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New trends in the financial sector - Prospects of growing electronification in the capital markets (fintech, blockchain, electronic platforms…)

Brave new world – banks, bytes and blockchain

By Dombret Andreas - Member of the Executive Board, Deutsche Bundesbank


Technological innovations have been a catalyst for major upheavals in the world of finance. Nowadays, 63% of bank clients in Germany make use of their bank’s online services , while 47% turn to mobile devices to conduct their banking affairs – and forecasts suggest that these services will be used even more often going forward. Online and mobile banking services are no longer an add-on to banks’ traditional services – they have become an integral part of their business strategy.

Digitalisation has raised the bar for the financial industry. Today’s IT capabilities can make the financial system cheaper, faster, more flexible and more efficient. These prospects are an enticing proposition for both banks and society at large.

But digitalisation also harbours at least two major challenges for banks. One is that technological innovations open the door to both “disruptive technologies” and new competitors known as “fintechs”. These entities came up with numerous new IT-based business ideas in recent years, mounting a stiff challenge to banks’ profitability. In addition, banks face the risk of falling behind if they fail to respond quickly enough with competitive products of their own. And that’s not just down to fintechs – disruptive technologies are a key factor in streamlining individual processes, but also in rendering entire business models obsolete.

Distributed ledger technology has the potential to unleash such disruption in the banking industry. It enables any transaction conducted in the world of finance to be documented in what is thought to be a forgery-proof, near-real-time and decentralised manner, ie potentially bypassing central securities depositories and banks altogether. It would allow any individual and any company to settle any type of asset or liability transaction directly with other financial market agents.

Banks need to formulate a strategic response to these challenges. As regards fintechs, some have realised that banks’ relationship with technological innovators can be more than just a rivalry. In the past, banks have acquired fintechs as soon as their ideas have matured. So fintechs do the research and development work for the financial industry and bear the associated risks. Banks will then need to develop monitoring and evaluation tools to allow them to assess whether fintechs’ business ideas will prove to be a long-term success. When it comes to distributed ledger technology, banks have to realise that they offer more than just transaction services. Transformation of risks, liquidity and maturities are hardly replaceable by computer algorithms, at least in the short- to medium-term.

Managing digitalisation is a senior management task.

The second major challenge which digitalisation presents for banks is cyber security. The financial system is particularly vulnerable since the digitalisation of banking has led to a shift in the economics of financial crimes. Huge values are stored on bank servers, rather than as cash in safes, making hacking an increasingly lucrative venture. A security service provider has identified a new malware sample every 14 seconds for Android smartphones alone ; banks have to fend off thousands of attacks on their IT systems every day. 61% of CEOs regard cyber risk as a key threat , and some observers are even predicting that the next financial crisis will emerge from cyberspace.

Averting cyber risks, then, is anything but a trivial task. Technological capabilities are constantly evolving. But more often than not, the human factor is the weakest link in IT processes. Targeting “digital carelessness” among customers and staff is usually a good way of achieving fast results in mitigating risk.

The digitalisation of banking presents a host of complex challenges. Managing digitalisation, then, is a senior management task – in banks, just as in any other business.