Future of Banking: For Banks not to be merely actors in their own theater, concrete actions are needed.

Journalist: Marc Landis

(this article was featured in German language in the "Zukunft Banking" feature magazine of Sonntagszeitung Switzerland and netzwoche.ch; 26.05.2019)

The financial sector is facing substantial change, because of the pressure on the clasical business model continues to increase through digitization. However, the PwC banking experts Frederik Gregaard and Marcel Tschanz certainly see opportunities for the future of banking in Switzerland - not least because of the strict regulation of the market.

Frederik Gregaard (left) is Leader of PwC's Experience Center and Head of Digital in Financial Services Advisory at PwC Switzerland. Marcel Tschanz is Leader Wealth Management Consulting at PwC Switzerland and supports banks in the digital transformation.

The Swiss financial industry is in transition. Inevitably. Because it is under pressure from several sides. The regulation of financial markets in Switzerland places high demands on compliance through new or expanded regulations. And international developments in regulations must often be taken into account in Switzerland.

As the CEO Survey 2019 of PwC said, even 30 percent of the Swiss CEOs surveyed cite overregulation as the greatest threat to the growth of their companies. But is that really true? Frederik Gregaard, Leader of PwC's Experience Center and Head of Digital in Financial Services Advisory at PwC Switzerland, does not think so, "Exactly the opposite. Regulation can be an important driver of innovation, such as in the area of crypto assets. The regulation in this country enables business models that are currently not possible in any other country. ?This has given Switzerland a head start. But for Gregaard, too, it's clear that regulation is causing costs. "And nobody likes costs." However, the regulation hits all market participants in one country equally and ensures the same amount of time. In addition, it often protects the home market. But "at the same time it creates security and this is an important export commodity that creates trust in the international market for the local industry."

This is similar to Marcel Tschanz, who supports banks in digital transformation at PwC Switzerland as Leader Wealth Management Consulting: "Regulation has massively increased in the past 10 to 15 years." The problem of regulation is not necessarily the regulation itself, but the handling of the banks with it. "Banks have in the past built a new silo for each new regulation, which has led to tremendous complexity. The silos were not integrated - neither along the business processes nor along the customer journey, ?says Tschanz. So it seems that regulation is not the biggest threat in itself, but above all the inability of companies to cope with increasing regulation.

Further challenges arise for the banks from the customer side. The customers have high demands on consulting quality and usability of bank applications. In addition, fintech start-ups intervene in the value chains of the banks and take over parts of it. In the distant future, it would even be conceivable that the banks, as they exist today, no longer are needed in the new value chain.

"The banks will concentrate on two normal niches.

Marcel Tschanz, Leader Wealth Management Consulting, PwC Switzerland

The blockchain also has further disruptive potential for the traditional business areas of banks. For the traditional banks to survive the next 5, 10, 15 years and not become extras in their own theater, they have to move. They have to develop new business models, indeed rethink their ecosystem and integrate new players into their ecosystems or even dock with other ecosystems.

But what is the "business" of a retail bank today? "It has become a difficult business," says Gregaard. Because with the traditional interest rate differential banking banks today no longer earn money as the use to. As interest rates are negative, they lose money. Gregaard also proclaims the ecosystem approach or the convergence of financial services with other industries. "So far, core banking systems have acted primarily as interfaces to the infrastructure of the financial industry. The latest third-generation core banking systems are more integrated into the business models of other industries and increasingly incorporate joint business relationships. These include combined technology stacks, ie technically integrated solutions with a common earnings model and pre-approved legal opinions. ?

Innovation from PwC's Experience Center

In the Experience Center of the consulting and auditing company PwC Switzerland, which opened in March 2018, experts are working on new strategies - also for the financial industry. And not only in interdisciplinary teams. Here, however, teams are completely broken up and international experts as well as local lawyers and auditors are integrated directly into the idea process. This not only creates opportunities for validation in real time, but also for direct implementation.

One important project for the Swiss financial sector, which started in the Experience Center, is the new Swiss Digital Exchange SDX from the banking infrastructure service provider SIX, which will be launched in the second half of 2019. As a flagship project for the potential of the blockchain, the SDX should not only gain national but also international attention (more about this in an interview with SDX CEO Martin Halblaub ). This is where once tokenized securities and so-called non-bankable assets are to be traded digitally.

However, a project of this dimension is more of an exception in the local financial industry. It is rare for a bank or a financial service provider to start on a greenfield site. Marcel Tschanz also sees it this way: "The major disruption will probably not come from the current banking world, because the banks live on legacy IT systems, some from the 80s, which can not be flexibly integrated. In addition, they also have a legacy in terms of their customer base. "When existing banks have to transform their business models, this means, as it were," rebuilding the aircraft during the flight ". Often proclaimed by start-up enthusiasts, the "fail-fast" mantra is not an option for an established bank; After all, you have a reputation to lose and, worse, customers' trust.

The situation is different, of course, with the emerging smartphone banks. ?Revolut, N26 or even the NEON and others can quickly attract new customers with a cool and fancy business case.? Tschanz also sees the problem that it is difficult to convert the attractiveness of mobile-only banks into comprehensive banking business, for example, to conclude a new mortgage end-to-end via an app. "It's still a long way to go." In this context, it will be interesting to continue watching Bank Cler's journey with Zak.

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"There will be no universal bank in the future that offers everything for everyone"

The traditional business models of banks are under pressure. Now they are to earn money as part of ecosystems. How would you describe that?

Frederik Gregaard: Imagine you want to transfer money from Switzerland to the UK. It is not a SEPA transaction, so it costs you 5 francs. Instead of paying these 5 francs, you have the choice of seeing a 20-second commercial for the latest SUV from a German automaker. If you look at the spot, the automaker pays to the bank that shows you the spot, say 50 to 300 francs. This works in such a way that a marketing cloud is directly connected to online banking, which recognizes the profile of the user and thus plays only advertising that fits the profile. Of course, in compliance with data protection laws such as EU-DSGVO etc., without data flow over the user to the automaker. At least not yet. If I looked at the spot, I would end up being asked if I would like to try the car for which I have seen advertising. And only then do I give personal information about myself to make an appointment.

What types of banks will exist in the future?

Marcel Tschanz: There will no longer be a universal bank in the future that offers everything to everyone. We strongly believe that banks' business activities in the coming years will focus on two - we call them "normal niches": one for local (or national) wealth and one for the super-rich internationally. This transformation requires new business models and a value chain review.

Does retail banking have a future for Swiss banks?

Gregaard: For me, the future of retail banking depends on the trust that customers have in the brand of their respective providers. And of course it depends on who owns the customer interface. Anyone who has both, the customer interface and the trust of customers in the services offered, can dominate the industry. At the moment, it does not look as if the technology companies enjoy the full confidence of their customers. Many security incidents have damaged confidence in the recent past.

What future do you see for private banking?

Tschanz: We see the trend "wealth management goes retail". Private banking will therefore continue to be democratized. This means that more tools will be available to a wider range of clients for their wealth management. The digitization of wealth management functions such as asset management, asset planning, pension and insurance solutions will be offered to retail customers via digital channels, enabling them to use their own private banking at no additional cost.

What does the future of Blockchain look like?

Gregaard: We will use the blockchain as the infrastructure layer as we use electricity or the internet. In addition, the blockchain will render obsolete any type of validation by third parties. Blockchain will change the way we trust suppliers of products and services. Confidence and/or Trust in the business relationship between contractors will be reflected in the blockchain. This reduces the risk and should offer a clear competitive advantage. All the companies that validate trust these days will not do that in the future. From the motor vehicle register over the land registry office to notaries and also auditing companies like PwC will no longer have to validate trust, because this can be mapped with a blockchain. This also means for the banks that a large part of their work will be irrelevant in the future. We will see a new type of company emerge for this purpose, so-called trust companies, ie trust companies such as banks, whose business model will be to keep private keys for crypto currencies and other tokens.

And then what will all the auditors, lawyers and consulting companies do instead?

Gregaard: We will no longer validate the trust, but check that the blockchains are built to be trusted. The question will also be how quickly our culture will change so much that we trust a software - the blockchain - as much as a bank or the work of PwC.

Original Article:

https://www.netzwoche.ch/news/2019-05-26/statisten-im-eigenen-theater-banken-muessen-sich-bewegen