“Self-driving” banks

Margaux Rensink

February 2017

Technological innovations are common in today’s business environment. Imagine self-scanning services in grocery stores to cars that drive themselves. These are some examples of the results of technological innovations. Most of the developed products are better and more efficient than the average human being. The key is to keep in mind that it still is humans that are in control. It is important to consider this in the developing highly banking world. This requires for great leaders with a flexible however compelling vision. One thing is for sure, competition will not get less and instead of only focusing on competition, cooperation might be an eye opener.

Banks have been subject to a lot of changes on many different levels since the development of the first banks. Is it possible for banks nowadays to keep up with all these changes and challenges and if so, is there a best way how to?

The core of banking finds its origin more than 4000 years ago. In 2000 BC there existed some kind of institutions that gave out loans to farmers in the agriculture industry. During the ancient Greek, civilization the main three banking activities already were outperformed, namely: lending, deposits and money changing. These activities can be seen as the core activities in banking. They actually still are, but nevertheless, a lot has changed in the world of banking and operations are definitely not as straightforward as they were anymore. The core of banking lays in key functions such as safeguarding money, providing loans and to determine risk and return. Recent changes and events have caused changes in the exercise of the core operations of banks.

Lots of banks went bankrupt in the past years, namely due to the recent financial crisis. In this dynamic time and field it is important to keep up with your competition. Also be aware of and respond to changing customer needs and industry-linked trends. Banks have a systemic impact on everyone’s lives. Systemic risk is defined by the co movement of financial variables concerning the measurement of stability of financial institutions. The fact that banks induce systemic risk is due to the interconnectedness between financial institutions and the fact that some banks are so-called institutions that are “too big to fail”. (Chen, Cummins, Viswanathan and Weiss, 2013)

Looking at this specific past financial crisis, particular products were used in large numbers by bank employees to transfer risk, such as Credit Default Swaps and issuing Collateralized Loan Obligations. We see that the increase in share price beta is solely due to the growth in correlations between banks, imposing greater systemic risk. (Nijskens& Wagner, 2011)

Since the past financial crisis that started in 2007 most people are more aware of these facts. Consumers lost their trust in banks and the financial system as a whole, winning this trust back should be one of the main drivers for banks.

The financial crisis also raises questions about the effectiveness and boundaries of competition in the banking sector. Several views on the influential role of bank competition on financial stability exist. Two main views can be distinguished: one were bank competition leads to more risk taking and the opposite in which bank competition ensures more financial stability. (Berger, Klapper &Turk-Ariss, 2009) What matters the most considering both views is how to encourage banks not to take on too much risk and as mentioned before, make sure that individual bank risk does not have too much effect on the banking system as a whole. Knowing the history of the financial industry, including its multiple crises, suggest regulators should embrace a different method. Nevertheless, one thing is for sure, the fact that the past crisis was still quite intense requires a different view of regulation.

In this context banks are still and will always be subject to increasing and changing regulations. A liberal market setting does not ensure financial stability; regulation and governance seem to be highly needed. In the further development of regulation it should be considered that these regulations are followed by competing economic agents and thus question an approach in which self-regulation of risk could work for banks. Regulation should be just as dynamic as the banking industry. The world of banking and finance as a whole is dynamic and will innovate around regulations. The world of banking is competitive and is subject to many developments in the field of technical innovations, digitalization, big data, etc., therefore regulation must be more dynamic also.

Not only in the context of risk constraint we see much development but there are also lots of increasing and changing regulations regarding other subjects. The recent and on-going growth in terms of technical developments means an even quicker way to receive and use big data, as this phenomenon already existed. Digitalization enhanced the opportunity and speed for use of data. The use of big data can be seen as a challenge, on one hand it creates opportunities but on the other hand, it does bring changes and it should not be forgotten that sound intuition and judgment must prevail. For instance, in terms of privacy, especially considering the damage of consumers trust, appropriate regulations are in place.

Why keep up with these changes? At the end of the day, banks need to attract as many customers to make sure to operate on at least a profitable level. It does not seem to be an option to refuse the needs and demand of the so-called Millenials, especially where competitor banks will. Not to mention the development of non-bank organizations, those are already responding to the changing demand for financial services. For instance, PayPal, an online payment system. This is just one of many recent developed technology providers for financial services such as in-store payments and wealth management.

In this dynamic time and field it is nevertheless very important to keep up, to be sure you will keep up with your existing and new competitors and changing customer needs and environment.

The biggest challenges that banks thus face, is keeping up with competition as a broad concept of risk constraints, including the appropriate regulation and the influence of the accelerating development of technical innovations and digitalization on business operations.

The previous described developments ask for adaptability and flexibility of the banks, where I’m not sure that every bank can pull this off. Generally speaking the past developments ensure for the fact that banks will be operating in quite a different way.

It could be the case that new regulations push banks to not only be smaller in terms of employees but also be smaller in terms of operational size. To indirectly decrease the systemic risk of banks, by creating a clearer overview and discourage the existence of banks that are “too big to fail”.

However, banks will definitely develop to be smaller in terms of branches. Where there used to be human contact at an office for every operation in banking, these moments of contact have been downsized gradually. For most financial operations, customers are free as a bird, as they decide where and when to outperform for instance, a money transfer or applying for a credit card. This development eliminates the ‘where’ restriction for customers in their choice at which bank to work with, so their choices are almost unlimited. It does not mean that all “human” contact should be excluded. The demand for step-by-step assistance when necessary is still very high.

There will definitely be segments that are going to be universally controlled by non-bank organizations. And there will also still be segments that will operate best in the structural bank environment. Banks probably will fulfill the savings and investment-advisory role. It is up to the individual banks it selves to choose to participate in the digital transformation or perhaps see the opportunity in cooperation with non-banks that are specialized in these kinds of innovative financial services.

Banks should be able to transform their ability to manage risk and the capability to adapt as a digital organization, people and organizations have a capacity to transform that can be coached. Even in this competitive and turbulent environment, in general banks are able to keep up, just as in every other industry, competition and regulations are one of the most important factors to keep in mind when running a business. What is needed is strong leadership with a refreshing view on all these developments and a leader who is able to respond to these recent developments as opportunities and not necessary as threats. To be able to convince your employees to be flexible in their willingness and abilities, is just as important as attracting the employees that are indeed able to work in such dynamic and digital environment.

With these on going technical innovations and changing regulations, the banking sector will look quite different in 10 years. The core of banking might change a little, due to the upcoming competition of tech companies, depending on the fact if banks will embrace these companies in a cooperative way or will enter the competition. Nevertheless, the development already is and will go on to so-called “self-driving” banks. Technical innovations will make sure that most of the human contact will be taken over by computers and that only the real investment–advisory role will be outperformed by real humans.


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  • Chen, H., Cummins, J.D., Viswanathan, K.S. and Weiss, M.A. (2013) ‘Systemic risk and the interconnectedness between banks and insurers: An econometric analysis’, Journal of Risk and Insurance, 81(3), pp. 623–652.
  • Nijskens, R. and Wagner, W. (2017) ‘Credit risk transfer activities and systemic risk: How banks became less risky individually but posed greater risks to the financial system at the same time’, Journal of Banking & Finance, 35(6), pp. 1391–1398.
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Margaux Rensink

MSc Finance at Vrije Universiteit Amsterdam