“Banks will get cheaper” – What benefits will digitalisation bring to the world of finance? Interview in the Frankfurter Allgemeinen Sonntagszeitung

Interview conducted by Georg Meck.

Mr Wuermeling, the world of finance is going digital. Does that mean cash will soon have outlived its purpose? 

Digital innovation is having the same transformative impact on finance today as the steam engine did on industry two centuries ago. The pandemic has marked a turning point in public awareness of the raft of benefits that digital progress can deliver. Yet people in Germany are still using cash to pay for six out of ten transactions. Our job at the Bundesbank is to supply the general public with money in whatever form they desire, including in the form of notes and coins. The digital transformation won’t change that, but it will alter many other things.

The digital push we’ve been seeing since last year really has changed a great deal. What other impacts are you expecting to see?

Banking business is also an area – and there are more besides – where we are merely catching up with the increased uptake of applications that are over thirty years old: online banking, card payments, video consultation services. The euphoria surrounding the supposed digital push overlooks the fact that the digital transformation is of a different magnitude altogether, particularly in finance.

What we’re experiencing is nothing short of a sea change. It’s no longer a question of “digitalising” analogue processes in the traditional sense of the term. After all, a car dashboard with a digital speedometer is a different matter altogether than an autonomous, self-driving vehicle.

What’s the equivalent of self-driving cars in the world of finance?

We’re seeing the emergence of new products like crypto-assets, stronger moves towards digital lending, and an influx of new players like bigtech firms and neobanks. And that’s just the beginning: artificial intelligence, big data and quantum computing are still in their infancy, remember. We now need to harness the digital push unleashed by the pandemic to take a far bigger step forwards. 

What’s the upshot of the digital transformation for banks and consumers?

Banks can streamline their processes, make them more efficient and more stable, too. But consumers stand to benefit as well: bank services will be easier to access – they will be available 24/7 in some cases – and far quicker. There will be a richer variety of banking services to choose from. And brisker competition means that services can be provided cheaper, perhaps even free of charge.

That sounds very euphoric indeed for a banking supervisor. 

You’re right: that’s only one side of the story. We’re certainly not getting starry-eyed over the new technologies, and we’re also facing fresh risks, above all in IT. Cyber security is just one of the items we’re examining very closely as banking supervisors, and we’re adapting to novel business franchises that are often global by design. Regulators and supervisors are carefully weighing innovative opportunities against new risks.

So why are we yet to see a stronger uptake of digital innovations? Whose move is it, exactly – the government’s or the banks’?

The customer’s, mainly. If consumers push for a higher quality of service based on technology, banks will offer them just that. If there’s one thing people have learned during the pandemic, it’s that digital applications like the ones used to work from home or shop online can deliver staggering benefits and be rolled out very quickly. This presents a whole new set of challenges for providers, particularly in the financial services space.

But innovative efforts often fail because legal frameworks are outdated. Can the government really just sit back and do nothing?

You’re right to say that action is needed. The legal framework has to be adjusted to take digital developments on board. Legislators need to be more accommodative to digitalisation in finance, ideally in the shape of an EU regime. The European Commission’s digital finance package, which sets out rules for matters including cryptocurrencies and cloud computing, is a step in the right direction. 

Rules for artificial intelligence were put forward just recently that many felt were overly restrictive. What’s your take on this?

The new AI Regulation is centred around consumer protection and proposes very high standards. To a large extent, banks will already be familiar with similar requirements for risk management. Finance is a particular area where algorithm-based decisions might be a source of risk if, say, AI were to autonomously create credit or market risk. But that’s not the case for every algorithm you find in a fancy app, so the risk-based supervisory approach is appropriate. We’re not looking to hold back development; instead we want to maximise the potential of AI for smart bank services for the benefit of all.

Central banks like the Bundesbank are also facing digital competition, like the challenge bitcoin or Facebook’s currency is presenting to the euro. Do you think a currency outside sovereign control is dangerous?

Government needs to retain control of the currency. Central banks like the ECB and the Bundesbank need to be in a position to continue preserving monetary stability for households and firms. The crypto tokens and stablecoins you mentioned just now are a risk not only to monetary policy and financial stability, but for users as well – just take the fact that there’s not normally any legal entitlement to exchange them back into government-issued money.

What’s set to change for the euro in the digital world?

The internet has evolved from a means of merely exchanging information to a platform for transferring actual assets like shares, thanks to blockchain mechanisms. For that to work, payment in euro needs to be possible in the same way.

Is that why the central bank is planning a digital euro?

A digital euro could provide key support for digitalising the European economy. For one thing, it could help automate the payments I mentioned just now, for example. But a digital euro also comes with risks, particularly for the functioning of the traditional banking system. That’s why it would need to be designed in a way that enables the opportunities to be harnessed while keeping the risks in check.

Germany’s financial industry is facing not only the twin challenge of the digital transformation and the pandemic, but also Europe’s aim to be climate-neutral by 2050. How can banks help achieve that goal? 

The expected large-scale transformation of the economy will need to be funded, and that depends on Germany and Europe having a sound and stable financial system. However, Brexit means that, for many financial products, we are reliant on financial centres outside our prudential reach – for instance, London is still home to just under 94% of euro interest rate swap trades. But we need to be in a position to raise funding by ourselves, and making that possible has to be integral to any modernisation strategy. I get a sense that this point still isn’t getting the attention it deserves.

Anything that’s green, or at least sounds that way, is getting support and will attract funding. What about everything else?

There’s no rule to say that loans can now only be granted for green economic activity. That’s still a decision for financial agents themselves to make. Data from the Climate Bonds Initiative indicate that the market for green bonds has grown by 60% annually since 2015, and numbers are still on the rise in 2021. That’s a gratifying development, but it shouldn’t be allowed to dry up the funding sources for other investment. Just take traditional craft firms and small-scale industry. These have less of a bearing on the climate, but are arguably important for consumers and the economy as a whole. Decarbonisation is all well and good, but there still needs to be credit for other types of investment as well.

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