“Europe needs to get off the sidelines” Interview published in "Handelsblatt"

04.04.2019 | Burkhard Balz

Interview with Burkhard Balz conducted by Andreas Kröner, Jan Mallien and Daniel Schäfer.

Mr Balz, for nearly ten years you were a member of the European Parliament before you took a post on the Bundesbank’s Executive Board last year. How much of a culture shock was the move for you?

Not much of one, really. My track record as a parliamentarian meant I was already au fait with matters surrounding the European Central Bank and the national central banks. And many of the names and faces have been on my radar for some time as well. Needless to say, there were a couple of items on my to do list when I first joined the Bundesbank, but I’m now at a point where I can say that joining the Bundesbank was the right move for me personally, too.

It’s six weeks and counting until the European elections – do you miss the campaign trail?

If you’ve twice stood for election to the European Parliament, which means campaigning for 14 to 16 hours a day, month in month out, it’s not really something you miss. It’s an experience that takes you to your limits, mentally and physically. But there’s another reason, of course, why I don’t yearn for those days – and that’s my exciting tasks here at the Bundesbank.

You’re the Bundesbank’s Executive Board member responsible for payments, and you’ve called for European solutions in this area. What do you mean by that?

Here in Europe, we need to prevent a situation from arising in which American and Chinese payment systems are all we have left to choose between. Highly successful firms from the United States and China are looking to carve out a huge chunk of the European market. Hence the desire to forge a payments solution with a clear-cut European “brand”.

Many experts reckon that the world of payments will end up being dominated by just a single enterprise.

That’s the danger. Chinese and US players are also saying that a race is under way here in Europe in which market domination is probably up for grabs. If you ask me, Europe needs to get off the sidelines and take a stance.

Do you have any idea what a European solution might look like?

Essentially, it all boils down to two factors. First, there’s the need for the major core markets of Germany, France, Spain and Italy to bundle their resources. The existing systems in these countries differ greatly. Second, work needs to get started on establishing pan-European solutions and platforms.

Do you think that’s realistic? In Germany, say, the banks launched Paydirekt in an effort to push back against the US PayPal platform – and the results so far have been underwhelming, to say the least.

Of course there are cases where the results have fallen short of expectations. But I’m talking about defining our final destination. Take a look at how credit card providers have increased their share of Europe’s payments market, and you’ll see a strong increase in concentration. Do we want to sit back and just let that continue? Or wouldn’t it be better to at least try to forge initiatives of our own in response?

Considering how much market power lies in the hands of groups like Amazon and Google, isn't it a pipe dream for Europe to set up a rival solution of its own? 

I don’t have a problem with Amazon or Google. It is, however, worth noting that developments are afoot in the world’s two largest economies to establish their own systems throughout the world. They have every right to make that attempt. But equally, we in Europe have every right to create our own brand. We shouldn't just be a spectator in a market that’s as important as this.

The private initiatives we’ve seen so far in Germany are trailing far behind the competitors from the United States. Are the central banks now getting more involved because the private players can’t pull it off on their own?

It is not the aim of central banks to set up payments platforms and vie for customers. That’s something the banks and other payment service providers need to sort out for themselves. I do feel, though, that it would make sense for European players to pool their resources as a way of competing eye to eye with global rivals. Our role to begin with will be that of a moderator.

And have you already been busy moderating?

Let’s just say I’m no stranger to acting as a moderator, thanks to my previous experience in Europe.

Judging by your remarks, it sounds like the Bundesbank is following the Federal Government’s cue by also engaging in industrial policy.

It’s not national champions we're calling for – we’re looking to preserve diversity in the payments space.

So that’s why you’re promoting European champions?

I've tabled a proposal because the pressure in this field is immense. I wouldn't call that industrial policy – it doesn't belong to the Bundesbank’s remit. But there's no harm in providing impetus. As I see it, this is another area where the Federal Government as a whole is also thinking in terms of European alternatives. It’s a topic where we’re on the same page as politicians.

Major tech firms like Amazon and PayPal are making increasing inroads into the traditional world of banking, and they’re now also issuing business loans. This looks set to intensify the pressure on banks. Does this worry you?

It doesn't worry me, even if it’s safe to say that competition will mount. One pivotal factor here is the EU’s new Payment Services Directive (PSD 2), which will come into force in September and allow not just banks but third-party providers, too, to access account data. This will lead to a situation where not just big tech companies but many fintech players, too, will attack banks at the lucrative points of the customer relationship.

Are banks prepared for this?

Institutions will probably lose some market share as a result of PSD 2. But my overall impression is that the new regime and the influx of new players into the market is encouraging banks to put payments back onto the agenda. This topic is experiencing something of a renaissance. Because whoever takes care of the customers’ payments and gets hold of the transactional data is closest to the customers and can offer them other products as well.

You mean Apple Pay and PayPal have awakened Germany’s banks from their slumber with a kiss?

Players like Apple Pay have given banks a wake-up call and created fresh momentum. The importance of payments as a core product is dawning on many banks. And they have stepped up their efforts to defend or even expand their position in this market.

Judging by the market valuations of firms like Adyen or Wirecard, was it a mistake for banks to quit this business?

These firms have gained market share and grown to become relative heavyweights. Now they rank as serious rivals. Arguably, banks missed a trick here.

Wirecard has got a banking licence, other players haven't. Given the advance of tech firms, do financial supervisors need new powers?

I reckon it would be good to regulate the financial activities of tech firms more. But that's ultimately a matter for politicians to decide. It’s often like the race between the tortoise and the hare – by the time you’ve introduced a new rule, things have already moved on. But it’s not just about supervisory issues – there is also the question of competition law.

What’s your take on the competitive situation right now?

There isn't always a level playing field right now, because there are incumbents with full banking licences while the new kids on the block operate under simplified regulatory conditions or barely any at all. This is a situation that would certainly merit a new legal framework.

Our research suggests that Germany and France are discussing a new regime which would regulate the financial activities of big tech firms. The Federal Government has given its deliberations on this subject the heading “digital capital markets union”. What's your view on this?

I've always been in favour of Germany and France playing a pioneering role. That way, you see, Europe stands a good chance of making progress. And if arrangements need to be hammered out at relatively short notice, that’s certainly a good way of going about it. If the two countries can reach an agreement, that would send a strong signal across the EU.

What kind of timeline do you have in mind?

2019 is a challenging year because all the European institutions will be getting new leadership teams. But I expect we’ll make progress on this front in 2020, if not sooner.

Are talks already under way?

Yes. We always talk with many counterparts, including our friends in France. The Bundesbank also regularly exchanges views on this subject with the Banque de France, just like it does with other central banks.

What would a digital capital markets union look like in practice?

Germany and France generally have similar ideas on this subject. And we both see a need for Europe to push ahead with fresh regulation in this field.

Real-time payments are another topic in Europe. The ECB is pinning great hopes on TIPS, its new instant payments scheme. But German banks, especially, have been giving TIPS a wide berth. Why is that?

TIPS came onto the market a year later than the private RT1 system coordinated by EBA Clearing. This gave RT1 a head start, of course. Another reason is that EBA Clearing is backed by Europe’s major private banks, who are naturally keen to see their system being put to use. Nevertheless, I think the medium-term prospects for TIPS are good.

But its take-up by banks has been modest so far.

We already have more than 800 addressable participants, though admittedly most of them are passive participants. And a number of larger players have announced plans to link up before the end of this year, including the major French bank BNP Paribas. I’m hoping to see a similar response here in Germany, with the bulk of savings and cooperative banks linking up to TIPS at some point.

Does it make sense, in regulatory terms, for a central bank to compete with products and services provided by the private sector?

There's no harm in questioning the need for a service developed by the central bank when the private sector has already put one in place. That said, central banks have the wealth of expertise needed to run infrastructures of this kind. Plus they’re neutral market players. Not just that: we’re also the only ones who can provide safe central bank money to settle transactions. That’s why it makes sense for central banks to engage in this field as a way of establishing a very stable infrastructure and guaranteeing harmonisation in the market.

We started our interview with a personal question, and if we may, we’d like to conclude with one as well. Deutsche Bank and Commerzbank are currently in negotiations about a merger. As a former employee of Commerzbank, do you think the two banks have matching cultures?

Given my function at the Bundesbank, I decline to comment on planned mergers. At the Bundesbank, we always take a neutral stance where such alliances are concerned. And that also applies to a potential tie-up between Deutsche Bank and Commerzbank.

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