Authorities (NCAs) have limited knowledge of platform-based business models and are not fully aware of the specific implications in terms of regulatory or supervisory issues.

The EBA does not identify the need for specific legislative changes at this stage, considering EC legislative proposals on digital operational resilience for the financial sector and digital markets and digital services for the economy as a whole.

However, the EBA recognises the need to support NCAs to better understand platform-based business models for supervisory purposes.

What does the report contain?

The EBA has focused on the following 5 main types of platforms currently observed within the EU banking and payments sector:

1. comparators: platforms comparing products by multiple financial institutions;
2. platforms of financial institutions providing access to third-party product and services;
3. non-financial platforms with separate banking / payments services;
4. ecosystems: platforms acting as a marketplace for a plurality of third-party providers of financial and non-financial services/products;
5. enablers: platforms operated by large technology companies, including BigTech, which offer digital wallet and payment services.

The EBA Report identifies a range of opportunities for both EU consumers and financial institutions other than enabling innovative business models; for instance enhanced customer relationships, improved accessibility of financial services, and reduced costs.

At the same time, the EBA intends to mitigate challenges and risks with a set of recommended actions aimed at improving the NCAs’ supervisory capacity to monitor market developments. These actions concern:

• observability of (i) new interdependencies between different types of financial and non-financial institutions (namely, tech-firms) and (ii) the use of digital platforms to provide banking and payment services cross-border;
• issues relating to consumer protection and conduct of business requirements;
• challenges relating to AML/CFT; and
• data protection and privacy issues.

What does the EBA plan to do in 2022?

In this respect, the EBA Report indicates as first step for 2022 two specific actions:

1. developing common questionnaires for use by regulated financial institutions on a digital platform and enablers in order to harmonise the collection of supervisory information against a rapidly changing market; and

2. sharing information between NCAs on the dependence of financial institutions on digital platforms and enablers in order to facilitate coordinated monitoring at EU level.

What does the EBA propose to do next?

Following this first phase aimed at gaining knowledge and experience on digital platform use, the EBA proposes as means of improving monitoring and supervisory tools to:

• build a conceptual and operational framework to aid data aggregation about financial institutions’ use of digital platforms and enablers for financial products/services marketing and distribution, in order to identify the nature and the reach of these dependencies; and
• set parameters and indicators to help evaluation, identification and measurement of potential concentration, contagion and possible systemic risks.

In addition, the EBA proposes to continue its efforts to foster the sharing of supervisory knowledge and experience about digital platforms and enablers on a sectoral and multi-disciplinary basis (not limited to financial sector supervision, but including consumer protection, data protection and competition authorities).

The EBA proposals will be further considered in the context of the Joint Committee of the European Supervisory Authorities (ESAs) response to the EC’s Call for Advice on digital finance, to be published in Q1 2022.

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