Hugo Frey Jensen: Creating relations in a digital new (banking) world
Speech by Mr Hugo Frey Jensen, Governor of the National Bank of Denmark, at the
Director's Conference of the Danish Bankers Association, Copenhagen, 8 September 2014.
* * *
Thank you for inviting me to speak here today.
The heading of today's conference - "Creating relations in a digital new (banking) world" -
shows that the banks now have the strength and resources to look forward after a few years
in the shadow of the financial crisis. This is positive and on the whole tallies with Danmarks
Nationalbank's assessment of the economic situation and the general condition of the
banking sector.
The Danish economy is recovering after some difficult years. Admittedly, the most recent
figures show a small decline in GDP in the 2nd quarter, but viewed in a larger context,
activity has grown since the end of 2012. It is important to stay focused on the underlying
trend and not to become hypnotised by quarter-on-quarter fluctuations.
Decreasing North Sea oil output is reducing overall production these years. If this factor is
disregarded, value added in the Danish economy is now 2 per cent higher than in 2012 - and
rising.
The increase in activity has also been reflected in the labour market, where employment has
been picking up over the last year or so. Employment is developing at a steadier pace than
production. As a result, productivity development is a little jerky, which is quite normal for the
Danish economy.
As the economy has improved, pressures on the Danish banks have gradually eased. But a
few banks are suffering from the repercussions of the crisis and several banks are still
struggling with low return on equity.
The sector has ample excess liquidity cover, and for this reason Danmarks Nationalbank has
phased out the temporary measures introduced to boost the banks' liquidity. These included
the option to raise 6-month loans from Danmarks Nationalbank and to pledge sector
company shares and credit claims as collateral.
The financial crisis is over, but it has left its mark. Above all, the crisis has reduced the
number of banks in Denmark. As the chart shows, it has amplified a trend that has been
evident for many years.
In our Monetary Review from the 4th quarter of 2013, we examined productivity and cost
efficiency in the financial sector. In terms of the cost-to-income ratio, Denmark seems to
differ from comparable countries. The figures indicate that resource consumption within the
sector has not yet been fully adjusted.
In addition, the future slope of the graph showing the number of banks in Denmark could well
depend on how the banks manage to tackle the challenges posed by today's theme -
increased digitalisation.
***
Competition and cooperation in the new world of banking that awaits you and us will also
affect the role of Danmarks Nationalbank. A case in point is the future participation by
Danmarks Nationalbank in jointly owned infrastructure companies.
I could also mention the issue of Danmarks Nationalbank's oversight of the financial
infrastructure - including in an area that is at the heart of today's conference: competition
from non-banks in the field of payments.
In Denmark, we have a long tradition of shared solutions for leveraging economies of scale
and network effects. This is reflected in e.g. joint ownership of core companies within the
financial sector, often with Danmarks Nationalbank as a co- owner. This means that the
users - or customers - have also been owners, and the general operation of the company
has been placed in the hands of a board of directors representing the owners - typically
people like you and me.
When these companies were set up, this was a natural way of doing things. It ensured that
the various stakeholders had a say, which was a precondition for their full support. In
addition, the companies were focused primarily on servicing their Danish owners, which
meant that business and competition issues were limited in scope.
But over time this form of ownership has come under mounting pressure. The reasons differ
from company to company, but frequent explanations include increased competition as a
result of international regulation, technological advances, undesirable tying-up of capital and
a need to achieve economies of scale. On balance, there can be no doubt that it has become
more complex to operate such companies. This has increased the need for strong
managerial skills, including the ability to secure the commercial interests of the company.
An early example of a jointly owned company where it was necessary to change the
ownership structure many years ago is the Copenhagen Stock Exchange. Some of you have
been part of the process right back from Stock Exchange Reform II, when the CSE was
converted into a limited liability company, to the merger with OMX and later with NASDAQ.
I will not go into detail, but simply conclude that no-one has questioned the need for a
modern, efficient stock exchange, even at a time when the possible existence of a credit
crunch has been discussed. Foreign ownership without the participation of all customers and
stakeholders has not prevented the Stock Exchange from raising capital - on the contrary.
More recently and amid much media attention, Danish and Norwegian banks and Danmarks
Nationalbank have sold their shares in Nets. This has done away with a structure in which
banks were both owners and customers of and in some cases also competitors to Nets. It
has eliminated a number of rather obvious opposing interests among the company's owners
and provided a more suitable framework for operating Nets on commercial terms - which will
ultimately benefit the end users of payment services: citizens and firms.
VP Securities is another jointly owned company that has undergone a transition from its
establishment as an independent institution in 1980 over its conversion into a limited liability
company in 2000 to now operating in a market where the framework conditions are changing
radically. The single most important change in this area is the establishment of TARGET2
Securities - T2S - the future trans- European securities settlement platform.
At the same time, the securities sector is being thoroughly harmonised. So these years
European central securities depositories are changing from being national monopolies to
operating on competitive terms. VP has decided to join T2S and will soon have to make a
number of strategic choices as regards its position in a competitive environment.
As I mentioned earlier, Danmarks Nationalbank is or has been a co-owner of several jointly
owned companies. Each shareholding has its own history. However, I would like to take this
opportunity to emphasise that Danmarks Nationalbank's role is that of an authority, including
in relation to oversight of the financial infrastructure. Our role is not to be a co-owner of
competitive companies operating on commercial terms. For this reason we have gradually
begun to withdraw from such companies.
The first step was taken when we sold our shares in Nets. Since Danmarks Nationalbank
had acquired those shares, PBS/Nets had developed into an international enterprise
competing with other companies offering advanced payment solutions in multiple countries. It
was clearly no longer a company in which a central bank should have a stake. Furthermore,
we wanted to be beyond reproach in relation to performance of our oversight tasks, which
also comprise Nets.
Another jointly owned company in which Danmarks Nationalbank should at some point divest
its shares is BKS Cash Service. Danmarks Nationalbank and the banks established BKS in
order to support a secure supply of cash. We did so in response to several serious robberies
which had disclosed a need to raise the level of security in relation to cash handling. At the
same time, a number of security standards were laid down, which must be observed by all
cash-in-transit companies.
Together we have come a long way in terms of meeting the new standards - and we will get
there. When we do that, the main objective of Danmarks Nationalbank's co-ownership of
BKS will have been fulfilled. We will still consider security aspects and lay down
requirements, but Danmarks Nationalbank will no longer be a natural co-owner of a company
like BKS. But as with the other jointly owned companies we will not simply abandon BKS.
There is still plenty of work to be done. In due course, Danmarks Nationalbank will retire from
the group of owners in an orderly manner.
***
Now let me turn to the potentially increased role of non- banks in the field of payments in the
coming years.
There is a clear trend. Danmarks Nationalbank's payment instrument - cash - is becoming
less and less important. Cash as a share of retail turnover has dived sharply over the years,
and this trend is set to continue.
Banks still account for the vast majority of payments, and when it comes to new payment
solutions, the banks' products - such as MobilePay and Swipp - get all the attention. But the
widespread popularity of these solutions shows that this is a dynamic area which could
rapidly undergo significant changes.
A recent report from the Danish Payments Council makes a broad distinction between two
categories of non-banks that could become significant players in the field of payments. One
is firms receiving payments, who see an advantage in offering customers their own solutions.
There can be several reasons why a firm chooses to launch its own payment solution, but in
most cases it is a desire to provide optimum customer service, thereby boosting turnover.
The other category comprises a wide range of non-bank providers of payment services. Their
payment services vary considerably, but a common feature is that these services do not
include deposit accounts. The providers often rely on existing account structures or payment
solutions, are not in possession of the customers' funds at any point during the payment
process and primarily want to collect data - not to make a profit from the actual payment
transactions.
Non-banks offering payment services are currently regulated by the E-Money and Payment
Services Directives. These two Directives lay down rules for e-money and payment
institutions, respectively. A major objective for both types of institution is to increase
competition in this area. Some years after the Directives came into force we can conclude
that there are still very few payment and e-money institutions in Denmark - so you are still
strongly positioned in the field of payments.
Another - potentially more extensive - legislative initiative is a proposal from the European
Commission to allow third- party access to execute payments via bank accounts with the
approval of the customers. This proposal was presented last year and has been analysed by
the Payments Council. The analysis resulted in a number of recommendations for Danish
views, especially in relation to security aspects of giving third parties access to bank
accounts.
Precisely the issue of security and hence of user trust may be a decisive factor in
determining the success of non-bank solutions. And we should not underestimate the
competitive value of trust for the banks. Users typically have strong trust in the banks and
their solutions - believing that their funds are secure and protected, that the solutions work
and that data will not be misused.
A survey conducted by Danmarks Nationalbank last year, in which 1,300 Danes were asked
about their views on various payment methods, etc., confirms this. One question was the
extent to which respondents trusted public authorities, banks and others to treat their
personal data with discretion. As you can see, the Danes seem to have greater faith in the
data security of banks than of other firms.
Other surveys that we and others have performed show that trust - along with price and
convenience - actually determines customers' choice of payment solution and provider of
payment services. Experience also shows that trust can rapidly evaporate.
One unfortunate experience - funds that are lost, a solution that does not work, or a breach
of data security - could undermine it. Trust is one of the banks' major assets and it must be
cultivated - also when it comes to payments. This should be a key element of your efforts to
provide competitive payment solutions that generate value for firms and consumers.
***
Undoubtedly, the higher trust in banks is to some extent due to regulation and oversight of
the sector by public authorities. Danmarks Nationalbank's role in relation to oversight of the
financial infrastructure is enshrined in the Danmarks Nationalbank Act, which states that its
objectives are to "maintain a safe and secure currency system and to facilitate and regulate
the traffic in money and the extension of credit". Although the Act dates back to 1936 it is
actually future-proof: it does not distinguish between cash payments and electronic
payments, and the objective of today's oversight is clearly defined.
The objective of Danmarks Nationalbank oversight is to ensure safe and efficient settlement
of payments in Denmark. In terms of audit and supervision, oversight may seem to be
somewhat elastic, but that is because yesterday's safe and efficient solutions are not
necessarily safe and efficient today. It is important that the infrastructure - the "tracks" - is
always prepared for the needs of citizens and firms for convenient, fast and safe payments.
Examples of this are the Intradagclearing and the forthcoming Straksclearing. In my opinion,
the banks and Danmarks Nationalbank have shown due diligence by "straightening the
tracks" so that the trains can run faster. On top of that, the new, automated liquidity tools
provide enhanced security. This supports new payment options, such as Swipp and
MobilePay. Without the new systems, I think it would have been increasingly difficult to
explain to users why it may take several days to settle payments.
For retailers, the Straksclearing offers settlement finality for credit transfers, unlike e.g.
Dankort payments, for which retailers only have a guarantee that they will receive the first
4,000 kr. So the Straksclearing paves the way for digital development in the field of
payments.
For the economy it is extremely important that electronic payments can be effected in a safe
and efficient manner, and that people have faith in them. Like other central banks, including
the ECB, Danmarks Nationalbank intends to strengthen its oversight of payment solutions.
Oversight will be targeted at systemically important payment solutions in Denmark, currently
the Dankort, Betalingsservice and credit transfers. This will support safe and efficient
payments - in shops, online and when transferring funds between accounts. Since Nets and
the Danish Bankers Association are responsible for the payment solutions, you will be
receiving a letter about the enhanced oversight. As usual, it will be based on good and close
cooperation.
Although oversight is resource-intensive for all parties, including Danmarks Nationalbank, I
am convinced that Danmarks Nationalbank's oversight of the payments infrastructure boosts
one of your key assets when it comes to payments - trust.
But how about the "third parties"? Can they fly below Danmarks Nationalbank's radar and
simply get a free ride on the safe and efficient payments infrastructure? No. If these payment
services acquire a certain size, they will be subject to oversight by Danmarks Nationalbank.
That also applies if the services are offered from other countries, as central banks have a
long tradition of cooperation when it comes to oversight.
***
Danmarks Nationalbank has decided to set up a credit register in cooperation with the
Danish Financial Supervisory Authority. A register of individual credits with information about
the debtor, collateral, etc. will improve the basis for Danmarks Nationalbank's oversight of
financial stability and for the supervisory activities of the Danish Financial Supervisory
Authority.
We are aware that the credit register will involve a lot of work for the sector in terms of
establishing the reporting system and regularly reporting information. But not only do we see
the credit register as a prerequisite for Danmarks Nationalbank's and the Danish Financial
Supervisory Authority's work to ensure financial stability, the establishment of the register will
also help to ensure that Denmark's supervisory and oversight instruments are at least as
good as those applied elsewhere in Europe. The euro area has decided to establish a similar
register from the end of 2016.
Obviously, the credit register will not relieve the individual bank of its responsibility for
pursuing prudent credit policies, and in a market economy banks will differ - also in terms of
credit policies. However, we would like to engage in a dialogue with you about the design of
the standardised reporting, so that you have a useful tool for comparing your credits with
those of the financial sector as a whole. We hope you will support this work.
Thank you.