Commerzbank, Supervisory Board Member
Bank of Russia, Deputy Governor
French Treasury, Deputy Assistant Secretary
European Commission, Head of Unit, Startups and Innovation, Co-Chair, Task Force on Financial Technology, Directorate General Communications Networks, Content and Technology
Western Union, Executive Vice President, General Counsel and Secretary
Santiago Fernández de Lis
Banco Bilbao Vizcaya Argentaria, Head of Financial Systems and Regulation
La Banque Postale, Chief Financial Officer
The European Consumers’ Organisation, Special Advisor
1. The EU single market has made some progress
The first question that would be discussed is what has been achieved in the single market, and what progress has been made. This would include standardisation with SEPA and the Revised Payment Services Directive (PSD2), which is a revolutionary piece of legislation, as it opens access to data. There would also be discussion of what has been achieved in cross border bank mergers, and other ways to roll out to the single market. The second issue that would be addressed would be what can be expected from digitalisation – whether this will accelerate the single market – and the third is what actions should be taken on the policy side to make it beneficial for more providers, and also for consumers.
1.1. The ability to use current accounts and payment across borders is making important progress
An independent expert informed those present that several years ago, a student who had the chance to study abroad who needed to make some payments, found this to be very challenging: cross border payments were very difficult, expensive, and, in many cases, impossible. Very often, they were obliged to open a local bank account but, due to know your customer and anti money laundering rules, it was very difficult for them to do so. This was a ‘trauma’ for Erasmus students at that time.
A lot of progress has now been made. It is almost always possible for an Erasmus student to use their bank account from their country of origin; they can make a lot of payments, and use the various payment instruments. However, some restrictions still exist. It is sometimes difficult to establish a cross border direct debit in some countries, and some countries still have some companies asking to be paid by a national, rather than a cross border, bank account. These are problems that need to be solved, but nevertheless, a lot of progress has been made.
There are new developments, such as the instant payment, which is very important. Consumers have some difficulty in understanding why this development has taken so long: when they want to write a letter, they can type it on their computer, send it immediately, and it will arrive immediately, so they do not understand why payments can take two days. As such, the independent expert is very happy to hear about all of the improvements that there have been in the field of instant payments, even if there will need to be discussion about the security of these payments.
A representative of the industry clarified that significant progress has been made in the areas of regulation, infrastructures, and in the institutional frameworks. Single European Payment Area (SEPA), Payment Services Directive (PSD) 2, TARGET2-Securities (Trans-European Automated Real-time Gross Settlement Express Transfer System for Securities) and more all constitute relevant developments, along with all of the institutional progress that has been made, in particular in the Eurozone with the SSM and the SRM.
1.2. However, there is very little cross border retail activity
The industry representative noted that, however, there is very little cross border retail activity. Yet intra Eurozone activity should no longer be considered cross border. According to Eurobarometer, only 7% of consumers purchased products from another EU country in 2016. When they are asked for their reasons, 50% of them are related to barriers in some sense: these are not necessarily regulatory barriers, but can be de facto barriers.
Europe, and the Eurozone in particular, should look to the US as an example, and consider how far they are from that model. Wells Fargo, for instance, is headquartered in San Francisco, but few people in the US know or care about this. The day that European banks can operate without regard to their location will be the day that Europe has achieved this goal.
An independent expert recalled that Microsoft’s Bill Gates said 10 years ago that banking services are very useful, but that they were not sure that banks are necessary. Now, there is the concept of developing many activities outside of ‘classic banking’. PSD has created the payments institutions that provide payment services through payment accounts. These are not regulated as a bank, but are in competition in some ways, and this competition is very important for the future. However, this does not mean that some new regulations would not be useful. There is probably a need, for instance, to do something quite quickly in the area of crowd funding or P2P (Peer to Peer) lending.
1.3. The EU is far from being a single EU retail banking market and progress is still required to reinforce customer confidence notably and defining a regulatory scheme for digital payments
A representative of the industry stated that having a single European retail banking market would mean the possibility of any European customer opening an account, making payments and transactions, requesting credit and being offered savings and investment solutions in any bank in Europe, regardless of where the company is incorporated and without necessarily including a local branch or subsidiary. In this sense, Europe is very far from having a single market for retail banking.
While many improvements have been achieved, in the areas of payments and the SEPA regulations but also in terms of infrastructure, a great deal of efforts are required. The harmonisation of prudential supervision is important: consumer confidence in banks, and more generally in the European financial markets, is essential for the development of the banking system and for the development of digitalisation. Europe may seem to be far away from its final objective, but harmonisation of supervision is a pre requisite for harmonising, strengthening, and making customers confident in the strength of all Europe’s banks. In a sense, harmonisation and SSM have paved the way towards future evolutions that have yet to be realised.
Another industry representative stated that PSD2 is a remarkable piece of legislation; the ‘Big Bang of the payments industry’. However, the next issue that needs to be resolved is where to go from here, and how to encourage the development of new technology and create new opportunities for new players to come into the system.
There is no need to make the case for digitalisation of payments; the case is obvious. Digital payments are fast, seamless, frictionless, and will bring down costs for money transmission. These may be competitively threatening for certain participants, but nevertheless, they need to be regulated and dealt with by a regulatory scheme that is not PSD2. Fintechs, whether in Europe or in Silicon Valley, will innovate around the regulation if regulation does not keep pace with them; as such, the need for regulation is critical.
The need to encourage financial institutions and technology to develop is also critical. Regulators need to consider this issue and these concerns not as regulating to preserve the existing system, but regulating to encourage development of a new system.
1.4. Specific national regulations, supervisory barriers to the development of foreign subsidiaries and cultural habits are preventing the deepening of the single market
A public authority representative stated that Europe is facing a kind of paradox, because it has implemented a very intensive legislative agenda over the past decade, including the harmonisation of consumer credit, mortgage credit payments and even a deposit guarantee scheme, which could increase savings in other member states. However, at the same time, there still exist very significant discrepancies across Europe, as regards prices and service offers to consumers. The average rate offered by banks for household saving accounts is 1% in France, but is 0.5% in Italy and 0.3% in Germany, as a result of specific regulation. This is also the same for payment accounts: prices for consumers range from €40 a year to more than €200. These differences remain very significant.
The first reason for this is specific national regulations for the housing market, regulated savings and fiscal incidence. The second is linked to supervisory barriers to the development of foreign subsidiaries in other countries, which could hinder the proposal that some banks have made to harmonise their offer in all EU countries. Finally, the most important barrier is probably cultural habits.
1.5. Ways toward further deepening the single market for retail financial services
1.5.1. Increasing competition and a richer ecosystem are still necessary to foster progress
An industry representative stated that faster payments are very important. This goal has almost been achieved, but it is surprising that this has not been entirely achieved in all countries. In Spain, such a system has been in place for some time. However, efficiency gains, increasing competition and the richer ecosystem that Europe is moving towards will all facilitate this progress. Banks, as well as fintechs and other players, and the major internet companies will play a role in creating a supportive ecosystem.
1.5.2. Further improving the level playing field is a permanent challenge
Having a level playing field is very important in this sense; however, both fintechs and banks complain that the playing field is not level for them, for different reasons.
It is very important to look at the combination of PSD2 and the General Data Protection Regulation (GDPR) from a global or holistic perspective. There is asymmetry here: PSD2, in a way, requires banks to open their platforms and provide standardised information to third party providers. In the case of GDPR, the requirement for openness is not standardised. As such, the possibilities are not the same, and this is a very important issue that should be addressed. Ultimately, everything is about trust: this is related to data, and consumers providing consent to access their data. As such, all stakeholders, banks and fintechs must ensure trust and security.
2. The digitalisation of retail financial services and its consequences
2.1. Fintechs are moving more slowly in Europe than other regions
2.1.1. ‘First the rest, then the West’
A representative public authority stated that they intend to give an external view regarding the development of the single European retail market and fintechs. It is obvious that financial technology will be a major factor in the transformation of the industry, and this transformation is happening much more quickly than has been expected. The speed of the development of the single European market, and the speed of fintech development, are two different speeds. Fintechs develop very quickly, and the plans and achievements of the single European market do not take place as fast. From the European Commission’s Green Paper, dates and periods of decisions are measured in years, from three to 10. Fintechs develop much faster, and need much quicker decisions.
Capgemini and Efma’s fintech development report shows how fintechs develop in different countries. One of the questions that was asked of customers was whether they maintain a constant business relationship with a non traditional financial or banking company. In China, 84% said yes; in India, 77% said yes; and in the United Arab Emirates, 70% said yes. The figures for European countries are lower, although there is one exception: in Spain, more than 50% of clients maintain a relationship with non traditional banking providers, although these are not necessarily fintechs. The lowest are France, with 36%, and the Netherlands and Belgium, with 30%. This is proof that, despite the ambition to develop fintechs and a single retail market, because these two dimensions are linked and can help each other, these developments are moving more slowly in Europe than in other regions. The slogan for modern fintech developments is ‘first the rest, then the West’.
2.1.2. Investors need further clarity regarding the role of fintech and their regulation in the EU
There are two major reasons for this. The first is that, in Europe, the relationships between big European banks and fintech companies are still unclear. The banks do not really understand fintechs as a rival, competitor or partner, and until this understanding is in place, the big actors will not involve themselves in this field. The second reason is that relationships between European regulators and fintechs are also unclear. The only involvement of the regulator in the fintech sector was the creation of sandbox, which has not been created in all countries. This is ‘temporary freedom’; an observation box, because the regulators do not understand what the business is and what its risks are. They prefer to look at the segment and then consider how to regulate it.
The absence of regulation, especially temporarily, is not a good thing. It may be perceived as a good thing for a venture capital investor, but it is not beneficial for a serious, long term investor: knowing that, at some point, regulation will be put in place, but not knowing when or what this regulation will be, is a significant strategic risk. As this relationship is still unclear, and there is no clear roadmap for development of ‘regtechs’, the big banks and serious strategic investors will not involve themselves in this market.
2.2. Regulators and supervisors need to adapt to these new technologies
A representative of a public authority believes that digitalisation and new technology could offer an opportunity to overcome existing domestic habits, to propose new offers, and to try to find convergence in prices. Therefore, both banks and regulators have a strong interest in promoting the development of digitalisation and new financial technology.
Regulators need to adapt their regulatory methods to fit these new technologies. The French Ministry of Economy and Finance is trying to do so, together with the French supervisor and the French central bank, and attempting to define some principles for the regulation of new financial technology. At this stage, there are four main principles; the first is transparency. There are new actors that are not used to interacting with the regulator and supervisor, and these bodies should therefore increase their transparency and explain what they are doing. The second principle is openness to new technologies and ideas, and the development of consultation papers before introducing new regulations. The Ministry is sceptical about having no regulation and instead adopting a ‘sandbox’ approach, but at the same time aims to avoid over regulating or regulating too quickly, which can prevent new technologies from developing.
The third principle is related to neutrality. New technology should be developed, but this new technology could come either from incumbent banks or from fintechs and startups, and therefore regulators and supervisors should remain as neutral as possible. The last principle is that of proportionality: having regulation that is proportionate to the risk caused by a new technology. To achieve this proportionality, these risks need to be understood. It can be challenging to adhere to these principles, but the French Ministry of Economy and Finance tries to do so.
Another public authority representative added that if the goal is putting the retail financial market into force across the entire EU, questions need to be asked in the public consultation about whether there should be a new licensing category for fintech activities, with harmonised and proportionate regulatory and supervisory requirements, including pass-porting for such activities across the entire single market.
It needs to be asked whether the principles of technological neutrality, proportionality and integrity are appropriate to guide the regulatory approach to fintech. Europe should use these different tools to adapt to, and adopt, the new technologies rapidly.
Finally, regarding the data and the application of GDPR, there is the possibility of asking for opinions on a special subject from the European Data Protection Board, or an industry – such as the banking industry, for instance – drafting a code of conduct on how to apply these principles in each sector.
2.3. Current work-streams of the EU Commission through the Task Force on Financial Technology
A representative of a public authority stated that the Task Force on Financial Technology launched by the EU Commission deals with financial technology for any size of enterprise. The task force is also looking at cyber security issues and data: the same issues that were raised regarding GDPR and PSD2, for instance.
2.3.1. Automated advice and digital platforms, including distributed ledger technologies
The next workstream will be in relation to platforms and automated advice, and the task force is looking at the ways in which platforms are entering the European financial sector, including the Chinese ones and GAFA, and also distributed ledger technologies and blockchain.
2.3.2. Achieving interoperability and standards implementation in different technological tools
The task force sees issues of access to finance and economic analysis of fintech in the context of its ‘Startup and Scaleup’ initiative; this is cross sectoral, with startups working with mid caps and corporates – in this case, banks – in relation to interoperability and standards, including questions like how to implement something like PSD2 and how to ensure interoperability between the different technological tools.
2.3.3. eIDAS – the EU regulation on electronic identification
The task force sees the eIDAS – the EU regulation on electronic identification – as an enabler for cross border retail banking for the single market, allowing a bank account to potentially be opened online, while maintaining strong Know Your Customer (KYC) requirements and verification of customer due diligence, as a result of various electronic identity schemes. The task force wants to ensure interoperability in this area. Qualified e signatures is another tool that moves Europe in this direction; as can be seen from the current draft of the Anti-Money-Laundering (AML) and the proposed amendments, these electronic identification means are accepted by the Commission.
2.3.4. Regulatory and supervisory conditions for putting the Single retail financial market into force
The task force is looking at regulatory and supervisory innovation and outsourcing issues, including the aforementioned sandboxes. The European Commission does not see regulatory sandboxes as deregulation; the fintech public consultation that opened on 23 March, which the public authority representative encouraged all present to reply to, contained a definition of sandboxes. There, sandboxes are defined as mainly tools for firms and supervisors to explain how regulation should be interpreted, in light of a firm’s new solution, through running live tests. This is something like individualised supervision and asking to be supervised, but in some ways the live test utilises the proportionality principle, along with technological neutrality. These are the main principles that the Commission has in the area of regulation.
3. Needs and challenges emerging from digitalisation
3.1. Fostering competition will trigger new services and further market integration but raises new issues and challenges regulatory processes
Banks are obliged to become more consumer and customer orientated, otherwise they will fail. The topic is whether digitalisation will accelerate the implementation of retail banking; it will, but a previous speaker has mentioned one reason why there is a huge difference between prices of bank accounts in different countries. Another, which is very important, is competition, or lack of competition. Consumer organisations support fintechs because they introduce competition, and develop new services. Payment initiatives and services are now in payment service providers because these entities have developed new services, which are very useful for consumers and which were not provided by banks. In France, Nickel is a new payment institution that has created a lot of new payment accounts; it has become the most successful payment institution in France, and two days ago, was bought by the first French bank, BNP Paribas.
3.1.1. Customer-protection challenges emerging from the digital world should also be addressed
An independent expert noted that sandboxes have been discussed, and their organisation supports the development of fintechs, but consumer protection rules need to be maintained in all cases. There are a large number of other factors that need to be taken into account, regarding digitalisation and the development of fintechs: the first is big data, and what will happen in this area. A consultation has been launched by the three ESAs on this point, which is a very important issue for consumers. The ‘internet of things’ is related to this, and all the information that companies collect about their consumers. Other aspects include the idea that, in future, society will be cashless; this point needs to be considered, as a lot of people will be excluded from this cashless society.
Another point that needs to be considered is fraud. This will become the main issue in the future, due to the development of various aspects of digitalisation, including instant payments. Digitalisation will not automatically create an internal market in the field of insurance; there is no internal market for this. A lot of other obstacles will also have to be dealt with.
An industry representative added that they identify a lot of merits and future benefits from digitalisation, both for banks and for consumers. On the other hand, there is also a need to be very cautious. Predatory lending in the auto loans industry in the US is an example of how digitalisation can lead to the best, but also to the worst, practices. The US auto loans industry targets people with very poor credit ratings and attracts them with very attractive fliers, then trap them with offers and credit paying up to 29% interest rates. As a consequence, the default rate is very high, around 30%, and the contracts allow for the repossession of the car after only a few days of payment delays. Some companies even install devices in the car to prevent it from starting when the payment is late. The repossessed car is then immediately resold, which makes clients’ default even more profitable than the normal payment, which is already at an interest rate of 29%. Replicating this in a digital environment would cause significant damage to the market, and to the confidence of customers. Regulators will need to identify how they will make sure that only the best aspects of digitalisation are adopted.
Institutions need to make sure that they offer an alternative to the 100% digital relationship, as this kind of relationship may not be totally applicable for some customers. However, the speaker’s institution will also develop its fully digital bank: it is in the process of making this announcement, but will develop an offer of digital services that will be inclusive, easy to use, intuitive and transparent. This is also the best answer to banking exclusion.
3.2. Main regulatory expectation from the industry in the context of digitalisation
3.2.1. A key issue is further harmonisation in the field of remote identification and digital on-boarding processes
An industry representative stated that Europe is moving in a good direction, towards a richer ecosystem and more competition, although it may be asked whether it is moving fast enough. The relationship between banks and fintechs is one with multiple different dimensions: they may be competitors or partners, but banks need fintechs for stimulus, and emulation will be part of the process.
The question is whether more needs to be done in the area of harmonisation; to the speaker, this is a key issue. In some cases, the lack of harmonisation is creating imbalances or arbitrage opportunities. For instance, remote identification has been allowed by AML authorities in some countries, but not in others. Video calling is a tool that is cross border by nature, so the problem therefore is that the regulations are trying to introduce barriers where they do not work. In Spain, fintechs located in other EU countries were opening accounts in Spain with Spanish customers, using a digital onboarding process, which Spanish banks were not allowed to use with their own customers. Eventually, Spanish Banks received authorisation to do so from the Spanish authorities, but there are many other cases like these.
European authorities need to consider all of these cases, and identify whether further harmonisation is necessary in certain areas. If they do not do so, the regulatory arbitrage will harmonise in any case, and this may be a disorderly process that creates competition problems. Having a level playing field is very important, because the wrong incentives should not be created; rather, those companies that offer the best products to consumers should be able to do so in the single market. Banks are looking forward to competition, but on the basis of the same rules applying.
3.2.2. Moving toward a customer centric industry capable to anticipate customer expectations and address wider and unanswered banking needs
An industry representative stated that they expect a few changes to take place; some have already begun. In the banking sector, market participants need to completely reverse their states of mind; banking used to be an industry based on standardised products pushed toward the consumer. It is now moving towards a customer centric approach, in order to meet the individual needs of its customers. A recent study by CGI Business Consulting states the top five consumer asks in the banking sector: the first is ‘Reward me for my business’; the second is ‘Give me, at any time, at any place, access to my balance’; the third is ‘See me as a person’; the fourth is ‘Provide me with wealth building advice’; and the fifth is ‘Tell me what I am spending money on and how I can save’.
This needs to be heeded, as customers are central to banks’ business, and as such, banks and credit firms must first focus on delivering a seamless customer experience across all channels. Banks must become ‘totally omni channel’, which is not the case at the present time. However, this will not be enough, because customers also want companies to understand their unstated needs, as well as their likes. Spotify demonstrates the kind of service that is required: suggesting new pieces of music based on an analysis of what the customer has been listening to recently. It will be a challenge for banks to move from a standardised product push culture to a forward looking culture, focused on anticipating the personal needs of the client. From that perspective, digitalisation is key to understanding and having a forward looking view of the needs of banks’ customers.
There are also a lot of benefits from digitalisation: for example, tackling banking and digital exclusion. Two weeks ago, the speaker’s institution issued their strategy regarding banking and digital exclusion, which consists of three main actions. The first is to provide numerically vulnerable customers with a new relationship model, in cooperation with association networks. This will be based firstly on the identification of these customers, providing training to basic online banking services, and then – only if necessary – redirecting them to digital health associated networks.
Another industry representative added that their institution serves a substantial portion of unbanked and underbanked clientele, but 90% of its customers have smartphones, so the issue is not customers not having access. Its customers will have access to digital financial services, and this institution hopes to be able to provide greater and better offerings for customers, because these digital services drive prices down.
3.2.3. Toward a more global regulatory approach delivering regulatory simplicity and consistency
The industry representative continued that, in 10 years, the single market will be a ‘quaint’ concept: it should be a global market, not limited to Europe. Digitalisation will create this kind of global market that regulators should address as a global issue, rather than as a European or United States issue. The speaker noted that that morning, they ordered in Malta some socks to be sent to their home in Denver, via Amazon. Regulating banks and financial institutions is a systemic issue, different to Amazon delivering socks, but this demonstrates how borderless the world is going to become.
However, some significant regulatory issues will need to be addressed. Simplicity is preferred to complexity, and sometimes regulators focus too much on the things that go wrong, as opposed to trying to facilitate what can go right with the digitalisation of financial services. Europe has AML laws, and provisions in the current PSD legislation that require points of contact in each country, which is completely antithetical to digitalisation. Yet, the development of this technology is critical to providing financial services for bank and other customers around the world, at a lower cost, in a borderless fashion, and in a seamless and frictionless way.
3.3. New regulatory paradigms are necessary
3.3.1. Going beyond traditional financial stability regulatory approaches in order to encompass all potential players (fintechs and GAFAs) and issues (big data)
A representative of a public authority stated that regulators should develop a clear regulatory agenda, including in the area of fintech, and this should be harmonised in Europe. There are three major mistakes that the regulators should avoid when creating this agenda: the first is to think that fintechs only exist in sandboxes, and are only small players, interacting with interesting parts of the banking value chain. Fintech is a business model; it means is the usage of technology in the financial sector. This business model could easily be taken up by a very significant market player. The GAFA companies could start to engage in banking: they have already started to do payments. Similarly, the big banks already utilise cloud computing and big data management, and employ financial technologies in their work, so the regulators should not think of fintech as a very small issue.
The second mistake would be to continue to look at fintechs through the traditional prism of prudential regulation, because the financial regulators are traditionally prudential regulators. They look at the company’s capital base, and whether it is well capitalised or not; they look at asset quality and liquidity, which is the 25 year old, standard American CAMELS supervision model. Fintech business models have none of these metrics: no capital, no assets, and no liquidity. Their business models consist of providing services and products without having these services and products. Uber provides cars without having a car park. The fintech business model consists of providing finance without having money, and this is a completely different business model that should be supervised and regulated differently, rather than from a prudential perspective.
The majority of the regulators have a prudential block of regulation and supervision. Some of them have a business conduct dimension, but not all of them. Not one includes technological regulation and supervision, and this is a completely new dimension that must be included in this new regulatory agenda, because the fast growing gap that exists today between the IT enabled business models in the financial industry and the lack of technical risks regulation and IT enabled supervisory solutions constitutes a major risk. The regulators should look at this dimension carefully, and possibly dedicate less time to the subjects that we are the focuses of attention at the present time. Yesterday and today, Eurofi has been discussing compromise on Basel III, which is purely prudential. This compromise is the answer to problems that occurred 10 years ago; new risks will not come from the financial area, nor be of a financial nature, but will arise in the technical space.
3.3.2. Regulating the fast-evolving landscape requires gathering many different stakeholders, addressing unprecedented situations and experimenting
A representative of the industry added that Europe should not dwell too much on winning battles that first occurred 10 years ago, but should open its eyes to what is now taking place in society and in the economy. Digitalisation is the present, rather than the future, and regulators and supervisors appear to be somewhat ‘behind the curve’, which is not without risk. These bodies may wish to be prudent, and wait to see standards appear ‘as if by magic’, but there is a lot to be learned by the industry, by regulators, and by supervisors together.
This is related to the notion of sandboxes, and is also about understanding the point of view of consumers. Digitalisation has empowered the consumer, and the competition that has ensued is good and healthy, but competition on the basis of a level playing field may be dangerous. ‘1,000 flowers blooming’ is an interesting situation, but these new entities may pose risks to financial stability and the transmission of monetary policy, and in the areas of consumer protection and investment protection. Many people who are investing in peer to peer services do not know that they are risking 100% of their capital; some people are going to new lending outlets because they cannot get a loan from their bank, but this may be for good reasons. They are incurring guarantees. There is plenty of scope for the authorities and the industry to learn together, with open minds, and not trying to prevent technology taking over the relationships between people in society, which is impossible to prevent.
A member of the audience invited other panel members to respond to the point that was made regarding the business model of fintechs. The banking sector does not want to do the things that fintechs and GAFAs do; the latter do not want to take a transformation position and invest the deposit, which is something that the economy needs to have available. Fintechs are happy to engage in transactions and payments, but their customers need to have money in their wallets; they do not want to offer customers an overdraft. In the areas of P2P lending and crowd funding, some people accept taking a risk with a dedicated entity, but most people want to have revenues and savings invested. As such, the banking sector mitigates the risk for investors, offers liquidity, and invests the savings.
Before approving these kinds of evolutions, it must be recognised that although these new actors are quite formidable, they do not want to do some of the things that the banks do. The risk, therefore, is that the new actors will take a high part of the value chain and leave the banks with only the much larger systemic financial risks to deal with, which are taking a transformation position and managing liquidity. This issue needs to be addressed more: when people talk about digitalisation, they are enthusiastic about innovation, but there is also a need to think about welfare in the financial sector and its utility to overall society.
A public authority representative noted in this respect that the Task Force on Financial Technology’s public consultation asks whether the European Commission should set up or support an innovation academy gathering industry experts and competent authorities, including data protection, cyber security and consumer organisations, to share practices and discuss regulatory and supervisory concerns. The idea is to enable use of the cloud and big data. Regarding the regulatory sandboxes, the Commission and the member states that are implementing these, agree that consumer benefit should be the first requirement.
There are also merits in developing a European regulatory sandbox targeted specifically at fintechs that want to operate cross border. The approach that the task force is taking is designed to apply to any size of enterprise, with caveats regarding financial stability and prudential issues for a big player engaging in a big test.
The issues of the innovation academy, the regulatory sandbox approach, and the approach of the task force are holistic issues. The task force incorporates data issues, such as the competition from GAFAs, or even more so from Chinese platforms: how to ensure that data use is in the interests of the consumer and controlled by the consumer, rather than by a ‘grey space’.
4. One general challenge is educating customers
4.1. Digitalisation contributes to simplify banking products and improve financial inclusion
An industry representative stated that the most important thing for financial education is transparency: being clear to customers, and having good products that are simple and easy to understand. This is an effort that this speaker’s institution is constantly making. There is a lot to do in relation to this, but financial education is crucial to enable customers to compare different products from different types of companies. All present agree that this diversity is good, but it is more important that customers should understand the different characteristics of different products, the types of regulation attached to them, the types of protection, and what is protected – or not protected – by the deposit guarantee scheme. It is very important to be clear about all these things, and making sure that this happens is the joint responsibility of companies, banks, fintechs, and the authorities.
A public authority representative added that fintechs’ development began with financial inclusion and education: five or six years ago, the first fintech companies started in countries with very low levels of access to banking, and developed very quickly in regions where it was thought that customers did not have bank accounts, but did have telephones. Now, the question that is being discussed is not whether banking is possible without branches, but whether banking is possible without a bank, which apparently it is. This is the major psychological and ideological transformation that has taken place as part of this journey, and part of financial education is also to understand that financial services can easily be provided without a bank.
4.2. Digitalisation requires combining consumer protection, security, privacy protection and financial education
An industry representative stated that the audience member who had spoken had made a good point: fintechs, and the development of financial services, will become commoditised at some level. People will shop for financial services, and will not go to a bank for all of these, but will go to banks for some and to payments institutions for others. Customers are very sophisticated, and the market is responding to their needs. The importance of consumer awareness and education therefore needs to be part of this issue: fintechs have the ability to not only provide customers with better service, but also to abuse customers in different ways. It is therefore incumbent upon participants in the market to ensure that customer and consumer protection are absolutely paramount.
A public authority representative stated, regarding the possible competition between big banks and fintechs, when promoting the development of technological activities, there is a need for clarity about the fact that some objectives will remain very strong for the regulator, and may be non-negotiable. These are consumer protection, the security of payment systems, data and privacy protection with effective informed consent by the consumer for the use of their data, and financial inclusion. This is linked to financial education, because digitalisation can also be a source of exclusion for some categories of the population.
These four objectives should remain very strong; there is therefore a need to find the balance between those objectives, on the one hand, and the need to push for innovation and sometimes competition. This balance is related both to the substance of how much Europe should improve information, simplicity and mobility, but also to the issue of timing. Europe could move very fast in improving mobility, simplicity and the development of fintechs. At the same time, they should allow some time for actors to adapt, and to allow for the possibility of continuing to develop new systems for security and adapt to the rules on data protection.
4.3. Education is key, and financial institutions should be encouraged to further contribute to educating their customers on banking
An industry representative noted that their institution does a lot in relation to financial education, and has developed programmes in some countries in Latin America. It also has a financial inclusion policy and a micro finance foundation that is the biggest in Latin America, and possibly in the world.
Another representative of the industry added that education is key. Their institution is currently implementing, and has been implementing for years, a move towards other types of populations. However, this institution is far from achieving the goal that the audience member mentioned. Europe’s citizens are still a long way from understanding the business of banking, liquidity and transformation; most European citizens are unable to deal with their own family budget and understand basic products. A lot remains to be done in this field.
The question that the audience member asked is an absolutely fundamental one, and is also something of a public policy question. Although there is no question that Europe needs these kinds of liquidity and transformation missions, the question is how to fund them. Either banks should be allowed to use some of their profits from other areas of activity to fund the other missions, or if this is not the case, they will have to be funded in another way. It is not up to the end consumer to make these sorts of decisions; that is a goal that will be met when customers are perfectly educated, which could take centuries. This point has to be taken into account in all of the discussions and consultations that have been launched.