The headquarters of the Association of German banks in Berlin
The Association of German banks (Bundesverband Deutscher Banken) has released a report on the digitalisation of the financial industry. The authors of the document, answering questions of representatives of the Bundestag, described the current state and prospects of the industry, including blockchain technologies and microcredit. The Association has more than 210 German banks, including giants Deutsche Bank and Commerzbank, working on blockchain projects in partnership with the start-up R3. Betnovate prepared an abridged translation of the document.
Will the proliferation of digital technologies to fundamentally change the business model of the Bank? If there are breakthrough innovations in this area?
For the financial industry digital technology is not news. Gradual digitalization began more than 50 years ago, with the introduction of automated data processing and provision of services by phone and by mail. Aimed at the mass market developments are introduced in areas that require more individual approach to the client, such as counseling.
The proliferation in recent years of smartphones and tablets, and broadband access to the Internet, caused a strong push of digitalization. Technical innovations have made financial services more affordable for the client and reduced barriers to market for financial institutions. The financial services market under the influence of the Internet is becoming a “customer market”. The producers of financial services less freedom in determining the price and less opportunities for differentiation.
Today it is impossible to answer accurately the extent to which technical innovation and in which jurisdiction will be the breakthrough. Among the most promising, razrabot. in the early stages of development, the use of biometric information for authentication and the blockchain technology.
FINTECH companies, as a rule, do not possess a banking license and are not seeking to obtain, providing services through partner banks. Regulators should consider the regulation of such companies to protect customers and ensure stability in the market.
Germany is an attractive jurisdiction for FINTECH projects? What countries are most attractive in this respect and that their experience can learn from Germany? What are the expectations of the financial sector imposes on the regulators?
Germany needs to maintain a favorable climate for innovation in the financial sector. It may, among other things, to speak against the regulators and Supervisory authorities. For comparison, in the UK the authorities intervene much more actively in the work of innovative companies in the financial sector. The German authorities in this sense, careful watching rather than active.
In Germany, widely discussed, up to the level of the Federal government, the problem of regulation of financing by private capital (private-equity). In this respect, the US and the UK have the advantage.
Politicians and regulators are facing new challenges: on the one hand, new technological solutions, develop FINTECH companies, means a surge of innovation in the financial industry. Innovation should not be impeded. On the other hand, it is necessary to find a compromise with the protection of customers and market stability. You should pay attention to the different approaches of regulators to the companies with a banking license and without it.
The inconsistency of the European legislation is hurting both banks and FINTECH companies. Requirements for measures to counter money laundering in Europe still differ greatly from country to country. This prevents the spread of successful solutions in the whole of Europe. Feature Germany — various data protection laws in different lands, which also interferes with the German FINTECH companies. Urgently needed General legislation in this field.
The European Commission tries to promote integration of capital markets in Europe. Can FINTECH companies to carry out the arbitration, that is, acting from other European countries, to provide financial services in Germany?
Financial market in Europe remains highly fragmented. Almost no Bank in the state of being in one member state of the European Union to provide services throughout the EU. Each country has its own peculiarities of taxation, legislation and regulation in the field of consumer protection. For companies makes sense for the market entry of new countries to establish a separate enterprise. In the short term it will not change. This is true for banks and FINTECH companies.
Does the digitalization of threats to the stability of financial markets?
FINTECH companies aim to mediation services between lenders and the owners of capital in the region, not governed by banking legislation. They increase the transparency of the market and open new markets outside the regulated banking sector, where regulators process huge amounts of data, watching for risks. In this regard, the risk of instability may grow, as the regulator will not have the necessary information and legal means of intervention to correct errors outside the banking sector.
Customers now have a wider choice, but must bear the greater responsibility. Policy must recognize that outside the regulated banking industry with its laws on the protection of the client are investors who are able to answer for their actions. Regulation should ensure equal conditions on the market of credit services.
How digitalisation will affect the branch network of banks?
The events of recent decades show that although customers appreciate the Bank has physical offices (possibility to visit the office is one of the main criteria when choosing a financial services provider), in practice, customers rarely use them. This trend will continue as the popularity of alternative channels of communication of the client with the Bank. The credit institution will be forced to adapt to the trend and to optimise the branch network. How exactly — depends on the characteristics of a particular Bank.
That should make legislators, companies, and customers to ensure the security of financial transactions in the light of digitalization? What measures are most effective?
Banks sell a variety of measures to protect online banking and their infrastructure, preventing unauthorized access to customer data. Among other things, are used based on a set of rules of the intrusion detection system. Attackers are constantly improving their skills, and the Bank has no way to affect the security of the hardware and software of the client.
Customers must follow a set of simple rules. You must use the latest versions of OS and antivirus. The EU should develop a common framework of information security to provide equal opportunities to all companies.
FINTECH companies rather competitors or partners for banks? The areas in which their cooperation could be most fruitful?
FINTECH companies can be roughly divided into two categories: providing services for a client or for some internal process of the Bank.
With the first category of banks are in direct competition. Although there are nuances: a custom platform for microfinance (crowdlending) may not compete with the Bank: its customers still could not get a Bank loan because of small volume or high risk. Competition is not a new concept for private banks. It is important that politicians and regulators have created a site with equal conditions for all, that competition gave optimal results for customers and the economy.
The second category of FINTECH company cooperates with the banks. Their business model is to offer banks an innovative solution to optimize internal processes.
Many of the technologies that are now launching on the market of FINTECH companies, interesting for banks. These include, for example, automated advice.
How do you assess the prospects of cryptocurrency? Can a large company (Google, Apple, Facebook, Amazon) to enter the market using similar technologies? What are the implications of the decision of the European court on the release of bitcoin transactions from VAT?
The European court has ruled that bitcoins can use it like a legitimate means of payment. Without going into questions about the extent to which this method of payment convenient and popular now and how state institutions will respond to the growing popularity of virtual currencies at first glance, the main consequence for issuers of virtual currencies, according to the court, will be the possible attention from Bank Supervisory authorities.
There is no reason to believe that these major players are developing solutions based on virtual currencies.
In our opinion, much more important for the development of the financial industry is the underlying bitcoin technology blockchain.
Blockchain has a chance to make a revolution in the whole modern system of calculations, including securities trading and currency exchange.
Today we can’t anticipate the reaction of consumers and future usage scenarios of this technology. It is unclear how will be solved the issues of data security. Depending on the development of technology and its implementation in the legal space there will be new risks and new opportunities for banks and other regulated companies.
What the implications of P2P lending from the point of view of the borrower and the lender? Under what regulation should be subject to such platforms? Whether they bear risks for financial stability?
Credit platform to expand financing opportunities for businesses and individuals and offer new ways of investing for investors. This is to be welcomed, especially because the access to capital obtained including those who previously didn’t have it because of the high risks or the smaller volume of lending.
From the point of view of consumer protection it is important that investors understand what laws there are organizations where they invest, and properly assessed risks. The new credit platforms have yet to prove their worth and resistance to cyclical market fluctuations.
We do not believe that the industry now requires additional management. Providers of innovative services should generally tightly regulated at the early stage of development.
Will the creation of new enterprises taking over the communication with the client, to the erosion of the classical notion of a Bank?
A representative survey among members of the Association of German banks has shown that customers tend to take financial decisions very conservatively. Reliability, quality and a wide range of services — strengths of banks will long be valued highly. In order for innovative FINTECH companies gained significant market share in the first position in importance for the clients should exit the convenience, individuality solutions and affordable price.
What will be the role of a digital platform that provides financial organizations, for example, simple cash transfers?
While this ecosystem is not widespread because of the need to obtain a banking license and the differences between the markets of European countries. Besides, users do not consider the Internet platform a trusted store their financial data. Further development of the market depends on relations between banks and FINTECH companies, especially from the actions of the banks. Banks solve the problem of digitalization, develop their solutions and not giving up in the battle for customers.
What is the optimum approach needs to be arranged a bunch of traditional banks and innovative FINTECH companies in Germany? What are the German cities most favorable for FINTECH companies?
The Association of German banks — a staunch supporter of cooperation between banks and FINTECH companies. Each of the parties can bring their strengths: banks — long-term trust, high standards of products and consumer protection, a wide range of services for all client groups. FINTECH companies, in turn, offer dynamism, innovativeness, focus on convenience.
The optimal set of banks (now very diverse) FINTECH companies develop into a market at the level of individual enterprises. Responsible policy regulators should encourage this partnership to the competition to give maximum benefit to customers.
Both banks and FINTECH companies is still to prove his ability to adapt to changing conditions. FINTECH companies, the growth will fall into the field of view of politicians, regulators and Supervisory authorities. Not all of them will survive, but those who survive the competition will turn into long-term projects and may take away some market share from banks.
Traditional geographical factors do not lose their importance even in the age of digitalization. For FINTECH projects important access to investors, the exchange of ideas and the creation of a business environment that requires direct communication. The concentration of businesses in one place makes it possible for ecosystems to carry out mutual technical and legal consultations. The advantages of Frankfurt — close to banks, while in favor of Berlin says variety: there are more representatives of various industries and above the “cross effect”.
The impact of digitalisation on the labour market? Which occupations will be replaced by algorithms?
Mostly the impact will be low-skilled workers that perform standardized actions. The extent to which digitalization will affect qualified personnel (e.g., consultants), depends on the development of appropriate algorithms and how graciously they accept customers.
According to the materials Coindesk, bundestag.de (pdf)