Five existencial Rs for banks and future scenarios

José Manuel González-Páramo received the Royal Academy for Moral and Political Sciences’ 22nd medal at the formal ceremony. Founded in 1857, this institution under the Ministry of Education, Culture and Sports is a place to debate pivotal ideas and issues in Spanish society. It is a knowledge-sharing center, a laboratory for research and critiques based on the experience of its members - important political, social and economic leaders in Spain from the past two centuries.

BBVA Group Executive Chairman Francisco González and CEO Carlos Torres Vila attended the ceremony, together with prominent financial, political and economic figures.

The new member selected the topic “Reinventing banks: From the great recession to the great digital disruption” because “before our eyes, perhaps inadvertently to some, a total revolution is underway in the world of financial services,” he indicated.

José Manuel González-Páramo began his speech by reflecting on the last three decades in the financial industry. During this period he identified a period of globalization and economic stability that led to an underestimation of risk; a deregulation process; and the incorporation of new information technologies and communications in the banking sector.

He then made reference to the 2008 financial crisis and its consequences, which laid the foundations for the sector’s restructuring. In his opinion, the five forces of change that have affected banks for the past decade are:

Recession: “The economic crisis and its consequences, together with the accelerated rate of technological change have immersed the banking industry in an existential crisis which will lead to a radically different banking configuration from what we have seen in the first decade of the millennium,” he affirmed.

Return: The sector’s lower profitability is due to “lower revenue than in the past and higher than desirable costs”. He feels that “the permanent negative discrepancy between profitability and capital costs could lead banks as we know them today to decline until they become extinct.”

Regulation: Banks have recently undergone an “actual regulatory tsunami” in attempt to guarantee financial stability and correct the mistakes and excesses from the years prior to the crisis. Looking forward, he believes that authorities should take into account the impact of establishing more rules, since “institutions need to be viable in order to be solvent”.

Reputation: “Trust and reputation are banks’ two most important assets,” he stressed. However, “the discovery of longstanding practices from the past quarter of a century have aggravated the crisis and caused damage to customers, investors and the economy in general.” He feels that the only option for banks is “to maintain a balanced relationship with customers, with clear language and good commercial practices, to always make decisions with a long-term perspective in mind and finally, to commit to the development of the societies where they have a presence.”

Digital Revolution: This last R has the “most profound impact”. And “it can help make the healthiest part of the sector survive the pressure from low growth, dwindling profitability and heavy regulation, and regain customers’ trust and reputation in society.”

José Manuel González-Páramo discussed this last factor of change in depth. He described the main exponential technologies in the financial world, related to mobility, the cloud and big data. He reached the following conclusion: “The digital transformation trends will create a very different future from what we know today. The financial sector must adapt appropriately to guarantee its survival and what is more important, its relevance.”

He also referred to the disruption in the banking business on the supply side – from the fintech and digital giant competitors – and on the demand side – from the radical changes in behavior, consumer spending and saving patterns. In this regard, he affirmed that the speed at which the change takes place will depend on two factors: banks’ ability to transform in this new scenario and the regulator, which can promote or hinder the change. “Without a doubt, it is in everyone’s benefit for the regulatory framework to allow banks to adapt to this new context,” suggested José Manuel González-Páramo, who is the head of Regulation at BBVA, as well as of BBVA Research and Public Affairs.

All of the above served to allow José Manuel González-Páramo pose two possible scenarios for the future of banks:

• A scenario of inertia, in which banks continue doing things the same way. “In an environment with increasing competition, low growth and lower profitability, the lack of strategic vision or the inability to make the investment and internal organizational changes that are needed to adapt to the new environment would be sufficient to guarantee that many of today’s institutions move slowly toward their extinction,” he concluded.
• A substantial transformation of the sector, where few of today’s banks survive. “The banks that want to survive can only do so if they make an effort to take care of their main asset: the customer,” through “competitive products that meet all their financial needs,” he explained. They will also have to regain trust and their reputation through “greater transparency”. And finally, they must provide “an experience that meets expectations, with lower prices, the automation of certain processes and access to advisory services.”

To accomplish this he outlined two strategies. First, “traditional banks must be selective and identify in exactly what customer needs they can compete with the new arrivals,” mainly through the use of big data. And second, banks should “become third party integrators.”

The scenarios are not mutually exclusive and will depend on the vision and determination of the institutions’ managers to make these changes. Nonetheless, Jose Manuel González-Páramo stressed that the second scenario would “guarantee survival, strengthen their model and generate significantly higher returns than the financial sector has been able to generate in the last decade.”

He also added that “to evolve in the new digital model, institutions must completely reformulate their business model. We are talking about a transformation in three areas: technology, strategy and corporate culture.”

To conclude, he spoke of the fundamental role of regulators. “A competitive environment needs to be created where similar products and services receive the same regulatory treatment,” in reference to banks and their new digital competitors.