Will there be banks in the near future as we know them today?
This is the question that José Manuel González-Páramo posed in a recent discussion at the Bank of Finland, where he analyzed the digital transformation underway and the challenges it brings for the banking sector. In his opinion, we are in the middle of a banking revolution that will transform financial institutions as we know them today. According to BBVA’s Executive Director, their survival as institutions will depend on their ability to adapt to the new environment.
José Manuel González-Páramo participated in a seminar on “Tomorrow’s Banking and How Central Banks Have Developed in last 15 Years” in a farewell seminar for Pentti Hakkarainen, the Deputy Governor of the Bank of Finland. He will become a Member of the Supervisory Board of the Single Supervisory Mechanism in February. Yves Mersch, an Executive Board Member of the ECB; Erkki Liikanen, Governor of the Bank of Finland; and Klaas Knot, President of the Dutch central bank, also participated in the seminar.
BBVA’s Executive Director feels that digital disruption may help the healthy part of the sector to survive the pressures of low growth, waning profitability and tough regulation. If banks can adapt to this new reality, they will again come closer to what customers demand and need, helping them take advantage of the opportunities of this new age, he indicated.
The challenges ahead are not minor. As BBVA Group Executive Chairman, Francisco González recently said to Brithis newspaper Financial Times, "for the time being, the likes of Facebook and Google are on the fringes of banking because they don’t want to be regulated”. “But sooner or later they will jump into our arena. They will try to take some parts of the value chain. That is the real challenge,” he added.
The digital transformation of the economy and society
To understand the future scenarios for the banking industry, the Executive Director described the digital transformation taking place in the economy and society in general. Interconnectivity from mobile technology has spearheaded this change. In addition, big data analysis techniques are making it possible to further augment hyper-connectivity among people and machines – known as the Internet of Things.
What will be the next technological frontier? All signs are pointing to artificial intelligence and automation. They will have a significant impact on the labor market and will be an essential part of this 4.0 industry, he explained.
The digital transformation of the financial services industry
The financial sector is no stranger to this transformation. The arrival of this disruptive force (the digital revolution) is changing both the supply and demand for financial services. On the demand side, he noted that we are already seeing radical changes in the consumption and savings patterns of an entire generation. The two new generations of digital natives – the millennials and the centennials – will become increasingly important customers. And on the supply side, the sector is facing greater competition from new financial actors like fintech firms and Internet giants, and technological changes will decisively affect the quantity, quality and price of financial service.
In this context, two factors will be fundamental to determine the speed of change and the scenario towards which the sector will move. The first, which is of an internal nature, concerns banks’ vision for the future and their technological, financial and organizational capacity for self-transformation. The second is the role the regulators and supervisors play as either drivers, or brakes, for the changes needed during this transition.
He feels that customers have the most to gain from the changes brought about by this new ecosystem - both the changes currently underway and those that are yet to come. But this digital revolution also raises new challenges to the stability and integrity of the financial system (e.g. cybersecurity), protection of customers’ data and consumer protection, among others.
Taking this new context into account, regulators and supervisors have the challenge of creating a regulatory framework that balances the promotion of the new digital value propositions and protection against the associated risks. Public and private sector collaboration under the framework of a common strategy is vital, José Manuel González-Páramo maintained.
The future of banking: scenarios
Will banks still play a significant role in the future? BBVA’s Executive Director feels that this will greatly depend on the scenario they face, which could be one of the following, or a combination of both:
The first scenario is one in which banks and regulators continue business as usual, and over time, merely provide infrastructure, leaving the services of high added value to other players.
The second scenario, resulting from proactive strategies, is one in which banks undergo a complete metamorphosis. These new banks would be highly competitive in the digital environment. The key to this scenario lies in banks offering a good user experience, rebuilding their reputation and offering lower prices through the integration of automated processes.
This model requires profound technological and strategic changes, as well as changes in financial institutions’ talent and culture policies – in other words, it means completely reinventing the banking business.