.. it is plain to see that the digital transformation of our societies and economies is accelerating. The banking sector is no exception, and this has profound implications for the business of banking and for us as supervisors...
When I was growing up, the term “new frontier” was commonplace in the United States, capturing a period of hope and opportunity as science and technology made rapid progress. I remember how thrilling it was when this progress ultimately sent the first person to the moon.
We are of course not talking about the space race today. But the speed of technological innovation makes the present day no less exciting. It has been said that we are living through a technological renaissance. I don’t know if it is a renaissance or a revolution, but it is plain to see that the digital transformation of our societies and economies is accelerating. The banking sector is no exception, and this has profound implications for the business of banking and for us as supervisors.
Today I will first focus on our supervision of banks’ digital transformation and on the results of the digitalisation survey we conducted last year, which provide something of a snapshot of the progress made so far. I will then reflect on the broader challenges we face in implementing appropriate supervisory and regulatory oversight regimes for the new frontiers of digital finance.
Supervising banks’ digital transformation
Advancements in technology have been shaping banking for centuries – from the first wire transfer between Boston, New York and Chicago in 1871 to the unveiling of the first ATM in Enfield, north London, in 1967, and the rise of online and mobile banking in recent years.
The uniqueness of the current situation stems from a combination of three trends in today’s market environment.
First, customers are increasingly calling for digital solutions to conduct their daily banking activities, facilitated by the widespread use of mobile phones globally, and the proliferation of apps for transactions and payments in particular.
Second, today’s accelerated pace of technological development makes it easier and more cost-effective for banks to digitalise their operations and processes and extract value from data to gain a competitive advantage.
Third, and related to this age-old challenge of gaining competitive advantage, new market entrants are intensifying the ever-present competitive pressures.
In the face of these three trends, digital transformation is now widely considered to be both a strategic imperative and a strategic risk for banks. So what is the role for us as supervisors in this digital transformation of the banking sector?
Tommaso Padoa-Schioppa once famously said that it’s not the supervisor’s task to prevent Darwinian selection in the financial system, nor to protect dinosaur banking from extinction. Indeed, as supervisors, it is not our task to defend banks’ market shares. It is certainly in our interest, however, to make sure our supervision encourages banks to develop and implement sound digital transformation plans, especially if these plans make the banks more cost-effective, as this increases their profitability and thus improves their overall business models.
Having said that, I think it is no longer fair to compare banks to dinosaurs, since digital transformation is certainly underway across the euro area. However, I fear that many banks may be underestimating the speed of technological innovation and the urgency of digital transformation. We only have to look at the developments in artificial intelligence (AI) in recent months, where a generative AI language model has demonstrated its potential to be a real game changer for many businesses. While banks are already making changes, it is the nature, speed and extent of their transformation that will determine how they manage their business models and strategic risks, as well as their operational resilience....
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