Is technology changing everything?

For the banking and financial services industry, the last 10 years have been driven by regulatory changes that have refashioned our industry in unimaginable ways. The next 10 years will be shaped by technology.

I recently held a speech at the Lugano Banking Day on how technological change is shaping our business and how we can benefit from partnerships with fintech firms.

Read some key extracts from my speech, and feel free to share your thoughts.

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Technology is changing everything.

That was the belief towards the end of the 1990s in the middle of the internet bubble.

This outlook was right on target.

Back then and maybe still today, the speed of change was overestimated, but the scope of change was underestimated, not to mention the long-term impact of the internet and technology on the economy and on society.

Technological evolution and the rise of the fintech sector today offer huge opportunities. Above all, they will have an even bigger impact on the financial industry in the next 10 years, compared to what we have seen in the last 20.

Technology is changing everything we do already, most of the time in a positive way.

There are, of course, some negative aspects. Unfortunately, in the various analyses and debates, people mostly focus on these negative effects, in particular about disintermediation and potential job losses.

Personally, I believe that it’s important to be aware of these issues, but at the same time it is vital to focus on the huge opportunities for us all, which also includes the creation of new professional roles and new jobs.

Embracing the technological transformation is therefore critical to our success.

To put it more dramatically, I could say that it's critical to accept and understand these changes to stay competitive and to survive – no matter what business activity you are in.

Actually, the simpler your business activity, the higher the risk that it is vulnerable to technological disruption.

Banks have changed and reshaped themselves drastically due to technological progress over the last 50 years.

Our industry was one of the biggest users of IT services in the first wave of digitalization.

It helped the industry to process more data volume, deal with more complexity and also become faster and more efficient in bringing its services to clients.

The technology paradigm of the future will not be only about doing things faster. Technology will continue to bring additional benefits to banks, specifically on three fronts:

1. It will help us be closer to the needs of each individual client by creating more frequent and positive relationships and by assisting us in developing products and improving the quality of service.
2. It will help us deal with the complexity of regulations, which are increasingly fragmented and in constant flux. This includes, for example, anti-money laundering and Know Your Customer regulations.
3. Finally, it will help us work more efficiently, boosting profitability in a sector in which most players have struggled for years to achieve sufficient profits to cover at least their cost of capital. A big part of these efficiency gains will also be passed on to clients.

Developments in technology will help drive growth, mitigate the pressure on margins and, more importantly, allow banks to better serve clients. All this translates into profitable and sustainable growth for shareholders.

At UBS as well, technology has a significant impact on all our processes.

We notice it in our daily lives: For example, e-banking and mobile banking are becoming increasingly popular.

• In Switzerland, almost half of our clients are frequent users of online banking.
• 13% are transacting with us via smartphone, and this percentage is going up rapidly.
• The major investments we've made in digital technology have paid off.
• On average, we've had about a 17% increase in services provided to clients who use our online channels.

 So investments in technology do more than boost efficiency.

They are also a means of generating additional business with existing clients, contrary to the assumption that digital channels are simply cannibalizing profit margins.

The potential for Switzerland as a country remains enormous.

According to the World Economic Forum, Switzerland is ranked second when it comes to "technological readiness".

Having said that, in terms of penetration of usage of digital channels, we are ahead of Southern Europe but, for example, still well behind Scandinavia.

In Switzerland, UBS's aim is to strengthen its leadership position in digital banking with the digitalization of our whole offering by 2020.

Clients will be able to access our services in a simple way, anytime, anywhere.

Today, the electronic signature allows our clients to sign legally binding contracts without ever visiting a branch, including the option to open a bank account online.

This is a revolutionary step that would have been unthinkable only a few years ago, be it from a technological or regulatory point of view.

But digital banking goes beyond private clients and well beyond Switzerland.

We are introducing solutions that will allow us to enhance and differentiate our business in all the sectors and countries where the bank is active.

For example, in our Global Wealth Management business, we have recently extended the use of our technology platform to the Hong Kong and Singapore markets, allowing for economies of scale unique in the market, and a consistent global offering. Today, about 85% of client assets outside the United States, or about 900 billion dollars, are on a single platform.

This is important also because those UBS clients operating at a global level need a seamless and exclusive offering, regardless of the country from which their relationship is managed.

Within this platform, our UBS Advice application analyzes every single position of hundreds of thousands of client portfolios overnight against changes in market valuation and our analysts' recommendations, based against a set of predefined asset allocation, risk and expected return criteria and suggested rebalancing actions.

This allows client advisors to offer value-added advice, bring relevant, same-day insights to clients and therefore be more efficient.

So, while I don’t believe we will ever have critical investment decisions made by robots that no human is accountable for, the combination of creative human capital with artificial intelligence and technological capacity translates into huge potential.

We want to structure the human decision-making process, rendering it more disciplined.

So this means developing tools which, thanks to artificial intelligence, will help us make better decisions.

Digitalization, which often starts with the client interface, is changing the way people do their banking, absorbing a lot of resources, and also has a strong influence on the activities of our Investment Bank and Asset Management businesses.

But it should not and cannot stop there.

I'm convinced that the crucial battleground for being successful in the banking sector is not the front office but the back office, which has the biggest cost complexity for a bank.

That's why it’s so important that we leverage new technology to deliver our services in the most effective and efficient way by completely digitalizing processes from start to finish.

In our Operations function we've already rolled out over 300 "robots" as part of our automation program. And this figure is expected to reach 700 by the end of 2018.

To be successful in this field, however, you have to do more than automate existing processes.

It is crucial to innovate by looking at processes differently, reassessing how we do things, and optimizing work flows.

Reducing costs in all categories, irrespective of revenue and profit developments, will continue to be fundamental going forward.

I’m convinced, however, that, at least for the next few years, it will not be possible to considerably reduce IT costs without significantly compromising one’s own future. If anything, the opposite will be true. Thanks to technology investments it will be possible to introduce new solutions for optimizing all bank processes leading to greater efficiencies.

Last year we spent 3.2 billion Swiss francs, which is more than 10% of the Group's revenues, on strategic initiatives and "run the bank" IT management programs.

Over the next three years, additional investments of around 1 billion Swiss francs will be added, with a growing proportion related to initiatives focused on clients and efficiency, rather than projects aimed at compliance with new regulations.

Many of these investment projects have been – and will be – developed in cooperation with innovative small technology startups, or fintechs.

Through the UBS Future of Finance Challenge, we invited talented people and start-ups from all over the world to come up with new ideas in the fintech space, with over 600 participants in the first edition. We have already seed-funded and accelerated over 50 projects in our innovation portfolio, spanning a range of disruptive and emerging technologies.

In the first UBS Future of Finance Challenge, three of the 12 finalists came from Switzerland.

And who knows, maybe right here in Ticino there is already a fintech talent who will be a finalist or winner in one of the next editions of the Challenge.

For us, collaboration with fintech startups and the broader fintech ecosystem in which they are evolving, is of crucial importance.

Our Innovation Labs, like the one at Level39 in London and the Wealth Innovation Lab in Zurich, operate as centers of excellence where our teams can develop proofs-of-concept tapping into UBS's network and global expertise.

Collaboration with the academic world is also vitally important.

Let me mention the initiative we recently announced for a new competence center for data analysis and artificial intelligence, leveraging know-how from the Istituto Dalle Molle in Lugano.

Ladies and gentlemen, in conclusion I would like to take a look into the future… specifically, some of the further challenges and opportunities facing the financial services industry as well as the new reality of fintech and large technology companies.

Fintechs bring fresh ideas, and are fast and agile. But you need access to clients, products and know-how to be successful.

For sure, there are fintechs out there trying to secure a future by fully disintermediating the current system.

But the fact is most of them do not want to compete with us, they want to cooperate with us. For fintech startups which want to go completely independent nothing is impossible, but I think it's going to be very tough.

In future, clients' trust in their financial services provider will be even more relevant and much more driven by how well these service providers can satisfy the need for client protection and data security.

In this context, many people think the major technology companies will largely replace banks and the existing financial system.

It would clearly be a fatal error to underestimate this possibility.

But it is also very likely, if not desirable, that the more these tech companies offer banking and financial services, the more they will have to work in a regulated environment, which will limit the flexibility and agility they enjoy today.

To avoid competitive distortions, it is vitally important that regulators and lawmakers focus on two distinct impacts of innovation.

On the one hand, they must avoid acting in a protectionist way by insisting that all the new providers of financial services strictly apply all the same rules required of big financial institutions, irrespective of their field of business.

On the other hand, there is the risk that the desire to push innovation at all costs could lead to competitive distortions and risks if new entrants are not subject to the basic norms faced by traditional financial services providers.

Guided by the principle of "same services, same risks, same rules", apart from providing legal certainty, rules should therefore be neutral in order to encourage competition and support innovation.

To square the circle and resolve this apparent contradiction, "regulatory sandboxes" are needed providing a clearly defined room for experimentation, open to all players large or small, to test new products and services – clearly ensuring that risks are transparent and the negative impacts are limited.

Of course, not all technology is something banks can or should immediately adopt, also because – and above all – we have to protect our clients and our shareholders.

Cryptocurrencies are a good example.

It cannot be denied that there is great long-term potential for the underlying technology, the blockchain, in facilitating transactions and contracts.

Yet only time will tell whether cryptocurrencies can maintain their function as a means of payment and a credible store of value while at the same time adapting to the strict anti-money laundering regulations that are in effect.

Personally, I'm excited about the possibilities that the fintech sector and technology in general offer our industry.

I think gloomy visions of the future where people no longer matter are exaggerated.

But we need to address those fears, and inspire our employees to seize the opportunities digital technologies present and perform even better in their jobs.

It is therefore vital that we continue to invest in staff training. Employers play a crucial role along with institutions.

But employees, too, must be willing to invest in themselves by giving up some of their own free time for training and staying competitive in the work environment.

Finally, technology will help us address the upcoming shortage of skilled personnel caused by negative demographic trends.

We are at a turning point.

For the banking and financial services industry the last 10 years have been driven by regulatory changes that have refashioned our industry in unimaginable ways.

The next 10 years will be shaped by technology.

But don't expect a Big Bang. It's going to be a gradual process.

There will be winners and losers, and new realities will emerge.

Looking back 10 years from now, we'll all be surprised how technology once again will have changed everything.