The Role of Financial Services in Society: Understanding the impact of technology-enabled innovation on financial stability

Industry AgendaThe Role of Financial Services in SocietyUnderstanding the impact of technology-enabled innovation on financial stability Prepared in collaboration with Oliver Wyman © WORLD ECONOMIC FORUM, 2016 – All rights reserved.No part of this publication may be reproduced ortransmitted in any form or by any means, includingphotocopying and recording, or by any informationstorage and retrieval system.REF 291215 3Understanding the impact of technology -enabled innovation on financial stabilityContentsPreface5 Executive Summary6 A New Kind of Innovation7 Opportunities to Enhance System Stability8 Risks to System Stability and Business Conduct10 Recommendations for the Private Sector and and Supervisory Authorities15 AcknowledgementsRegaining system stability and public trust has been a core challenge of the financial sector since the financial crisis. This task has been further complicated by the rapid deployment of financial and technological innovation, which have fundamentally changed how a financial services company and the value it delivers are defined. As legacy business models and long-held value propositions in financial services are reshaped by these new ideas, key actors in the system must work to ensure economic growth does not come at the expense of systemic stability.The Role of Financial Services in Society initiative was launched in 2012, with support from Oliver Wyman, to bring together a range of senior financial stakeholders, including leaders of financial institutions, financial policy-makers, leading economists and academics, executives of commercial firms that rely on financial services and representatives of civil society including consumer advocates and unions. Together, we are seeking a common vision for the industry’s role in society and, through that shared vision, a strengthened bond between the financial services industry and society at large. 4Role of Financial Services in Society 5Understanding the impact of technology -enabled innovation on financial stabilityExecutive SummaryThe Role of Financial Services in Society initiative aims to consider the impact of accelerated growth in technology-enabled innovation on the risk profile of the financial system.As part of this work, the Forum has completed a series of interviews with industry executives and experts to better understand the technological transformation taking place in financial services.This document provides a summary of findings and recommendations identified during the interviews, including: –Why this wave of new innovation, enabled by technology, is unique –How technology-enabled innovation creates opportunities for enhancing system stability –Where the use of technology has fundamentally changed the risk profile of the financial system –What recommendations can be made to the private sector and financial supervisors to maximize benefits and mitigate risks associated with technology-enabled innovationWe refer to financial services companies and providers throughout this document. Given the velocity of transformation within the financial sector, it is important to note that this reference is inclusive of all actors within the system from incumbent financial institutions to nontraditional financial services providers (“nonbanks”) and new entrants (e.g. fintechs and telecommunications companies).Ultimately, recommendations detailed in this document aim to foster competition between traditional financial players and new entrants while also preserving system stability in light of technological advancement.Figure 1: Recommendations for the private sector and financial supervisors1Debate on ethical use of dataGovernment, in collaboration with financial supervisors, should facilitate a public debate involving consumers and practitioners to clarify the boundaries for which financial services companies can use personal data for business purposes2Public-private dialogue on transformationA global forum should be established for public-private sector dialogue aimed at discussing technology-enabled transformation in financial services, particularly to identify areas where supervisor support is needed to develop technology for enhancing stability3Approach standards for monitoring and understanding technology-enabled innovationThe international supervisory community should define a set of standards on internal capabilities required to ensure that national supervisors are well equipped to monitor and mitigate against risks arising from technology-enabled innovation4Proactive standard settingThe private sector should create industry standard-setting bodies that redefine and enforce standards of good conduct in light of new technology-enabled innovations 6Role of Financial Services in SocietyA New Kind of InnovationThe financial services industry exists to fulfil a number of core societal needs, from enabling payments to promoting financial and economic resilience1. The financial sector has begun to more strategically harness the be