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Digital revolution during the crisis?

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With banks closing their local branches and cash payments now seen as a health risk, the coronavirus crisis is surely giving digital innovation in the banking sector a significant boost. Or is it? BaFin President Felix Hufeld has a more nuanced view of the situation. From his perspective, the crisis is becoming a litmus test for digital services, which are now being used more often. In this article, Mr Hufeld discusses this question and the matter of when BaFin will revoke the supervisory adjustments it introduced in response to the crisis (see info box).

At a glance:Up to date

More information about the measures that BaFin has taken in response to the coronavirus crisis can be found in the overview on the BaFin website, which is regularly updated. Information about measures taken by the European banking supervisors at the European Central Bank, the European Supervisory Authorities and other institutions can also be found here.

Mr Hufeld, will the German banking sector undergo a complete digital transformation as a result of the coronavirus pandemic?

We don’t yet know how extensively or permanently the pandemic will affect innovation and digitalisation. While I doubt that it will be the coronavirus that triggers a digital revolution, I am seeing two parallel developments that first seem contradictory.

On the whole, established banks are focusing less on innovation right now. Other matters are more pressing. That is understandable. Institutions are busy working to mitigate the devastating consequences of the coronavirus crisis on the real economy. On the other hand, we have observed more and more use being made of digital services. We should therefore consider the pandemic to be more of a litmus test for such services.

It is no surprise that customers are turning to digital services.

In some ways it was foreseeable, yes. When the branches were temporarily closed, more people switched to contactless payment methods. Online banking, mobile banking, telephone banking and chats have since taken on greater significance. Especially at established institutions.

Cashless transactions have also increased – which is likewise hardly surprising. This increase is primarily due to the marked rise in the number of people shopping online. Not to mention the fact that the limit for contactless payment with a credit or debit card without a PIN has increased from 25 to 50 euros. What is more, card payment devices can now even be found in bakeries and ice cream shops in Germany. The coronavirus crisis has undoubtedly boosted this trend.

Will customers stick with online banking and cashless payments? The branches have started to reopen, and Germans are known to be especially fond of cash.

We can only speculate on that point. Seven years ago, in Sweden people already thought you a dinosaur if you tried to pay cash for a bottle of cola in a convenience store. Germans take cash when they go to buy a television. Yes, these are stereotypes, but there is a grain or two of truth behind them. And there is another force at work: here in Germany, we are particularly sensitive when it comes to data protection. This also makes a difference when we consider whether customers in Germany will stick to online banking and cashless, contactless payment.

But the trend in this direction is likely to continue. We can expect to see the effect of preserving the status quo: many customers will continue to make use of digital services. But this will absolutely depend on whether or not these digital services provide real benefits. And I am certain this development will prompt a number institutions to question the necessity of maintaining some branches even more critically than before.

Who is actually ahead in terms of digitalisation and innovation – traditional banks or fintechs?

That is hard to answer simply because many traditional banks have developed varied and attractive digital services, and – conversely – a number of successful fintechs are well on their way to becoming traditional banks – more quickly than they might prefer.

This is intensifying competition in the financial sector. If it makes the financial system altogether more diverse, more stable and more efficient, I am all for it. Then I would say there will be one winner in particular: the customer.

It seems established banks had already undergone a digital upgrade before the pandemic broke out.

That’s right. Even established institutions have now expanded their digital communication channels and are offering mobile banking and wallet solutions. And they still have the tremendous advantage of being able to enjoy their customers’ longstanding trust.

Does this mean banks will be able to resume “business as usual” after the crisis?

Definitely not – although, on the whole, the banking sector is certainly more resilient today than it was in the 2007/2008 financial crisis. Back then, banks had a role in causing the problem. Today, they are contributing to the solution – this is in part thanks to the regulatory reforms of the post-Lehman period. We now have more and better capital in the system as well as more liquidity.

But let’s be honest: banks would have had a much harder time during the coronavirus crisis if our politicians, the European Central Bank and we as supervisors had not taken extensive measures. Apart from that, the crisis has not yet hit the balance sheets with full force. Institutions will have to expect credit defaults, presumably in several waves – despite the multi-billion aid programmes. And we must not forget that the pandemic is exacerbating the problems that were already present in weaker institutions even before the onset of the crisis.

For the short term, the coronavirus crisis has effectively shifted the focus to operational issues and risk management. But the overall banking sector will have to continue devoting a great deal of attention to innovation – that may mean digitalisation, or the need to review business models.

You have just touched on a key topic: BaFin has adapted its supervisory requirements in light of the crisis. When will things return to normal?

Our primary aim in making these adjustments has been to reduce the burden on the banks as much as possible during the crisis. They should and must be able to provide their own funds and the available public funds to those who urgently need them. We also want to equip the institutions as best we can to make sure they’re ready for any credit defaults that may arise.

We are conducting supervisory activities in crisis mode these days, and the crisis is not yet over. What’s more, nobody knows when it will be over – or when it will at least subside. We still have no reliable figures for credit defaults, for example. So far we have been working with scenario calculations. We are thus unable to say, “We will be resuming normal operations on such-and-such date”.

What we do know is that we will be resuming our normal supervisory activities. This is the only way forward if we are to continue safeguarding financial stability. But we will not be revoking all of the supervisory adjustments made in light of the crisis overnight, in one fell swoop. Rather, we will give this the time and consideration it needs and take things one step at a time. We are not going to punish the banking system for doing what everybody expects it to do right now: actively supporting the real economy in handling the crisis.

One last question, Mr Hufeld. Do you still stand by your statement that there is no systemic risk threatening the banking sector?

Nobody knows how things will develop. In light of what we know today, I believe that while the banking sector will sustain some cuts and bruises, it will be strong enough to weather the coronavirus pandemic without a systemic crisis.
As I said before: the banking sector is more resilient now than it was in the days of the Lehman collapse. But it is certainly not bulletproof.

Whether each individual institution is strong enough is another question. Coronavirus or no coronavirus, I would never claim, “From now on, no more banks will exit the market”. It has always been possible; it will always be possible. And the coronavirus pandemic will not make weak institutions any stronger – that much is obvious.

Mr Hufeld, thank you for your time!

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This article reflects the situation at the time of publication and will not be updated subsequently. Please take note of the Standard Terms and Conditions of Use.

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