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The payments industry is undergoing a transformation amid the emergence of open banking, fintech innovation and the looming competitive threat coming from traditional tech firms, according to a report from European banking regulators.

“All institutions may need to consider near-term transformation to secure their positions in the value chain, which keeps changing, partly because of fintech developments,” the European Banking Authority (EBA) said a new report released on Monday.

“Customers’ behaviour and needs keep changing and cannot be easily predicted, forcing institutions to be flexible and agile to adapt easily rather than to employ long-term strategies,” it noted.

Many firms are developing their competitive responses internally, the report said, while others are looking to partner with external fintechs.

In particular, the report found that firms are investing heavily in the development of open APIs and in digital/mobile wallets, “as they foresee potential opportunities to offer augmented services to their customers.”

Overall, the report concluded that “The outlook of the payments sector is quite positive in terms of revenues and profitability, with an overall expectation for increased customer base and new or revamped products, accompanied by an increase in internal fintech developments and IT spending.”

However, alongside the opportunities for growth and innovation, the report also highlighted the threat of new risks for the financial sector.

“The risk landscape is evolving as a result of the growing shift towards digitalisation, political uncertainties and the regulatory framework,” it said.

For instance, it pointed to the risks that arise due to data sharing, including heightened privacy and security concerns.

The report also said that looming competition from big tech firms (such as Apple, Amazon, Google and Facebook) in the payments sector may lead to rising concentration risks “that need to be closely monitored and managed to safeguard financial stability and consumer protection.”

Additionally, the added competitive pressure from these big tech firms may also “threaten the sustainability of existing institutions’ business models, raising the importance of maintaining customer relationships,” it said.

Existing firms should focus on “building strong operational resilience and capacity to secure and support their operations and expansion while adequately monitoring and complying with regulatory changes, as well as educating their customers and workforce,” the report said.

The EBA also noted that it will continue working toward a balanced approach to regulation that “protects financial stability and consumers while embracing innovation and being sufficiently flexible for future developments.”