Digitalisation – old game, new rules or an entirely new game?

Bank Reg

Erkki Liikanen, the Governor of the Bank of Finland, delivered a fascinating speech at the at the Payments Forum in Helsinki

Some of his key points:

Digitalisation and Financial Services

  • Digitalisation is a wide-ranging use of information and communications technology in the renewal of business models; it may also help create entirely new products and services.
  • Digitalisation also facilitates completely new kinds of operating practices in the financial sector. Traditional players are being challenged by Apple, Google, Amazon, Facebook and Alibaba, i.e. operators whose success is based on the intelligent harnessing of digital platforms and networks e.g. payments and trade financing. In addition, challenge is coming from specialised financial services providers i.e. FinTech.
  • Some traditional operators have forged new partnerships with each other and/or have started cooperating with new players; many banks have established start-up accelerators and incubators for FinTech businesses and/or have made significant private equity investments in start-up companies.

Digitalisation and Financial Platforms

  • The success of many new companies has been based on platforms i.e. an operating model that facilitates value-creating interaction between external producers and consumers e.g. Uber, Facebook, Alibaba and Airbnb.
  • A platform has two functions: it provides a framework for interaction and it sets the ground rules for interaction. Its aim is to create a favourable environment for parties to innovate and generate added value from which everyone benefits.
  • Underlying the enormous growing power of platforms are network effects i.e. each new user also increases the value of the platform for old users.
  • New digital technologies have removed constraints on growth, enabling rapid scaling of business operations; particularly where information is a key production factor.
  • Notable financial market platform phenomena include, for example, peer-to-peer lending and crowdfunding platforms.
  • Platforms and networks are also at the heart of blockchain technology.

Digitalisation and the Payments Market

  • An essential driver of digitalisation is young people who are accustomed to doing everything via the internet, often on a mobile device; new players entering the market have created operating models that place the user at the centre of payment services.
  • Ease and convenience are the features required of payments in the future; from a monetary authority’s perspective, security and reliability should be added to the list as without trust, even the easiest to use payment method will not survive.
  • Real-time payment transmission will be an essential element of the digitalisation of payments in the future, as will 24/7 availability of services.

Digitalisation and Regulation

  • Reliable, secure and efficient payment services that openly and extensively utilises the opportunities of digitalisation may help stimulate productivity growth in an economy.
  • The task of central banks is to ensure the credibility and efficiency of the financial system; and to set common ground rules and regulation to ensure its stability.
  • Technological advances and the entry into the market of new actors and practices are a challenge to regulation; striking the right balance between reliability and safety (of payment services) and the introduction of new innovations is key.

Digitalisation and FinTech are now ubiquitous in Financial Services. And while there are many consumer benefits, there are also risks which creates a real challenge for regulators.

Looking out the curve, regulation will most likely driven by “what a firm does” as opposed to “what the firm is”. Numerous regulators in Europe, the USA and elsewhere have already alluded to this.

The OCC has gone a step further, opining that ultimately consumers will want the protection of buying products and services from firms that are regulated.

It only takes a couple of incidents of market failure and/or consumer detriment for this to become a reality.

In terms of the latter, new players must ensure that “good customer outcomes” feature just as strongly as “customer experience / satisfaction” in their product design and on-going product governance objectives.

For the avoidance of doubt, they are not the same thing!

The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions, position, or policy of Berkeley Research Group, LLC or its other employees and affiliates.

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