Big tech has long been credited for spearheading digital transformation and igniting a new era of innovation in the banking sector.

Fintech businesses are the producers of emerging technologies. Between 2019 and 2023 alone, investment in these companies reached a whopping US$865 billion, more than twice as much as between 2013 and 2018.

But with new discoveries also come the emergence of fresh weaknesses and the amplification of already-present dangers.

Therefore, even as banks scramble to adopt the newest technologies, the issue of whether the advantages of digitalization outweigh the hazards still stands.

Maybe not according to the Basel Committee on Baking Supervision (BCBS), a worldwide regulatory body that sets criteria for bank capital, financing, and liquidity. According to BCBS, ongoing innovation in the banking industry has opened the door for risks related to data, operations, reputation, and strategy.

An increase in risk within the banking industry

The concerns listed by the BCBS are related to the development of distributed ledger technology (DLT), artificial intelligence (AI), open banking, and the usage of cloud computing, which is the practice of supporting core banking services through the use of third-party cloud technologies.

Because of the growing number of linkages between banks and fintechs, these innovations are allowing the banking sector to provide never-before-seen levels of client experience. However, the BCBS is concerned that these developments may put banks' operational resilience and system-wide risks to the test.

THE FOLLOWING OPERATIONAL RISKS:

• Model risk: Using AI and ML increases the possibility of model risk

• Technology risk: The history of banks IT systems might not be flexible enough.

• Cyber risk: New business models and technological advancements may make cyber risk higher.

• Legal ambiguity: Some technologies might put current legal systems to the test

• Banks that depend on outside companies to conduct KYC/AML checks run the risk of noncompliance.

• Risk associated with fraud: Digitalization makes it easier for new kinds of fraud

Furthermore, it is important to keep in mind that banks are subject to stricter regulations than their fintech rivals, which may result in a failure to comply with regulations.

Will thus new rules be needed to manage the dangers, especially with regard to the partnerships that open banking has created?

In order to reduce risks and vulnerabilities, the regulator said that it "will consider whether additional standards or guidance are necessary."

Are banks and fintechs going to face new rules soon?

With the BCBS expressing similar worry about data-related banking risks, which might worsen a bank's data governance difficulties, perhaps new banking laws should be proposed sooner rather than later.

The BCBS, which is composed of regulators and central bankers from the G20, pledges to implement the policies that its members collectively agree upon.

Therefore, more financial regulators should be anticipated. This might provide a greater difficulty for fintechs that are less regulated than for banks, which have long been subject to strict laws and regulations.

However, the exact nature of these rules is unknown, and it's possible that banks alone bear the burden of complying with regulatory requirements.

The Office of the Comptroller of the Currency (OCC), a US financial regulator, proposed earlier this year that banks should be the only ones in charge of actively monitoring the risks associated with fintech partnerships.

As a result, this obligation may be fulfilled as soon as BCBS members take action.