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Without Trust, Economies cannot Work

At the SAFE Research Conference "Sustainable Architecture for Finance – Where Are We Now and Where Are We Going?" several researchers from SAFE, other universities and central bank research departments came together in the House of Finance on 13 December to discuss the current financial architecture in Europe and to analyze recent developments. The conference aims to present promising new research results, and to discuss relevant measures policymakers should take in response to current and future challenges.

The eight sessions mirrored SAFE’s main research fields, including Systemic Risk, Financial Markets or Household Finance. Presentations were followed by intensive discussions among fellow researchers.

"Banks will need a better understanding of their customers"

The chairman of SAFE’s research advisory council, Professor Arnoud Boot from the University of Amsterdam, gave a keynote speech about the future of banking in light of the digital challenge. He started by describing the rise of shadow banks in the 1990 which, in his view, changed the financial system massively. Boot said that new technologies and fintech firms would do the same, causing major changes in the distribution systems and in the interaction with customers. He identified three challenges for the financial sector: First, banks need to find sustainable business models and deal with disruptive forces like fintech. Second, Boot explained that a more fluid financial system with more players may threaten its stability. Third, the distrust of societies against financial institutions should not be underestimated because the financial sector depends on society´s acceptance. "Without trust, economies cannot work," Boot stated.

The keynote speaker explained that regulation, technology, and customer preferences are the main drivers for change. Also, privacy concerns and ongoing globalization would shape the future structure of the industry. In his view, banks need to change their interaction with their customers. "To be successful, banks will need a better understanding of their customers and to tailor their product offers accordingly", Boot said. Fintech firms would offer their services from the need side of the individual whereas banks today mainly do the opposite, offering standard products that might fit or not for the individual. Social media would play a key role in the process of customer engagement. "Building trust and customer empowerment will be paramount", Boot said.

He continued by stating that the trend in regulation towards more intrusiveness is likely to continue with structural implications for the industry. He pointed out that disruptive players such as Apple or PayPal may provide more financial services, as they are already specialists in payment and transaction services. Technologies like P2P could cause disintermediation via direct interactions, putting relationship building at risk. According to Boot, the most profound challenge for banks is a possible disintegration of the value chain when online platforms become the preferred customer interface. For banks, integrating fintech into the new business models will be crucial. Indeed, they are the biggest investors in that area, Boot said.

Boot sees three possible business models for banks in the future: Very few banks may play a leading role in the fintech eco-system and may even go beyond financial services. Second, a more traditional niche strategy around higher value services for businesses is possible according to Boot. Banks would act in the role of trusted advisors. A third strategy he described as "lean and mean" where the focus would lie on low costs, providing simple services and products. "With information technology, a size of a bank does not matter so much anymore", he said.

Waiting for the next Minsky moment

After the workshops, Otmar Issing, President of the Center for Financial Studies, concluded the conference. In his speech, he addressed the importance of financial research. Since the financial crisis, according to Issing, a lot has been achieved with respect to the resilience of the global financial system. Research could point to possible problems and give recommendations for a more stable system. Nevertheless, Issing said, "there is no doubt: a next crisis will come". He pointed out that the characteristics of a new crisis could not be predicted, as the world is unstable and full of unknown risks. Issing said that the question is when a possible next Minsky moment will happen, in which a sudden, major collapse of asset values may cause a new crisis. "The problem is that we can identify Minsky moments only ex-post", Issing said. He concluded with the hope that a next crisis will be less severe and that in any case more research is needed: "You have made some progress today, but there is still a lot of work to do", Issing said in his address to the researchers.