Implications of digital transformation in financial institutions

Speech by the deputy governor of the Bank of Spain, Margarita Delgado, during the presentation of the Report "Digital transition and transformation of the banking business in Spain driven by Covid-19" carried out by KPMG/IEAF.

Some highlights during her speech were the following:

• Restructuring processes and role of the branches: The deputy governor explains the need to carry out these processes in an environment of accelerated digitization during the pandemic and falling margins and profitability: “together with the digital transformation, the sector had been undertaking a difficult, but necessary, restructuring process of the existing overcapacity”. In her opinion at the moment "it is clear that not so much physical presence is required to provide banking services, at least for a certain type of clients" and that any project to create a credit institution from scratch starts from the same approach: having few or no branches.
• Importance of financial and digital education: Especially for clients with fewer digital skills and who continue to require branches “education should continue to be promoted, both in digital and financial skills, since these new channels open the possibility of hiring many more one-click services”.
• Cybersecurity: Digitization raises the problem of new fraud and other cyber threats (Phishing or Deep Fake), against which extreme precautions must be taken and against which less technological customers and more used to branches are particularly vulnerable.
• The emergence of new competitors, the so-called Bigtech and Fintech, with numerous implications for the sector:
  - Traditional banks can lose contact with customers, "which makes it difficult to properly estimate and control risks" and is one of the main strengths of their business model, limiting one of the levers of profitability and loyalty of future customers, through data collection and analysis.
  - Traditional banking must compete with new entrants by increasing customer loyalty: either through the creation of personalized products that satisfy the customer experience or through the development of collaborative solutions between entities, among which it gives an example to Bizum.
  - Regulation: In order to compete with Big Techs on equal terms, it is necessary to facilitate a broad exchange of data, which goes beyond the scope of financial information. In which the bank receives an equivalent treatment with respect to non-financial data. The deputy governor reminds us "of the principle that the same regulation must correspond to the same activity, insofar as they may entail equivalent risks."

To face the above challenges, the sector must leverage its traditional strengths: 1- The trust of customers, which translates into the fact that in Spain the sector serves practically the entire population and in its recent role in the crisis where, according to the deputy governor "It has been essential in the articulation of public support measures." 2- Customer data: Financial institutions would have a good starting position with very valuable information from their customers, but the challenge is to be able to process and extract all its usefulness.