Club@Sibos: Governments around the world are launching or investigating digital economy strategies. What do you believe are the main benefits of a digital economy?
Ge Drossaert: Some governments, particularly in emerging economies, are trying to move payments transactions out of the cash domain and into the digital environment. For example, the Polish Government supported digital billing, which is a concept that the governments in other countries in the Middle East region have also adopted. The belief is that the more digital a transaction is, the more transparency there is in the financial system. This in turn leads to more transparency in financial institutions. Digital currencies bring traceability to transactions, create more trust in the financial system – which leads to greater investment – and improve financial inclusion for individuals.
Another way governments are stimulating the development of a digital economy is through enabling smaller, digital-only banks to enter the market. These banks are driving down costs and making it cheaper for individuals to become participants in the financial system. For example, such individuals don’t need a full banking account but can operate an electronic wallet-based payment account from a mobile phone. This is where many of the opportunities in a digital economy lie.
Another advantage of a digital economy is that identity becomes more secure – a digital ID is not as easy to steal as any other type of ID. In turn, this means know your customer (KYC) processes become easier, particularly in countries where people don’t have street addresses, but do have mobile phone numbers, for example.
Combining a digital ID – with the behavioural analysis and supported by biometrics made possible by big data – will enable more financial services to be sold to more people more cost effectively. A digital economy will be very positive across many fronts.
What role do you think banks can, or should, play in the development of digital economies?
Bill Gates once said, “we need banking, but don’t need banks”. I think banks need to transform into enablers, playing a role at each step in someone’s life cycle; giving people access to opportunities. This could be in the form of loans to people who want to start up small businesses, or to others who wish to pay for their education. Rather than viewing everything as an individual product on which a profit can be made, banks should make use of the data they hold on their customers to understand what stage of their life cycle they are at and ensure they enable the customer to progress.
If banks are clever, they could step forward and say to customers “I am the guardian of your money, I will look after it and provide solutions for you and your children for every part of your life cycle.” By partnering with third parties, banks can deliver services that will be helpful. It takes a change in mindset. Banks really need to put themselves into the customer’s shoes and look ahead with the customer. At the CEO level, a bank needs to understand how technology can be a differentiator.
What barriers exist in creating digital economies? How do you think these can be overcome?
The main barriers are borders between countries – even within the European Union. There is still an element of the dominant banking players in each country protecting their business, rather than adopting a truly open approach. The Payment Services Directive has been helpful, but it applies only within the EU. There are also issues with personal data, where some countries do not permit it to be transferred out of the country or stored in the cloud. In other countries, transferring funds above a certain value requires permission.
Demographics are another barrier. Younger people tend to be digitally savvy, but older people – and the European population is increasingly older – generally are not. But banks often don’t reach out to older people when it comes to digital products; we should be there for all people, not just one generation.
Criminality is also a concern, particularly identity theft. I am not sure governments have been particularly helpful in enabling financial institutions to deal with cyber attacks. Like banks, governments must also become digital in their mindsets and bring together the resources needed to fight cyber crime. There’s a lot of activity now, but not a lot of understanding. In one case, police patrol cars were sent to a bank that was under a cyber attack.
What steps should banks take to prepare for a digital economy?
Banks can take on an entry-level role, educating young people about a digital economy and also helping them to understand the value of money, the importance of identity and KYC and making it easier – and cheaper – to enter the financial services system. At the moment, banks can often create problems right at the start, making it difficult for people to open bank accounts.
An efficient digital infrastructure, combined with an understanding of each customer’s pain points, will help banks to be partners during a customer’s life cycle.
Which technologies do you think are the most promising for the future role of banks in a digital economy?
It is important to keep in mind that banking is still a business between humans. We can put technology into that, but we shouldn’t seek innovation for the sake of innovation. For example, while blockchain is a great development in fintech, a real, compelling business case is yet to emerge for its use.
However, artificial intelligence is more promising. AI is all about creating predictable models and learning from those models. It will enable banks to better predict the stages in a customer’s life cycle.
In a digital economy, networks are speedy and reliable, enabling greater continuity of data and the integration of more business opportunities. Technology that is adjustable, reliable, fast and repeatable will enable banks to develop cheaper products. But if banks don’t take advantage of the opportunities, they risk becoming like the electricity companies – customers don’t care who provides the electricity as long as the price is good. Banks must think more about differentiating in more areas than just products; to be relevant, they have to think in terms of ecosystems.
What qualities do you think bank CEOs will need in a digital economy?
The CEO of the future must be very technology savvy and think in terms of ecosystems and partnerships. He or she must always put the customer first, asking staff “does this make life easier for customers, yes or no?” This approach should be used to manage all departments within a bank.
At present, many CEOs have a single purpose – they have been brought in to make redundancies, set up operations in another country, improve the share price, or make things more efficient. These are all important, but they won’t create a new unicorn. For some CEOs, their actions and approach would be no different if they were working for an oil company.
I believe the days of the CEO being focused on the balance sheet and liquidity will soon be over. These tasks will increasingly be the prime responsibility of the CFO while the CEO becomes much more company strategic and is business-case driven.
CEOs are investing in and purchasing fintechs, but the real next step is to make the combination of banks and their fintech interest work. This puzzle contains a lot of potential but needs to be well thought out and orchestrated. That’s why I see fintech as a key enabler in larger banks that invest into the industry.
Bank CEOs are running some of the most profitable institutions in the world – what are they doing with this profit? I think they could do so much more and the answer lies in digital technologies. Fidor Bank created a digital community that has close to 1 million members now. Our customers in Germany use the channel to talk about financial affairs and interact with each other and with our experts.Through this digital community we are working to integrate the next generation of services in accordance with open banking, including 24×7 digital products relevant to our customers and their lifestyle. I am a little bit pessimistic that many of the big banks will ‘own’ their customers within the next five to six years. There’s a danger banks could become the next Nokia, disappearing into irrelevance. At the CEO level, they have to step up with a vision and go for it – spend those billions wisely!