Digital Banking Time to Confront the Challenge

It's hard for bankers to go to a conference these days without facing questions about the rise of "fintech" startups. The annual World Economic Forum in Davos has been no different. It's just one of many challenges facing Europe's banking sector.
John Cryan has an answer for fintechs. But is it the right one?

A year ago John Cryan, sitting on the podium in Davos, had to withstand a lecture on how major banks would be forced out of the market by technology companies in the next 10 years. This year, back at the annual global economic forum, the crisis-hardened head of Deutsche Bank, exuded a little more confidence on the subject.

Deutsche Bank is “fully capitalizing” on the new technologies being made available in the financial sector, the British banker, who has led Germany’s largest bank since July 2015, told the gathering. Going digital has allowed the bank to improve its controls, efficiency and customer service.

It hasn't not been an easy transition. Banks haven’t been very innovative until now, he conceded, but insisted this is changing.

That change of heart is largely because of new invaders from the financial-technology industry. These so-called “fintechs” are exerting enormous pressure on traditional banks, proving a threat to their way of life and dominating discussions at pretty much any banking forum in the developed world these days.

That was no different in Davos. The rapid growth of these startups is one of the major topics, along with the perennial issues of banking regulation and low interest rates.

 

Computers will replace about 50 percent of jobs in financial sector over the next 10 years, predicted Mario Greco, the chief executive of Zurich Insurance.

 

Fintechs play an increasingly important role in the financial sector, said David Rubenstein, founder of the Carlyle Group, a U.S. investment firm. He called it the fastest growing segment in the technology sector, predicting that global investments in fintechs would increase by 15 percent annually over the next 10 years.

That’s quite a statement in the age of digital startups like Google, Facebook and the arrival of self-driving cars. It shows the power that “fintechs” are expected to wield over the next decade.

The aggressive growth of fintechs is forcing banks further into the defensive. Mr. Cryan may have sounded more confident, but that doesn’t mean he has all the answers just yet. Asked whether digitalization is depriving traditional banks of profits, he conceded the point: "Yes, very often."

For Deutsche Bank, it adds to a whole list of challenges to its business model. It comes at a time when the bank is in the midst of a costly restructuring that involves cutting a tenth of its workforce. The bank is also still coping with a scandal-ridden past, settling some major legal cases in the United States but working to settle more investigations in other countries.

Digitalization is costing jobs across the financial sector, just like it is in manufacturing, a point on which everyone agreed at the Davos conference.

Computers will replace about 50 percent of jobs in financial sector over the next 10 years, predicted Mario Greco, the chief executive of Zurich Insurance. Mr. Cryan agreed – up to a point. People’s jobs, at a bank like in manufacturing, are moving from simpler work to more complex tasks.

"We absolutely do need people. We need that common sense that comes with people," Mr. Cryan said, but added: "We need to replace a lot of people who are actually performing the function of a computer. Our mantra is to stop people using their hands and eyes and start using their brains.”

 

 

European banks, caught between zero interest and digitalization, are not exactly in a position to embark on a full-fledged offensive.

 

The challenge posed by leaner, meaner fintechs is not the only reason cost pressures on traditional banks continue to increase. Bankers around the world, and especially in Europe, are also still struggling with how to profit off of historically-low interest rates.

While the U.S, central bank, the Federal Reserve, has taken the first steps to end its relaxed monetary policy, central bankers in Europe and Japan continue to adhere to a policy of cheap money.

Axel Weber, the former president of Germany’s Bundesbank and current chairman of Swiss bank UBS, in Davos said he doesn’t expect the European Central Bank nor the Japanese central bank to follow in the Fed's footsteps in the near future. Even the Fed will only raise rates slowly and “reluctantly,” meaning the cost of borrowing will remain low around the globe for a long time to come.

A long-time critic of the central banks’ easy monetary policies, Mr. Weber warned it has left the financial system more vulnerable to external shocks when the world inevitably tumbles into the next economic recession, because the amount of leeway for a new wave of unorthodox monetary policy has become smaller.

Not that central banks have a choice. Given the still fragile global situation, U.S. economist Kenneth Rogoff said it would be negligent for the ECB to suspend the tens of billions in monthly bond purchases that have characterized its monetary policy over the last two years. Ending the easy money would lead to the euro zone’s collapse, he warned.

No wonder the mood is rather glum on the Continent. European banks, caught between zero interest and digitalization, are not exactly in a position to embark on a full-fledged offensive.

 

Sven Afhüppe is editor in chief of Handelsblatt. Daniel Schäfer is head of Handelsblatt's finance section. To contact the authors: [email protected] and [email protected]