‘Banks and fintechs working together entails opportunities and risks’

The governor of the Central Bank of Cyprus Constantinos Herodotou and the president of the European Banking Authority Jose Manuel Campa this week emphasised the potential for positive synergies between fintech companies and traditional banks

However, they also stressed the need for supervisors and regulatory frameworks to remain vigilant as new technologies bring forth challenges and risks.

Speaking at an event on whether banks and fintech companies can co-exist, Campa commended the significant transformation of Cypriot banks, which have successfully reduced their non-performing loan ratios to 3 per cent of total loans.

He also encouraged them to continue their commendable work as their non-performing loan ratios remain slightly above the European average.

Preliminary results for the first quarter of the year indicate that the Cypriot banking sector boasts the highest return on equity among European banking systems.

This achievement has been facilitated by increasing interest rates and expanding interest rate margins, while effectively managing their funding costs.

The improved profitability has not only helped enhance the Cypriot banks’ solvency ratios but also demonstrated their high levels of liquidity.

Furthermore, Campa discussed findings from the upcoming Risk Assessment Questionnaire (RAQ) survey, revealing that 85 per cent of Cypriot banks surveyed embrace financial technology.

He stated that between 50 per cent and 100 per cent of the banks’ customers have access to either retail or corporate banking services through digital channels.

Additionally, 82 per cent of the banks are expected to leverage artificial intelligence applications for regulatory or supervisory reporting, risk monitoring, fraud detection, and creditworthiness assessment.

“82 per cent of the participating banks have reported plans to engage in partnerships with major collaboration companies for the provision of financial services,” he added.

Moreover, Campa highlighted the strong demand for financial technology solutions,
emphasising the positive role that technology can play in shaping financial intermediation.

According to him, financial technology has the potential to improve efficiency within financial institutions, including internal processes such as regulatory compliance and supervisory reporting.

“Assigning functions to specialised technology units can enhance the focus of banks on core tasks,” he stated, while also emphasising that leveraging digital platforms or partnering with technology firms can assist banking institutions in expanding their customer bases, including cross-border markets, by capitalising on economies of scale.

“To responsibly exploit these opportunities, the industry and regulators must actively identify, monitor, and mitigate the multifaceted and interconnected risks,” Campa said.

During his speech, Herodotou underscored the potential for collaboration between banks and fintech companies, aiming to leverage the strengths of each sector and deliver better services to customers.

“Benefits can be realised when combining the network reach and supervisory expertise of a bank with the flexibility and innovative operational model of a fintech company,” he explained.

Among other topics, he addressed the need for financing these companies to enhance their business operations, while banks can potentially benefit from partnerships with such firms by gaining experience in new technologies and business models.

“New opportunities come with challenges and risks,” Herodotou said.

“The supervisory and regulatory community must remain vigilant and ensure compliance with laws and regulations, regardless of business models and the level of technological advancement,” he added.