Category: Finance

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Bank Finance Innovation

“The anarcho-capitalist utopia of cryptocurrencies” Les Echos, 8th of October

Are bitcoins and other cryptocurrencies real currencies? They are essentially a product of a utopian world in which money would no longer be national but universal, valid in all countries and for everyone, and able to be transferred completely securely and without cost.

This currency would require no intermediaries and its value could not be manipulated by governments or central banks. It would be subject to private, decentralised management. It would guarantee the anonymity of transactions and its guardian would not be a central bank but an algorithm, supposedly infallible. In short, a form of anarcho-capitalism.

In the 1970s Friedrich Hayek and the Austrian school advocated the denationalisation of money by doing away with “the monopoly of government supplying money and to allow private enterprise to supply the public”. In some ways, the development of cryptocurrencies could be fulfilling this wish.

Gold as a counterparty

The first banking currencies were issued in quantities that were necessarily multiples of bank assets in precious metals, gold and silver. They circulated and were regulated freely by supply and demand, without state or centralised intervention.

The currency was subsequently issued not as a proportion of assets in gold or silver but consistent with the development of the economy. Money is thus created from credit. And loans make deposits. In other words, it is still the banks that create money.

This system is supervised by an institutional authority, the central bank, as there is no longer a self-regulation mechanism based on the convertibility of each currency into gold or silver.

Central banks were created following the serious financial crises of the late 19th century and the repeated bankruptcies of banks issuing money backed by gold or precious metals. By harmonising the currency sector and playing the role of lender of last resort, central banks created the possibility of stability and demonstrated the usefulness of institutions and rules.

Hyperspeculative assets

Cryptocurrencies have no counterparty, be it gold or silver, or the needs of the economy, since they are issued by private individuals according to arbitrarily set rules. Consequently, we are seeing a huge increase in private “currencies”, today totalling over 1,600! It is fairly clear that if everyone can create “currencies” from scratch, none of these currencies can earn the universal trust necessary to acquire the true status of currency.

Furthermore, if the economic system were to rely solely on these private currencies with no constraints on issuance, then it would quite simply no longer work, as there would no longer be any monetary constraints.

Rather than currencies, then, cryptocurrencies are financial assets at best. And for all the reasons set out above, their value is extremely unstable. A dip in confidence is enough to trigger a drastic slide in their value. Conversely, when their value rises, more and more people buy them, pushing up their price with no apparent limit and “in a vacuum”. This leads to speculative bubbles that may burst at any moment.

Cryptocurrencies at heart are hyperspeculative assets, as created by the financial world from time to time when it completely loses sight of the real economy.

That said, while these pseudo-currencies do not contribute to the common good (in the words of Jean Tirole), the encryption technology on which they are based, i.e. the blockchain, undoubtedly has a bright future and initial coin offerings (ICOs), under extremely strict conditions, are a project-financing method that broadens the range of possibilities. These last should not be confused with cryptocurrencies themselves, which are merely the product of a potentially dangerous utopia.

Please find my point of view, published in Les Echos “The arnacho-capitalist utopia of cryptocurrencies”

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Bank Finance

Can we trust cryptocurrencies ? 18th “Recontres Économiques d’Aix-en-Provence”

Bitcoin and other cryptocurrencies are essentially a product of a utopian world in which money would no longer be national but universal, valid in all countries and for everyone, and able to be transferred completely securely and without cost. This currency would pass through intermediaries, and its value could not be manipulated by governments or central banks. It would be subject to private, decentralised management. It would guarantee the anonymity of transactions, and its guardian would not be a central bank but an algorithm, a supposedly infallible IT programme. And, at a push, it would be possible for everyone to launch their own project to create a private currency, outside of controls and regulation.

It is a libertarian utopia that abrogates the role of the state, institutions, banks… what a dream!

I will try to demonstrate that it is precisely a utopia and that it cannot work in this way.

This analysis is based on monetary theory.

We must first ask ourselves if these cryptocurrencies are appropriately named and if they are really currencies. Going back in history, we find the hypotheses of Friedrich Hayek and the Austrian School, who, in 1976, called for the denationalisation of money, “to take from government the monopoly of issuing money and hand it over to private industry”. In some ways, the development of cryptocurrencies could be fulfilling this wish.

However, bitcoin is not a currency in the classic sense of the term. It is not a unit of account, or a medium accepted everywhere (in fact by very few merchants) to exchange value, and is extremely volatile. But nevertheless, it is a form of private money, without a central bank, as it is exchanged between the members of the “clubs” that hold it. It is created by a private issuer who benefits from it. Because, remember, when someone creates a private currency in the form of a cryptocurrency, as the issuer, they receive a very small percentage of the amounts issued.

We must also question the nature of the counterparty of the currency created. Another look at the history books shows us why cryptocurrencies are intrinsically unstable and why they are not currencies. In the 19th and then at the end of the 20th century, two schools of thought came into conflict, that of the Currency school and that of the Banking school. The Currency school considers that quantities of currency must be based on holdings of precious metals, either gold or silver. These are private currencies, issued by banks. They circulate and are regulated freely by supply and demand, without state or centralised intervention. The convertibility of currencies into gold or silver in fact penalises the banks if they issue too much, and, reciprocally, their results are weighed down if they do not issue enough.

For its part, the Banking school considers that the best counterparty for the currency is not gold or silver, but economic development. Money is created from credit. Today, loans make deposits. In other words, it is still the banks that create money, but they do so depending on demand for credit, thus mainly the needs of the economy. And this system must be regulated by an institutional authority, since it is not self-regulated by the convertibility of each currency into gold or silver. Regulation is therefore the task of an external organisation, the central bank, which has a number of instruments to influence, as much as it can, the quantity of credit distributed by the banks.

In both cases, there is a point of reference, whether it is the needs of the economy and central bank policy, or precious metals. In addition, the Banking school implies that there is a unification of the value of each private bank currency by the necessary conversion to prices fixed in the currency issued by the central bank. The currency area is thus homogenised and the quantity of currency issued regulated by central bank policy.

The debate between these two way of thinking is in practice outdated, because central banks were not created on the bizarre whim of a bureaucrat who wanted to create administrations to control currencies and individuals, but quite simply as a response to a series of extremely serious financial crises that occurred at the end of the 19th and the beginning of the 20th centuries, owing to repeat bankruptcies of banks, while they were issuing currencies convertible against gold and silver. Without a central bank to homogenise a currency area, these currencies could carry different values depending on the degree of confidence accorded to each issuing bank. Until confidence completely disappeared, as did the bank itself, though a series of cumulative processes. . By homogenising the currency area and playing the role of lender of last resort, the central bank has thus created the possibility of stability, thereby preventing the recurrence of financial crises or considerably dampening the effects of such crises on the real economy.

Moving on to our argument, all this explains why cryptocurrencies are not really currencies. They have no basis. They do not have as a counterparty gold or silver, or the needs of the economy, since they are issued by private individuals depending on rules set arbitrarily by these individuals and without any objective reference outside the cryptocurrency system itself.

In addition, newly-created “currencies” have proliferated (more than 1,600 cryptocurrencies!), which we can clearly see is unrealistic, because it is not in any way linked to the development of the real economy. To be a currency, economic players must have confidence in the currency issued and accept it as a discharge payment method, i.e. as a means of definitively releasing the debtor from his debt to a creditor or supplier. We can see that if everyone can create a currency from scratch, without counterparty or external regulation, none of these “currencies” can win the necessary confidence from everyone to acquire the real status of currency. In addition, if everyone could issue its own currency, no monetary constraint would therefore be possible and the system could not work.

I would not therefore say that it was a currency, but at best a financial asset. And, for all the reasons set out above, a cryptocurrency’s value is extremely unstable. A fall in confidence is enough to trigger a drastic slide in the value of this type of currency, or conversely, when its value rises, more and more people buy it, pushing up its price without a visible limit and “in a vacuum”. We are then faced with wild speculation, speculative bubbles that can balloon and burst at any time.

In conclusion, it is therefore at best a financial asset, but an asset that has no basis. We therefore bet on the value of this currency, through supply and demand alone, with no other reference point than the confidence that we have in future supply and demand, and without any objective reference point relating to the value of a company or economic development. In this case, we are in a purely self-referential situation. It is therefore in essence a hyper-speculative asset, as is created from time to time in the financial world, completely detached from the real economy.

Institutions exist precisely because they respond to a need for regulation to avoid this type of chaos and crisis. It is undoubtedly not the time to try and destroy them.

In conclusion, I would like to recall the words of a columnist from the Financial Times, who said that the way economists have paid no attention to cryptocurrencies is only equalled by the way in which cryptocurrency enthusiasts do not care about the economy. Finally, as Jean Tirole highlights, while blockchain is useful, cryptocurrencies do not contribute to the common good.

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Finance Global economy Management

Toward partenarial capitalism

Corporations are beginning to be redefined in France, and with it, governance is as well. Shareholders remain at the centre of governance. Proper compensation for risks requires acknowledging their essential role. The question is knowing how to better integrate the interests of the other stakeholders in the company alongside them.

For a long time, this question was not raised. At Wendel, Renault, Michelin, etc. shareholders and board members were the same people, and often families. The original family capitalism did not have problems with governance by construction. But, to help them grow, companies opened up their capital, and through the stock market, offered shareholders the ability to sell their shares for liquid assets. The shareholder base became disparate, and its power over board members became diluted.

In the post-war era, managerial capitalism became the most prevalent practice. Board members were emancipated from shareholders and controlled the company on the basis of their “technical” knowledge. This created a technocracy. The interests of the two parties were no longer aligned. Board members sought corporate growth and continuity, inserting employees into organisational pyramids. But this configuration did not always lead to the best efficiency or profitability, creating conglomerates that were often heavy and lacking in agility, which too often neglected shareholder interests.

In the 1980s, alongside financial globalisation, shareholders reminded board members of their existence and of the priority of maximising wealth. This change translated into the creation of committees (audit, compensation and appointment, strategy, etc.) and the development of incentive mechanisms (bonuses, stock options, etc.), to align the interests of the board members with those of the shareholders. A whole series of indicators was imposed (return on equity, distribution rate, etc.), in the same way the doctrine of value creation was developed. And if results were not achieved, shareholders allowed “raids” that organised offensive power takeovers to optimise value, sometimes by cutting out previously established groups. In parallel, these various compensation tools based on the growth of corporate value promoted innovation by allowing “start-ups” to recruit talent that shared in the company’s risks when salaries alone were not enough to tempt them.

But shareholder capitalism rapidly reached its limits. Because expected financial yields seemed guaranteed, speculation often outweighed reasonable gambles. To meet minimum short-term profitability standards (15%, regardless of the activity sector and risk-free interest rate, in the 1990s and 2000s), many companies bought back their shares to strengthen their securities and/or increase their leverage ratio. Board member income experienced growth that was difficult to justify. In 1965, the average income of a CEO of a major American group was 44 times that of a worker. In 2000, it was 300 times the lowest salaries. Even more serious, in the face of expected yields that were disconnected from reality, we saw the appearance of unethical creative accounting: Enron, WorldCom, Parmalat and others even more recently. In some respects, subprimes and their consequences stem from the same phenomenon.

The crises of 2000-2003 and 2007-2009 resulted directly or indirectly from this, along with their shares of very significant economic and social costs.

Hence the need to address a new age in governance, that of true partenarial capitalism that is able to put the company’s clients, employees, and the environment, in particular, back alongside shareholders, in a model better adapted to ongoing commercial, behavioural, ethical, managerial, and technological revolutions.

Shareholders must always hold a central place as principals for board members. This is because, in theory, they assume the risk without any certainty of future yield. The practice has made shareholders partly protected against negative changes in the business context by partially spreading the risk to other corporate stakeholders: to employees, for whom variability of compensation or employment has increased; and to sub-contractors, whose margins for negotiation with their ordering customers have significantly weakened. Sometimes clients are also balancing items, through the lower product safety or accelerated obsolescence imposed on them. The climate is also affected by corporate choices.

Therefore, it must be possible to take better consideration of these stakeholders within a balanced governance framework, as they also share in the company’s risk, and because over the long term a company is responsible to all of them. Regulatory methods that help achieve the best compromises among them must guarantee sustainable and profitable development for the company.

For this reason, by the fact that their clients are owners and elected members of the boards of administration, by their decentralised model that strengthens close relationships not only with the clients they serve, but also with the territories in which they operate in symbiosis, and lastly by the attention and role they give to employees without sacrificing any of efficiency, cooperative or mutual banks represent an interesting possible form for redefining the company with expanded governance. It is up to them to take advantage of new technologies that would help further strengthen the validity of their model and modernity.

It is up to each type of company, listed, private, or cooperative, large or small, to reinvent the definition of the company and its governance, to make it a real partenarial organisation. The future of our open economies and democratic societies also depends upon this.

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Conjoncture Economical policy Euro zone Finance

Exiting the ECB’s highly accomodating monetary policy : stakes and challenges

Revue D’Économie Financière – Extrait du numéro 127 – Article Olivier Klein

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Conjoncture Economical policy Finance

Cercle Les Échos : Faced with predicted Uberisation, what are the keys to success for banks ?

Is banking experiencing Uberisation? And if so, how do we deal with it? What assets do we have? There are certain analyses and lines of reasoning that we can put forward with a fair degree of certainty without looking into a crystal ball.

The word “Uberisation”, broadly speaking, can refer to the threat to an established model posed by a series of innovations and new players. We shall focus here on retail banking since it is, in principle, more greatly affected by this phenomenon than corporate banking. There are various types of digital innovations that may find an application in the banking sector: robotisation, the digitalisation of processes, of contracts and signatures, big data, artificial intelligence, payments, payments and many more. Clearly, these innovations are causing many profound changes and are creating a number of possibilities for revolutions that need to be analysed and incorporated into our strategies. Two types of profound change in particular are interesting to study.

The first approach involves asking the question of whether digitalisation could go as far as to do away with branches, or at least a significant reduction in the network bank model. This is a question that needs to be asked since there are far fewer customers visiting branches. We can therefore legitimately ask ourselves whether this will continue, whether this reduction is affecting all branch-based roles and whether we are heading towards an almost unique model of online banking or neo-banking.

The second approach involves studying the extent to which this technological revolution is allowing a number of start-ups, such as the fintechs, to grow and compete with commercial banks on one part or another of their value chain. Is there a possibility, in this case, that, in time, profitable segments will be lost? Could profitability fall without jeopardising the network banking model in the process?

These two questions are important and different, even if the answers one might give to them sometimes merge into one.

The first approach is fundamental: can we imagine a world where banks have no branches? This is what some analysts are claiming, speaking of banking’s “tomorrow’s Kodak” or, a little less radically, “the next iron and steel industry”. This question cannot be ignored. On the contrary, we need to get to the bottom of things. This subject merits answers founded on solid analyses. First of all, we need to differentiate the issue of digital from that of interest rates. We can see the convergence of these two phenomena but neither has anything to do with the other. On the one hand there is a very flat interest rate curve that is damaging the profitability of retail banks. We can reasonably expect that these rates will rise again, specifically with a sufficient gap between short- and long-term rates and a central bank which will gradually emerge from quantitative easing. We expect the ECB to make announcements in this vein at the end of October.

On the other hand, we have digital and its impact on profitability. I think we need to be careful not to answer the question of interest rates with digital by thinking that low rates structurally change the model. The interest rates as they are today do not change the model in itself but temporarily damage profitability, which is not exactly the same thing.

In my opinion, the line of reasoning to be followed involves going back to basics: What is the very essence of a retail bank? What is the essence of the banking relationship? Here we need to distinguish those non-variable contextual points which vary depending on current technology and how they are used by customers. In retail banking – the model of which can incidentally differ by country according to the customs and habits that are specific to each one – there are two major areas: everyday, transactional and relationship banking, that of “life plans” and advisory banking. These are two very distinct banking requirements, even if their paths often cross.

Clearly, everyday banking involves current transactions: picking up a cheque book, making a payment, making cash withdrawals or deposits etc. This type of banking practically no longer requires a network, even if there is still demand, albeit ever decreasing, to go the counter. The development of the internet, smartphones and automated machines means that this transactional banking practically no longer requires a network to carry out these common transactions. This reduction in visits to banks is very significant overall. This is very important because the demand for “cashiers” is becoming increasingly small and this must clearly be integrated.

On the other side is relationship banking, that of life plans and advisory services ̶ as well as being the banking called upon at those difficult times that can come upon everyone sooner or later – which essentially characterises the most profound relationship between private individuals and their bank, going far beyond managing means of payment. This is the long-term relationship with customers. This is crucial because this long time is linked to the fact that their life plans are being taken care of, both in their development and their deployment. These can be very important projects: financing one’s studies, your first start in the professional world, buying a home, preparing for retirement or planning for your heirs. They can also be small life plans that are linked, such as preparing for a trip or buying a car. This is all part of a world in which banks are entirely legitimate since they meet the needs of customers by offering them the necessary products, namely loans, savings and, of course, insurance (for property and people), which enables them to be protected. These plans require time to be for them to be prepared and brought to fruition. This creates a long and strong relationship of trust between customer and banker since it relates to the security of one’s property, person, family and, fundamentally, one’s well-being. The world of needs served by relationship banking is therefore a long-term one, just as loans, savings and insurance are long-term products.

It is a nomal and commonplace for thoughts to be polarised within society: at the end of the 1990s and throughout the 2000s, there was a lot of debate over whether mass retail would replace banking. At that time many people wrote knowledgeably that mass retail would remove whole swathes of banking. This is not what happened, however. Back in 2004, I wrote a long article in Les Échos on this subject. My thought process stemmed from the following point: mass retail deals with the short-term because what is bought through this medium is consumed almost immediately. If this does not satisfy us, it’s easy to change to a different brand or even a different outlet. In banking it is difficult to change quickly, depending on the consumer experience, because if someone takes out a loan, makes savings or takes out an insurance policy, this is generally a long-term affair. This is why bank advisors need to remain in their jobs for a sufficient length of time. This is also a strong demand from customers. Whereas in mass retail, by and large, there are no more “sales representatives” in store. I have never truly believed, therefore, that mass retail can take significant market share from banks, specifically because the fundamental analysis of what makes the very essence of what was the banking relationship led me to believe that no-one would buy savings in a pre-packaged form. The only meeting points between mass retail and banking are consumer credit and payment and loyalty cards, both of which are an exact extension of the act of purchase. There is therefore only one area in which, until now, there has truly been competition between mass retail and banks.

Furthermore, depending on the country, there are different mixtures between relationship and everyday banking models. A study carried out on behalf of the French Banking Federation in 2010 sought to discover which countries had a strong relationship model. France stood out as one of the strongest countries. This does not mean that French banks are not transactional but simply that they placed relatively more weight on the relationship aspect than many other countries do. Countries that have models which are far more transactional than relationship-focused therefore have a vested interest in closing large numbers of branches since branches have little new to offer. In relationship-focused banks, something else is going on.

Therefore, people are visiting their banks less and less for everyday matters, that is certain. However, will people’s appetite for relationship banking decline? For the last decade or so, relationships with banking networks have been evolving: physically and due to telephone, e-mail, visual communication and live chats etc. These are not however removing the need for banking advisors. Although banking advisors are needed as much as ever, if not more, it is therefore important to know where to place and accommodate them. Customers want to see their advisors face to face on a regular basis, for more complex subjects or for simple reassurance. Having branches closer to them is, therefore, not entirely incongruous, especially since branches, as a place where banking takes places, also act as reassurance for many private individuals and even professionals. Therefore, since we already have branches nearby, why deprive ourselves of this asset, especially when they offer us miles’ worth of advertising space in our branch windows that even online banks envy?

Therefore, relationship modes evolve and complement each other but they are not killing each other off. The essence of what they are is not changing because there is no fall in demand for banking related to life plans, far from it in fact. With the advent of the Internet, customers are ever more demanding when it comes to the quality of advice because they are adept at browsing the web to find out information and to compare and switch if they need to. They require their advisor to be even better, more responsive and more proactive than before.

In reality, the fact that fewer people are going to “counters” is an opportunity for banks and this is not a paradox. Firstly, digital is taking repetitive, unpaid tasks away from the counter, thereby reducing costs. We can therefore offer a lot more business time to customers who request more and, in doing so, make customer advisors out of those employees who used to be at the counters. Most of the time these are young people in their first job who don’t expect anything different, therefore making them easy to train. Thanks to digital, business time is developed and therefore avoids repetitive tasks for experienced sales staff.

The second argument, which follows from the first, is that we increase the productive business time of our own advisors, which increases our productivity. Our net banking profit is therefore increased by our ability to better serve and advise our customers and therefore meet their needs.

Thirdly, the customer experience is clearly made easier by digital since certain operations are much more easily handled remotely or by machines. Customer satisfaction is therefore increased because the bank becomes more practical.

Lastly, digital is also an opportunity because it makes it possible to improve the relationship model itself. Big data and artificial intelligence, which we are gradually trying to integrate, may allow us to better understand our customers and their needs, to better prepare for our meetings and therefore serve customers better. This therefore makes us much more efficient. This is about intelligent commercial productivity, which really satisfies customers since they will only be called regarding things that concern their true needs.

Increasing the practicality of our banks and the quality of the advice are therefore two fundamental keys to success. There are two axes that allow the banks to do this: training, the budget of which we have increased significantly at BRED, and digital itself!

We therefore need to ensure that online banking is just as practical. Of course, if we ensure it is just as practical but we don’t have correspondingly low prices, there needs to be something else that sets us apart: high quality advice. Without wanting to criticise them, because they are perfectly legitimate, purely digital banks do not have advisors.

Customers in France actually want both: highly practical everyday banking and an assigned advisor who can provide them with added value. They will only, therefore, seek to separate transactional and advisory banking or even to be satisfied with just one low-cost everyday bank if their usual bank does not excel at these two levels.

Retail banks therefore have a certain comparative advantage, provided that today, on the one hand, they continue to invest so they are as good as online banks when it comes to the practicality of everyday banking. Nothing impossible here. On the other, they also need to make sure that they can provide quality advice at the same time, the added value of which warrants remuneration. Significant investment in digital and training are therefore definitely two keys to success.

However, the agile organisation of each branch and of the network and optimising the use of resources to ascribe them to the most productive in terms of net banking profit is also crucial. In certain cases, banks may close branches because the need for transaction counters is disappearing. As a result, we effectively no longer need to have a branch every 200 metres in large cities, even if we still need branches to provide advice. Therefore, according to the configuration of banks today, the number of branches to be reduced may be quite different.

It should be added that, for the moment, online banking is not profitable precisely because it is having great trouble equipping customers. Furthermore, in order to gain customers, it incurs considerable cost corresponding to the need to advertise more than the other banks. Since they have no “shop windows”, online banks need to attract the customer before they spontaneously visit one of our branches. In the same vein, online banks need to offer many more gifts and free offers. For example, customers typically receive 80 euros for opening an account, but many students go to several banks one after another to collect these incentives in turn. Enhancing loyalty is not easy, therefore. As a result, online banking focuses mainly on transactional banking. It is therefore quite difficult to monetise these models and capitalise on customers unless they start to expand their offering and assign advisors, which is starting to happen here and there. If this were to develop, it would be very interesting since there could then be transactional banks that go digital and online banks which would start to play the traditional banks’ game by appointing advisors. Both types of bank would then start drawing nearer to one another in an interesting way.

However, this begs the question: can advisory services be digitalised? Can we do without humans therein? We could of course say the following: with quality big data and good automatic intelligence, automating “pushes” (text messages or e-mails) to customers would render the human advisor useless. The customer would receive intelligent suggestions, sometimes even more intelligent than those an advisor who has not been sufficiently trained or assisted would make. Why, therefore, would we need banking advisors in future since everything would be digital?

We are convinced that the opposite is true, even if it is impossible to predict with any certainty what will happen in ten or twenty years’ time.

We know that machines can beat humans in many areas. We also know that humans and machines acting in concert beat the machine alone. We need to remain very modest, however, because who knows today what artificial intelligence will be capable of tomorrow? Artificial intelligence experts themselves remain very cautious. There are, however, some key elements to be borne in mind.

The first element is that trust is a key part of the banking relationship for a very simple reason: people are trusting us with their money and helping them to construct their life plans. We enter into the inner world and security of people and their families. Having an interpersonal relationship allows us today to cultivate infinitely more trust than is possible with a robot, even an “intelligent” robot. The youngest among us, who are extraordinarily accustomed to digital, for example, need our banks to have assigned customer advisors, even if they are visiting our branches less often. At BRED, we have also experimented with sending commercial proposals to groups of customers who are in identical situations via text message or e-mail. As is always the case with mailings, there was a positive response rate of around 2% to 3%. We then sent out e-mails or texts again to other people with identical characteristics and then had the customer advisors ring them regarding the same subject. Our success rate then multiplied ten-fold. This very modest experiment therefore provides some hope for the human relationship.

The second challenge hinges on the fact that the basis for trust also resides with the institution’s reputation, which is an added value and an asset for banks.

Moreover, cognitive science currently shows that, to be able to make a decision, rational intelligence but also emotional intelligence is needed. Studies present certain cases of people who have been injured and lost the use of part of their brain used for emotional intelligence. They are therefore entirely incapable of making decisions even though their capacity for reasoning and analysis remains intact. Advances in cognitive science therefore demonstrate that, in order to make a good decision, we need to have an inkling of the solution as well as good analysis. Therefore, the human relationship can be a powerful aid in the decision-making process. In the same vein, econometric studies have recently updated the belief that a lesson could be learned more successfully in a “classroom setting” with a teacher, than through massive open online courses (MOOC). This in no way calls into question the extraordinary interest MOOC have in disseminating knowledge and their ability to reach many more students. However, this does not mean the classroom teacher has no future.

Finally, every day we receive more diverse and varied requests from people or organisations we do not know, in the form of “push” e-mails or text messages. A few years from now, we will all be saturated with these requests, if we aren’t already. What will make the difference at that point are humans capable of calling, in addition to these “pushes”, providing additional added value. This differentiation will surely prove decisive.

For all these reasons, retail banks will probably not be threatened with extinction by what seems to be a possible “Uberisation”.

There is a second approach that involves asking ourselves whether there is a possibility that profitable market segments will be lost due to external players like fintechs.

Let’s take fintechs which are flourishing. We are seeing more and more development of services proposed on certifications and authentications, biometrics, budgetary management, electronic safes, aggregators, payments, blockchain etc. The question therefore is: is there a risk of becoming disintermediated, as a bank, from portions of the banking chain that would be profitable?

The example that could be of legitimate concern is that of external aggregators which are now capable of accessing data, suggesting bank transfers and therefore initiating payments. On top of these, they can also add budgetary management services and suggest best-priced banking products. What could actually stop them, in future, from analysing our customers’ data and offering them the banking services they need? Such players could, for example, offer consumer credit by using brokers and suggest the cheapest provider – though not necessarily the most suitable one – which may not be the customer’s traditional bank. This hypothesis of banks being partially disintermediated is perfectly foreseeable.

I think – perhaps wrongly – that these fears may be exaggerated.

Firstly, many fintechs will not have access to customer data, such companies being, for example, those that offer budgetary management software. These companies will have difficulty in taking market share away from certain segments that are currently operated by banks. There are therefore two solutions open to them: either they cooperate with specific banks, the former being bought out by the latter or by forming a more or less exclusive partnership, or they form cooperative platforms with several banks in order to offer services that can be shared. Thus, they invite and integrate themselves into the banks’ value chain without disrupting their model. They would even help to enrich it since banks would become even stronger in the global model with their customers by expanding their services. For example, in the BCPE group, we sought out fintechs to offer professional customers CRM solutions linked to payments. Therefore, either the banks have the IT investment capacity to enhance their services themselves or they can look to subcontract. In fact, the reality is, of course, a mixture of the two. What does change, however, is the fact that banks were wont to do everything themselves, whereas in the future this is also likely to be an assembly profession, not just a complete, fully integrated profession. There’s nothing wrong with assembling as long as that allows us to expand our overall relationship base and our revenue.

The second case, which could of course pose a problem, is the one in which fintechs will have access to some of the data. Web scratching – which may soon be prohibited or at least highly regulated – and, more generally, DSP2 and APIs, pose the question of opening up banks’ data and customer accounts. Currently, all banks have built their aggregators to try to make sure that their customers don’t need to leave the bank’s environment to access their accounts at other banks and this works well. In future, by regulation, accessing data will be accompanied by strong authorisations which will certainly, and legitimately, make it much more difficult for external players other than the customer’s bank to process data (whether or not these players are banks).

The discussion is also currently focused on knowing which data can be accessed. We can say that there is growing awareness amongst customers, and the population in general, of the danger of allowing uncontrolled use of their data. This trend is likely to accelerate, being particularly noticeable among young people. This awareness will most likely put the brakes on any intrusion.

Furthermore, a new data protection regulation will be implemented next year (the General Data Protection Regulation – GDPR – which will apply from May 2018), which will reiterate the fact that the data belongs to the customers and that any use of such data must be approved by the customer. This will apply not only to banks but also to all data users. This is probably good news since, even if it is difficult for banks to justify everything, this regulation will make it possible to slow down the arrival of third parties that wish to use this data in a cavalier fashion, which will again put the brakes on intrusion. Banks must remain this trusted third party which processes people’s personal data and they clearly must not be allowed to disclose this information without the customer being aware of this and giving their consent.

Once again, therefore, banks’ ability to provide for and improve their overall relationship model with their private customers will be a deciding factor in resisting Uberisation while integrating and offering new services that meet the needs of the customers served by banks.

Therefore, if banks invest heavily in training and digital and carry out the essential changes their organisations require, there is no reason to believe that the retail banking model is dead. However, as with all enduring models, it no longer needs to be a chemically pure model. On the contrary, that model now needs to be intimately combined with digital. Today we are seeing in all areas of distribution that purely digital models are having a hard time surviving and that purely physical distribution models are dying out. The future will involve this mixture, with the right replies being found in understanding what the very essence of the banking relationship is. It seems to me that this is possible.

The risk of Uberisation will also, as in other sectors, have provoked strong competition, which is essential in a sector that is highly regulated and poorly suited to swift changes. We must be lucid, however: this stimulating effect which, overall, has led to an improvement in the banking model and benefited its customers, is not the only factor. A reduction in profitability, all other things being equal, caused by new players entering the market and putting pressure on prices, is likely. However, other sectors can no doubt be developed in parallel, connected with the recurring activity of commercial banks, which will see their revenue grow.

The risk of Uberisation, to quote the title of the conference, must be assessed in depth in the light of the assets that can be mobilised by commercial banks. Coming out on top, therefore, seems possible. But this is contingent on correctly appreciating the changes that need to be made and the adoption of a deliberately offensive strategy by these same commercial banks.

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Conjoncture Economical policy Euro zone Finance

Exiting the ECB’s unconventional monetary policy is necessary, but difficult.

On 26 October, the ECB (European Central Bank) will probably announce how it is planning to recalibrate its current highly accommodative monetary policy. Primarily consisting of massive purchases by the ECB of sovereign and corporate bonds and the introduction of negative interest rates, this policy has proven its usefulness in combatting the risk of deflation and the disintegration of the eurozone. It has, therefore, been effective.

Gradual withdrawal of the policy now appears necessary. Deflationary fears are now behind us, growth in the eurozone is confirmed and the unemployment rate has fallen considerably. Although we are experiencing stubbornly low inflation, continuation of the policy entails significant risks.

Through a policy of very low and even negative interest rates, below the nominal growth rate, the ECB, by supporting borrowers, impacts the remuneration of savers and lenders. Germany, a country of declining demographics and thus more sensitive to this situation, reminds the ECB regularly of this. Furthermore, and whether or not they are contractually required to deliver minimum yields, institutional investors (insurance companies, pension fund managers, etc.) may therefore be inclined to extend the duration of their investments and accept higher counterparty risks in exchange for higher remuneration. Should it continue beyond its necessary duration, this policy could cause future financial instability.

Additionally, such a policy may encourage speculative behaviour, a cause of bubbles, consisting of borrowing at low rates in order to buy risky assets (equities or real estate) in order to benefit from the yield differential. Yet, although such bubbles had not clearly been seen until recently, certain assets appear to have been experiencing quite rapid price hikes over the last few months, both on the US equities markets, for example, and on real estate markets of a number of large American and European cities (including in Germany).

By seeking to position long-term interest rates at very low levels, it destroys the differential between banks’ lending rates and the rates applicable to their sources of funds, while savers’ bank deposit rates cannot fall below zero. But this interest margin constitutes a fundamental building block of retail banking income. In the case of France, for example, since 2016 this negative effect has not been offset by higher lending volumes and a lower cost of credit risk, due to the same very low interest rates. Yet at the same time, results from their other activities (investment banking, international, insurance, etc.) have enabled them to generate very good overall results. Consequently, sooner or later the lower income from retail banking in domestic markets runs the risk of impeding their ability to support lending growth alongside resurgent economic growth, at a time when the solvency ratio demanded under prudential rules continues to rise.

For all these reasons in particular, the start of normalisation of the ECB’s monetary policy has now become necessary. It would also enable the institution to re-establish vital room for manoeuvre to combat any future cycle reversal, particularly as the budgetary policy of many European governments currently has little room for manoeuvre given their levels of public debt.

To implement this turnaround, from 2014 the US Federal Reserve commenced a gradual tapering and subsequently ended its asset purchase programme, and finally gradually increased its key rates (short-term rates). The ECB will probably announce its own tapering plans on 26 October. By deciding to unwind its asset purchase programme very gradually, and by first of all stabilising its stocks, it could trigger a very prudent rise in long-term rates over the coming years. At the same time it could also raise negative rates towards zero, a situation that can only exist in very exceptional circumstances. Key rates would only be raised after this first step.

The rates rise will be managed very prudently, as it also involves significant risks. It could cause major market shocks if it is very sudden and poorly anticipated. Similarly, in view of the high levels of sovereign, corporate and household debt, it can only be implemented very gradually. The euro has already risen sharply against the dollar. With the rise of our currency clearly having an effect which could counteract anticipated inflation growth following higher economic growth in the zone, the ECB cannot, however, run the risk of accelerating the revaluation of the euro while it is seeking to get inflation back up to around 2%.

The policy implemented by the ECB has, in practice, been designed to buy time for the eurozone, to enable its states to carry out structural reforms and to make the necessary modifications to the institutional and organisational framework of the monetary zone itself. As the policy cannot last for ever, it is becoming all the more imperative for the countries concerned to implement such reforms in order to enhance their competitiveness (quality/price) and sustain their growth potential. And consequently, in the absence of austerity policies, to reduce public deficits, including welfare, and structural current account deficits. The objective must be to create the foundations of a strengthened eurozone, through better coordination, with greater solidarity and where all members will be able to improve their growth potential.

Co-written with Thibault Dubreuil, Finance Major at HEC