On 16 July 2018, the BaFin published a speculative study addressing the technological developments of big data (BD) analytics and artificial intelligence (AI).

As BaFin President Felix Hufeld mentioned in the study’s foreword the financial sector is undergoing profound technology change with digitalisation reaching new heights. The study describes the BD / AI interaction and how this phenomenon can change the financial system and what implications it has for supervisory and regulatory bodies. BD / AI is not only suited to optimizing existing business structures, but paves the way for completely new applications, products, services and business models all of which have inherent opportunities and risks.

In terms of BD / AI impact on the financial system the study finds that:

  • capital markets are ahead of banks and insurance companies in terms of BD / AI usage. Banks and insurance companies are only just beginning to use BD / AI whereas it has been used extensively in the capital markets for many years with extensive use of large data sets and algorithms;
  • BD / AI can foster a “winner-takes-all” market structure. The more data available to a company, the more insights it can generate. These insights can then help the company develop more innovative products, from which it can, in turn, obtain additional data; and
  • unregulated BD / AI providers could become systemically important for the financial market. Dominant BD / AI providers can take data that they collect from outside the financial sector and put it to profitable use, particularly in the financial market.

For banks the key messages in the study include:

  • BD / AI innovations foster the disaggregation of the value chain – possible separation between the customer interface and the product platform;
  • BD / AI innovation could determine the outcome of competition at the customer interface;
  • transaction data is valuable BD / AI input and also attracts providers outside the financial sector;
  • BD / AI innovations allow for efficiency and effectiveness gains in core processes. The use of BD / AI on product platforms offers significant potential for all core banking processes, whereby the efficiency gains are typically conceivable in those areas in which there are sufficiently high numbers of similar tasks; and
  • sales of anonymised data analyses as a potential new business model – however, this is not set to replace traditional earnings.