Bundesbank Executive: Fintech and large tech companies and the central bank-conflict of interest or a common mission?

(Editor's note: This article's translator Long Baitao provided an exclusive review, click to read )

By Burkhard Balz

Translation: Long Baitao

Caption: This article is a speech delivered by Mr. Burkhard Balz, a member of the Executive Committee of the Bundesbank, the Bundesbank, on November 11, 2019, at the German Embassy in Singapore.

1 Overview

Ladies and Gentlemen, Dear Ambassador Dr. Sante:

I am very glad to have the opportunity to communicate with you at the German Embassy today. The German Embassy in Singapore was established in 1965, however, the establishment of German-Singapore friendly relations was much earlier.

As early as 1856, seven German businessmen came along and set up the Teutonic Club on Qiaobei Road. It didn't take 30 minutes to walk from here to us. People gathered there to sing German songs together. Maybe later today, we can also try the joy they had then.

The discussion on the topic of payments has never been more exciting than it is today. In recent years, as the "gateway" for the banking industry to stabilize customer relationships, the payment sector has once again received more and more attention.

We are witnessing fierce competition and cooperation among banks, large tech companies and fintech companies. At the same time, there are a lot of innovations and technologies that can be applied in the payment field.

From blockchain to real-time payment to artificial intelligence, we are experiencing huge changes. These changes will not only change our current payment methods, but will also bring us more changes in the future.

2. Overview of German Fintech

These developments and changes have lowered the higher market threshold that traditionally new entrants have to face, thus affecting the overall market structure. For example, at the back end, cloud computing helps to quickly and flexibly deploy computing power at a lower fixed cost, without having to consider the evolution of the IT system landscape over time.

This situation is increasingly seen as a "burden" rather than a strategic asset. It's more complicated especially for the old-time companies that entered early. On the front end, smartphones make it possible for companies to provide solutions for mass users in a short period of time.

It also reduces costs by eliminating the need to maintain costly branch networks. And, from a customer convenience perspective, these solutions are synchronizing with the new digital age.

Often, emerging companies will choose to use these technologies more. In the financial sector, we call these innovative start-ups fintech companies. There are currently hundreds of such companies in Germany. After focusing on the front end and the interface between customers and banks, their service areas have become more and more extensive-some Fintech companies have now focused on the B to B model.

In Germany, sometimes we forget that success and failure are always associated. Therefore, it is not surprising that some startups have ceased operations.

A typical example is the P2P (person-to-person) payment market. For example, you need to be able to use your smartphone to easily make payments to each other's email address or phone number. In Germany, when banks and credit institutions really set up their own service systems, some FinTech vendors in this field had to withdraw from the market. However, this has brought some benefits: these companies have made banks more customer-oriented, and banks' P2P services are now widely used.

The current integration phase is part of the market maturity process. From the perspective of investment and investment methods, this "maturity" of the market is obvious. In the first half of this year, German investment surged. In the first quarter alone, start-ups in the financial sector received approximately 700 million euros of investment. Compared with the last quarter of 2018, it has increased by nearly 80% and also set a new quarterly investment record. However, these investments are no longer widely diversified, but are mainly focused on several large rounds of financing.

Another sign of the market's maturity is the increasing number of ventures between FinTech companies and existing companies. The cooperation between Fintech companies and banks complements each other's strengths: thanks to these new companies, banks are able to present themselves more flexibly and digitally.

For example, "management technology [2]" participants can help credit institutions and other financial market agencies improve the efficiency of the regulatory reporting system by tapping the automation potential of regulatory issues. In addition, innovative artificial intelligence-based solutions have been implemented to detect fraud cases and automate the entire process. Artificial intelligence is also placed in high hopes that it can help credit institutions use "massive data" more effectively, which is also a way to ensure complete data sovereignty.

In turn, Fintech companies can benefit from expertise and banking customer base. The root of finance is trust, so it is difficult for new players to make a difference in the market on their own.

As regulators, we also have some interesting solutions: regulatory technology companies (referred to as suptech [3] companies) can support central banks and regulators to achieve digitalization of supervision and management. The huge potential is yet to be developed, especially in terms of data collection and analysis.

3. Large tech companies: partners or competitors?

You all know that there are many opportunities to create innovative products for financial service providers and end customers. Considering that the continuous expansion of the new company's payment business over a period of time has made it necessary for traditional companies to be flexible enough in the financial industry, this may never be as important as today. Large technology companies have become important competitors for banks with their large customer base, technical expertise and huge financial resources.

Some still believe that fintech companies will soon enter financial markets. The fact is, they are already there. For example, I can now pay in stores, I can shop online, and sometimes even get loans with plans from large tech companies. PayPal already provides a solution where people use Paypal to pay for their purchases later after shopping online. Apple is the first of its kind to launch its own credit card (although it is still working with banks).

In doing so, these companies are taking advantage of another of their strengths: their global reach and large customer base. We acknowledge that being able to use familiar programs around the world gives us a sense of security. Global brands such as ApplePay, GooglePay, and PayPal are already one step ahead in this regard.

So, with the increasing importance of these large technology companies in the global payment field, will it bring us any risks?

First, such companies are often platforms that strive to implement large closed-loop ecosystems. This is especially true if you look at the range of services provided by large Chinese technology companies. You can use WeChat and Alipay to make online purchases and book your next trip while paying in the store.

I don't want to be misunderstood: such models are not bad in themselves, because they are convenient and practical from a customer's perspective. Otherwise, they will not be so successful. However, once customers are "trapped" in one of these ecosystems, they will be reluctant to switch to another.

Everyone trying to switch from an Apple device to Android knows what I'm talking about-a few platforms determine what content and services users can see. As a result, the risk of developing monopolies has increased.

Second, customers often have the impression that they can get services from these companies for free. In reality, these customers pay for the raw materials that are vital to large tech companies: that is, data. If you can cover multiple areas like a large tech company, then you can get a lot of high-quality data. In other words, it also means that consumers can provide personalized and customized products. At first glance, this may seem like a good thing, but it is actually risky: consumers may ignore other options, which makes the other charging business model much less attractive.

Third, because the customer interface is dominated, banks risk losing contact with end customers, and instead become back-end alternative payment settlement providers. In this regard, I have seen the problems of financial stability and competition being affected, because the danger now is that the established business models of existing market participants will be under great pressure. I want to emphasize that our job is not simply to consolidate existing systems; we are interested in systems that ensure effective and secure payments. For me, this of course also includes banks.

Therefore, they (the bank) need to keep in mind their strengths: their connection with customers and the trust they have built. At the same time, partnerships with fintech companies help address the challenges of digitalization and meet customer needs in a targeted manner. However, partnering venture companies may be a more promising approach.

This cooperation between banks is becoming increasingly important, and, if I can say so at this point, this must be achieved through competition law. We therefore explicitly welcome the current proposal to create a European solution, as European credit institutions can only survive in the market through their payment services if the European banking community can provide attractive solutions to their customers. The European market as a whole is attractive to the banking industry: after all, it has 1.5 times as many residents as the United States.

Another new issue is that large tech companies have extended their services beyond pure payment services for some time. As a central bank, we have to face competition with Libra as Facebook plans to launch a product to the market, which may put our role in doubt.

We intentionally do not call Libra a currency, because in Germany and the eurozone, the only legal tender is the euro. In contrast, Libra, to my knowledge, is a "stable coin" that anchors a basket of currencies and is endorsed by collateral. Therefore, it needs the support of a stable national monetary system. However, Facebook tokens still raise too many questions to be answered-what exactly will the technology look like? What rights and obligations do users and members have? How can we effectively combat money laundering and financing of terrorism? This is just a small part of my question list.

4. Impact on central banks and regulators

As a central bank, we are fundamentally open to innovation. This is especially true in Asia in comparison to the more conservative Europe. But we must also ensure that the security and efficiency of payments continue to be guaranteed. In the case of Libra, these outstanding issues must be clarified and legal certainty established. It may be necessary to adjust the existing legal framework. One thing is clear to me: a payment method that wants to be used globally and can be used by billions of people, and will be integrated into a complex overall system, many participants must comply with very high regulatory standards . This is not to stifle this phenomenon in the bud. It is absolutely necessary to do so.

After all, we still follow the principle of "same business, same risks, and similar regulations." This ensures that no company is neither favored nor disadvantaged, be it a fintech company, a large tech company or a bank.

At the same time, fair competition must be ensured. To achieve this, we also enable third parties, including Fintech companies, to access account data by introducing PSD2 [4]. We hope that competition will intensify as a result, and payments will ultimately be more effective.

The challenge now is to develop regulation for all suppliers, and banks, fintech companies, and, most importantly, customers will benefit. In this case, dialogue plays an important role, and tonight we can start talking to each other. After all, unlike our predecessors at the Teutonic Club 150 years ago, we will not close ourselves by singing German folk songs; instead, we want to learn from each other and benefit from it. I am convinced that in Singapore, the world's leading fintech hotspot, there must be too much here for us to observe, learn and understand.

Ladies and gentlemen, have a nice evening. There will be many pleasant conversations.

Notes: [1] Ant Financial has built a number of world-leading database platforms, of which OceanBase, a financial-level distributed database, broke the TPC-C world record in October 2019. [2] Regtech: Management Technology [3] Suptech: Regulatory Technology [4] PSD2: the revised payment service directive: