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Financial system 23 Oct 2017

The keys to successful banking in the digital age

BBVA Executive Director José Manuel González-Páramo believes the success or failure of a bank in the age of digital disruption involves a combination of internal factors, such as changing the corporate culture, and external factors, like regulation. Speaking at an event organized by the U.S.-Spain Council – where participants analyzed the impact of digital disruption on both sides of the Atlantic  – BBVA’s Executive Director recalled that the banking industry is today in the process of reinventing itself.

Gonzalez-Páramo identified five factors that define the new environment for banking, which he calls the “five R’s”: 1) the recession during the financial crisis; 2) reduced profitability; 3) regulation to address the economic impact of the crisis; 4) reputation and 5) the digital revolution.

The forces of technological change

Beginning with this last factor – the digital revolution – González-Páramo said it has led the bank to face new developments with much more extensive implications. He identified three elements that characterize the financial sector’s digital revolution and BBVA’s strategies to tackle change.

The first is related to the technological advances that not only affect the banking industry, but all sectors: interconnectivity thanks to mobile technology; the Internet of Things and big data; technological infrastructure like cloud computing and blockchain, which “allows us to avoid lots of intermediaries”; and lastly, automation and artificial intelligence.

Second, he stressed the radical changes underway in the consumption and savings patterns of the two newest generations: the millennials and the centennials, who have grown up with these technologies and are much less loyal to banks than previous generations.

Third, he underscored the emergence of new business models. The sector is facing greater competition that will drastically affect the quantity, quality and price of financial services. He divided the new digital competitors into two groups: large digital corporations and the fintech startups looking for a niche to introduce their business models. Banks have a major advantage over these new competitors: their information on customers, and their confidence, he added.

Facing the new competitors, banks start with a great advantage which is the information about the customers, and their confidence “

José Manuel González-Páramo signaled that maintaining this trust is therefore “fundamental”  as it is the cornerstone of the digital economy – rooted in protecting savings and the customer’s identity and data.

In this environment, he said it is crucial to “put customers at the heart” of everything the bank does. He recalled that BBVA wants to help its customers become aware of their financial health, control their expenses and understand their personal finances. As an example of this, he pointed to “BBVA Bconomy”  – a function in the bank’s app and website that allows customers to measure their financial health.

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José Manuel González-Páramo, BBVA Executive Director, during his participation in the U.S.-Spain Council

Internal cultural change and regulation are paramount

What determines whether a bank is successful in this transformation and how quickly will it take place? José Manuel González-Páramo said the answer lies in a combination of internal factors: the need for banks to have a vision of their future, use appropriate technology and infrastructure and above all, change internal talent and culture. He also stressed that “external competitors can also be a source of cooperation within the fintech ecosystem – the strategy that BBVA has followed with Simple in the U.S. and Holvi in Finland, for example.”

The other external factor is regulation. González-Páramo underscored that apart from protecting the sector, regulation also has to create incentives for innovation. “There´s not a level playing field today,” he said. “When two companies are carrying out the same activity, if one is a bank, it is subject to regulation. The one that isn’t a bank might not be subject to any regulation at all,” he explained. In his opinion, regulation does not adequately protect customers and investors.

To do the same activity, if it is a bank is subject to regulation, and if you aren’t a bank it could even happen that you don’t subject yourself to any “

“Regulators are in the process of rethinking everything they do, in order to avoid suffocating the sector and so that those banks that have something to offer can compete in the same conditions as the fintech firms and Internet giants,” he concluded.

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