Over the past few decades, the emergence of the Internet and other disruptive innovations has influenced different sectors significantly. Financial technologies and innovations have impacted the banking sector, influencing banking operations immensely. The technologies continue to influence the development of new business models, processes, applications, and products, which have a material effect on financial markets and banking institutions. Technologies that redefine the provision of financial services by developing new platforms, more efficient, cheaper, and faster processes and banking elements affect the effectiveness of financial services, operations, and processes. Importantly, the innovations and technologies have resulted in the entry of new actors and competitors into the banking and finance industry. The entry challenges the traditional banking systems, operations, and processes. In the last three decades, banks and other financial institutions have been forced to adopt new technologies and invest in innovations that promote their competitiveness and the efficiency of their processes and systems. The emerging banking trends and the influence of the financial technologies and innovations highlight the significant challenge banks face in the 21st century. In 1994, Bill Gates predicted the possible challenges that banks would face with emerging financial technologies and innovations when he asserted that “Banking is essential, banks are not.” The emergence of financial technologies (fintech) over the years has revolutionized banking, influenced the banking processes, operations and systems, and importantly, shaped banking law. This paper focuses on offering an in-depth discussion of Gates’ statement by evaluating and exploring the influence of the technologies and innovations on banking and banks, the strategies banks and financial institutions have adopted to deal with the challenges posed by fintechs, the impact on the banking law. Banks have been forced to forge relationships, enter into mergers and acquisitions, invest in and adopt financial technologies and innovations, and adopt other strategies to remain competitive. Additionally, banking regulations, policies, and laws have been developed to guide the integration of new technologies, the operations of fintechs, and the business elements surrounding the interaction of banks with fintechs among others. Additionally, among the different challenges that came with the emergence of fintechs, banking and innovations include disputes. The discussion of Gates’ statement further covers the highlighted issues to show the challenges facing incumbent banks and their position in the banking sector.
Banking Regulations
Compliance and Supervision Regulations
The Basel Accord outlines the compliance and the compliance function in banks within the context of banking supervision[1]. The continued focus on the effective supervision of banks resulted in the development of a taskforce targeting the identification of accounting issues and supervision concerns in the supervision of banks. According to the Basel Committee, addressing bank supervisory issues and enhancing sound practices in financial institutions requires the adoption of high level paper on compliance risk and the institutions’ compliance function[2]. Banking supervisors focus on ensuring that the existing compliance procedures and policies are followed and that the management/leadership of banking institutions take the necessary measures for the correction of compliance failures. The emerging financial technologies and innovations continue to revolutionize banking and result in the development of policies, laws, and regulations to ensure the compliance of the financial institutions for effective supervisory and legal, regulated, and compliant practices. In the recent past, the Australian Treasury highlighted the government’s priorities regarding the regulation of fintechs and financial and banking innovations. The government seeks to focus on promoting the compliance of institutions that offer financial services regardless whether through established incumbent banks or through fintechs[3].
According to the Treasury, Australia has the potential to become a major player in fintech, which will have a significant impact on banking. The Treasury points out the need for prioritizing the policy setting to create an environment that offers support for the new financial technologies (fintech companies) for the maintenance and the development of a competitive edge and global leadership. Progress in the development of the policy setting will require an informed creation of policies, regulations, and procedures that guide the fintech firms. XXX asserts the need for creating laws, policies, and procedures that guide and ensure the compliance and promote the effective supervision of fintechs. This is regardless of the existing banking framework for the supervision of banks and existing financial institutions. The Australian Treasury argues that new regulations and policies will advance and support the capability of fintechs by supporting the emergence of disruptive innovations. Even where banks and other financial institutions adopt financial technologies, they will need to adhere to the guidelines, procedures, and regulations governing fintechs.
Currently, the Basel Accord and the Australian Law assert that compliance of banks and financial institutions starts at the management. Additionally, they Accords and Australian law attach compliance risk to regulations and policies. The banking corporate culture, therefore, demands high standards of integrity, honesty, and credibility from the directors and senior management. The senior management, directors and bank staff are expected to maintain high standards and comply with regulations when undertaking banking operations. Noncompliance with regulations, procedures, or the banking law poses compliance risks, which may result in lawsuits, fines or termination of banking licenses, or the adverse publicity. Existing compliance guidelines streamline banking operations by banks and minimize the compliance risk including regulatory or legal sanctions, material financial loss, or negative reputation. The continued emergence of new technologies in the case of fintechs makes it difficult to outline clear guidelines and compliance regulations but rather the government continues to update with time. XXX argues for the need for the continued redefinition of the aspects of fintechs to ascertain the development of effective laws, rules, regulations, and codes of conduct, and self-regulatory standards in the course of providing the financial and banking services. The Basel Accords define compliance laws, regulations, procedures and standards as important in ensuring compliance with the standards of conduct, the effective management of conflicts of interests, and the fair treatment of customers among others. The laws focus on ensuring that banks and financial institutions address specific issues such as preventing money
[2] Podpiera, Richard. Does Compliance with Basel Core Principles Bring Any Measurable Benefits? IMF Staff Papers 53, no. 2 (June 2006): 306–25.
[3] Abrahams, Nick. Digital Disruption in Australia : a Guide for Entrepreneurs, Investors and Corporates. Aspendale: Totalu Pty, Limited, 2018.
