Speech by Dr Andreas Dombret, Member of the Executive Board of the Deutsche Bundesbank, at the 2015 Bavarian Financial Summit "The opportunities and challenges of digitalisation for banks and insurers", Munich
1. Digitalisation of the financial industry: a better era or the seeds of the next crisis?
There is no doubt that the wave of digitalisation has walloped the banking industry and will leave no stone unturned. The percentage of bank clients in Germany who regularly bank online is now 63%.1 Many of them have smartphones and want to be able to do their banking anywhere, anytime. The banks need to figure out their role in this new world. It would help, of course, to know which direction this wave of digitalisation is sweeping us in. Will the financial industry become totally digital? Allow me to address this question.
Digitalisation has created great expectations for the financial industry: using today's IT can make the financial system much cheaper, much faster, more customised, more flexible and more efficient. [...]
The financial system is particularly vulnerable; rogue innovation can have severe consequences for society. There are therefore notable voices asserting that information technology will be at the core of a forthcoming financial crisis. Greg Medcraft, chair of the board of the International Organization of Securities Commissions (IOSCO), has predicted that the next big financial shock will come from cyber space following a succession of attacks on financial players. To be frank: I share this view.
So the wave of digitalisation can wash us up on all sorts of coasts. This means banks and supervisors need to set about charting the right route without delay. One thing I wish to state upfront: I do not believe that full digitalisation is the right destination for everyone: instead, we need to strike the right balance and seek out the right overall package which will convince society over the long term. [...]
2. Banks: finding their feet in the digital world
Banks can no longer discount digitalisation as just one of many trends they can simply sit out. Pressure is being created not only by new expectations among customers and within the industry, but also by the influx of new competitors from other industries. [...]
Fintechs, as they are known, symbolise the attack of the "small and quick". These are hi-tech financial services firms which mostly provide just a limited range of services but are highly innovative and show huge competitive potential. Banks need to acknowledge fintech companies' great innovative power without envy. [...]
"Blockchain" technology is credited with having a particularly sobering impact on banks. By using the global computer network, this technology is enabling all transactions conducted in the world of finance to be documented in a presumably forgery-proof, near-real-time and, above all, decentralised manner, ie potentially without central securities depositories or banks. Any individual and any company could therefore settle money, securities or any other type of asset and liability directly with other financial market agents - thus obviating the need for the existing, unwieldy settlement infrastructure used by banks, CSDs and central banks. As a solution for the entire financial system, this technology is thus raising fundamental questions - including regulatory questions. [...]
With regard to online and mobile payments, German banks have, in the meantime, seen the writing on the wall and have developed their own in-house solution, known as PayDirekt. [...]
Digitalisation therefore highlights customers' desire for fair treatment and transparent bank services. However, even in the area of digital applications, confidence is fragile: an algorithm which acts as a financial decision-making aid needs to actually help, and not to manipulate, its user. The use of "big data" analysis makes sense only if it does not abrogate human self-responsibility. [...]
3. Sector supervisors: have the courage of clairvoyance
[...] Wherever new risks are potentially created by digitalisation, we therefore need to respond in a sensitive manner; regulatory and supervisory practice therefore need to adapt. Upheaval in the financial industry caused by, for instance, murky securitisations of mortgages or high-frequency trading, teach us that supervisors need to look at innovation and financial trends early on with a critical eye and in a forward-looking manner - there will be no getting around this in future.
A major threat lies in looking at innovations mainly in terms of profits, whereas the background services or long-term impacts are often ignored. [...]
There are additional and, in some cases, completely new threats, not only in the area of IT security but also in areas such as data protection, manipulation of behaviour by computers or cluster risk caused by algorithms. [...]
I am firmly convinced that there should not be a race for total digitalisation; instead, the goal should be to deliver benefits for all which continue to be perceived as such ten years down the line. We need to address the specific problem areas affecting the digital financial world from the outset so that digital banking will justify the upfront confidence and even sceptical consumers can be convinced for the right reasons. [...]
I therefore demand that regulators be required to think proactively. This means, first, that no topic should be off-limits to us supervisors. We cannot assume that all new risks will fit into the existing categories of rules and supervisory practices. We need, second, to identify and understand new trends and developments in order to obtain a picture of potential risks in good time. Those who, for instance, neither know nor understand the aforementioned concept of a "blockchain" will not be able to keep up. Therefore, even though there are enough regulatory and supervisory issues to keep us busy, we need to have the courage to address even those topics which have not yet demonstrably caused a crisis. To be quite frank: I am calling for an entrepreneurial approach to supervision.