Reflections by Jochen Werne, Chief Development & Chief Visionary Officer Prosegur Germany (published in Prosegur Express 02/2021)
In all debates on analogue and digital means of payment, “trust” is always at the centre of the discussion: trust in the state-social order, which stands as a guarantor for stability and security of the fiat money issued. In this respect, some would almost like to marvel at how Bitcoin & Co. have managed to gain such trust in such a short time that a market capitalisation in the billions has been achieved. One of the points is certainly the technological confidence in the non-manipulability of the blockchain. But is the blockchain really not manipulable, or is it rather a question of time before an attack will succeed? And what conclusions are central banks around the world drawing from this as they look at creating central bank digital currencies? Currencies designed to bridge the gap between the stability of analogue central bank money and the demands of our digital age.
Perhaps the solution for a trustworthy and generally accepted today and now lies in a hybrid model: in a cryptocurrency, in form of a stablecoin, that is 100 per cent backed by physical central bank money. This means that every digital token has a unique physical counterpart (euro). Due to the tradability of the tokens, the flexibility of book money is paired with the guarantee of physical central bank money. Last but not least, a regulated trustee function guarantees that the existing and securely stored central bank money is always paired with its digital twin. Thus. the best of both worlds is firmly united.
A crypto currency challenges technology, regulation and humans.
Author: Jochen Werne
“Money is perhaps the most concentrated and acute form and expression of trust in the social-state order.”
In this clarity, the German philosopher and sociologist Georg Simmel, born in 1858, formulated the value of a currency in his work “Philosophy of Money”. This clear and comprehensible insight also provides a simple basis for understanding why, for example, states rely on the independence of their central banks. And just as simply the question arises, which order do you trust when it comes to crypto currency?
Almost 4,000 of these currencies now exist worldwide. After Bitcoin, Ether, XRP, Litecoin and Co., Libra now wants to establish itself as a future heavyweight in the market – and with a noble goal. Libra is to become the cashless payment option “for mankind” and make international payment easier.
Libra Coin – the currency of the future?
No crypto currency received comparable media attention, triggered only by the announcement of the project. And the emotionality and toughness with which the discussion is already being conducted shows how seriously the topic is being taken. It’s about reputation, influence, control, responsibility and only in the last instance about technology. Central banks and government bodies are sceptical about the “currency of the future” on a broad basis, even though the advancing globalization could argue for a single currency in the long run. A currency that supports a consistent free exchange of goods and services. Also under discussion is whether Libra Coin could be the means of payment for the approximately 1.7 billion people who have no access to banking services and whether the familiarity and the large target group of Facebook, combined with the announced low transaction costs, could make it possible to reach billions of people worldwide.
Challenges at all levels
Technically, not all hurdles have been cleared yet: In order to make a stable coin possible, it is necessary to find the right technology. It is precisely this stability that is supposed to distinguish Libra Coin from other crypto currencies and thus also make it suitable for skeptical end consumers. Members such as Mastercard, Paypal or Ebay should also provide the Libra Association with their names and brand promises additional confidence for the end consumer. But already today the alliance is not as stable as the founding members had hoped and the exits of Mastercard, Visa and Paypal weakens the consortium.
The Libra Association has repeatedly emphasized that it wants to comply with all regulatory aspects, but there are voices at the political and banking levels that are extremely sceptical about the project. The new payment system raises many questions in monetary and legal terms. Central banks and supervisors want to keep an eye on the influence of the potentially new currency and usually share the view that whoever acts like a bank must be treated like a bank. In other words, comprehensive requirements must be met and regulations observed – especially at the international level. This is difficult because current regulations are designed for the classical financial system, with which the Libra system has largely no points of contact. The aim is to keep total regulatory influence and not to allow any possible loopholes.
Despite its American origin, the Libra Coin is to be administered from Geneva by the Libra Association. The idea here is to be regulated by the Swiss Financial Market Supervisory Authority FINMA. Although Facebook has paid a lot of attention to the underlying technology, the legal issues still need to be clarified. Especially with regard to money laundering, consumer protection and possible misuse of the currency for illegal activities. Within the Association, there will be no special treatment for the founder Facebook, but equal voting rights for all members.
Acceptance and European values
With regard to Germany, it can be said that its citizens are within the international average as far as their affinity for digital is concerned. However, a historical-cutlurell caution can certainly be observed with regard to the topic of money, which certainly explains the well-known love of cash. A more pronounced European awareness of data protection with the General Data Protection Regulation (GDPR) makes many people, especially in Germany, sceptical about the subject. The fact that Libra was launched by Facebook is hardly a confidence booster after the Cambridge Analytica scandal. The fear of the transparent customer meets with security concerns about one’s own savings. Every German knows the quote: “Friendship ends with money” and thus new things are always put test. Culturally different in Sweden, where sometimes it’s only possible to pay by card. The same in China, where WeChat Pay and Alipay are no longer just a trend.
As always, changes are taking place step by step. It remains to be seen whether Libra Coin in its current form has future prospects. In any case, any change can only work if it is accepted and used by the end consumer despite all skepticism.
And this stands and falls – also in the digital world – with what Georg Simmel already put in the centre in terms of money in the 19th century: CONFIDENCE.
Jochen Werne, Director Marketing & Business Development at Bankhaus August Lenz, explains in his keynote address how we can shape the future from the innovations and topics of the past and why digitization must be thought of not only technologically but also culturally.
Jochen Werne, Direktor Marketing & Business Development beim Bankhaus August Lenz, erläutert in seiner Keynote, wie wir aus den Innovationen und Themen der Vergangenheit in der Gegenwart die Zukunft gestalten können und warum Digitalisierung nicht nur technologisch, sondern auch kulturell gedacht werden muss.
There is no lack of buzzwording when it comes to trends in the financial sector: Disruption, FinTech, block chain, crypto. Currently, another term is climbing the zenith of a media hype – platform banking. And not without good reason. “Platform Banking” was voted “Financial Word of the Year” in 2018. Behind this lies the call for banking institutions to open up to third-party providers. Banks and savings banks should not only offer their own services on open platforms, but should also integrate third-party offers and services. Consistently thought through to the end, banks will thus become more intermediaries for all possible services and less providers of their own financial services. The legally necessary prerequisites for such an approach in the strictly regulated financial market have already been set in motion by the adoption of the Payment Services Directive PSD2. Will platform banking become a new hope for the industry, or another risk component in the attempt to lose fewer customers to new technology competitors?
The hype surrounding the topic is understandable: Eight of the ten world’s most valuable companies – Amazon, Google, Microsoft, Apple and Co. – have a platform in their business model. And even more striking: Only one of these companies was already among the top 10 worldwide in 2008. This growth potential, which is the result of the platform expansion, is of course intended by many industries to benefit themselves. The world of finance is also changing rapidly. In recent years, a variety of innovative developments have taken place in the areas of payment transactions and payments. The arrival of third party providers and fintechs has changed the market sustainably and comprehensively. According to a recent whitepaper by Deloitte Consulting, banks will also have to consider a platform strategy in the future: In the future, the customer base will also be able to access products and services from third-party providers in addition to the existing offering. The long-term goal behind this is well known – to retain existing customers, acquire new ones and increase margins.
Platform as recipe for success?
In general, a platform can be seen as a place where supply and demand meet. Economists call such a market – not a new discovery. Due to the digitization of all areas of business and life, geographical boundaries of the marketplaces belong to the past. The result: an almost unlimited number of supply and demand meet on a digital platform – and competition is known to stimulate business. In these business models, the so-called “network effect” ensures that with each new provider on a platform, the incentive for demanders and customers also increases. And in general the more demanders there are on the platform, the more lucrative it becomes for the suppliers. Both sides save enormous search and time efforts and transaction costs are reduced. In short, reflects this the recipe for success behind industry giants such as Amazon, AirBnB, Uber and Co. Nevertheless, there are existing fundamental reservations. The desire of many bank managers to grab a straw in order to grasp a component of hope in a difficult market environment seems understandable. However, blind action is fatal in this situation. Banks must not forget what the emergence of competition in the form of FinTechs has already revealed: frightening weaknesses with regard to their own modern hardware and software solutions, organisation and innovative corporate culture. The fact is that the challenge facing change management is proving to be enormous. And this already now, without having given space to the idea of creating a single platform. The current wave of closing down banking or partnership-based Robo Advisor solutions shows how quickly these carriers of hope can become problems. The commission model behind this, which is always transparent and low priced, is hardly profitable for the banking infrastructure and marginalises the added value that an institution is able to provide for its customers.
The complexity of the changes on all levels, starting with the completely changed, technological possibilities and their effects on the transformation of long-established business models, over the resulting new economic situation of the enterprises are enormous. The difference to the past decades lies in the temporal component. If companies today do not react directly to market changes, they open the way for competitors to their own customers. And this faster than ever before. In such disruptive times, all those involved want an “efficient” change process. However, active, well-considered and vital change management is often criminally neglected. For this one opens door and gate to blind actionism.
The business model of a financial platform is complex, the regulatory framework is strict and the willingness of customers to switch is only slightly visible. For this reason, this business model has so far been too uninteresting for Internet groups. And now, of all things, the banks, often perceived as conservative and unmodern, are to be transformed into digital platforms that can compete with Amazon & Co?
Enormous change management challenge
Banks need a forward-looking and sustainable strategy. That is beyond question. At the latest since the massive “democratization” of the Internet at the end of the 1990s, our lives have been shaped by leaps in technology. In short, the world feels like it is turning faster than ever before. What does this mean for the banks of the 21st century? Anyone who does not understand this exponential dynamic of technical possibilities or does not take them sufficiently into account in his business model can quickly lose touch – with the customers of today and tomorrow. Open banking is both an opportunity and a technological challenge for the banking industry. The European Payment Service Directive 2 – or PSD2 for short – has inevitably made opening up to third parties the focus of the digital strategy.
At the technical level, this is primarily associated with the use of programming interfaces, so-called APIs, which enable both internal and external cost-effective and fast access to data, as well as functions of software applications. What provides the end customer with a cross-product customer experience, means for banks to strategically cooperate with external partners. For FinTechs, cooperation is also advantageous. It creates fast access to customers and their data, as well as to the necessary financial and structural prerequisites.
Anticipating these developments requires a good eye for tomorrow’s customers. After all, customer data is a success driver for future business models. A few years ago, FinTechs began to “poach” their digital offerings among the customer base of traditional institutes. All of this culminated in Robo-Advisors, standardized, computer-controlled asset managers with low fees. It was therefore time for the banks to set sail anew. The plan was to enter into symbioses with FinTechs or “buy” their products directly into their own portfolios. For many large banks, it has become good form to enter into cooperation with small, independent and innovative financial service providers. This is also clearly demonstrated by the current situation of FinTechs. Mergers and co-operation are nothing else than a proof for the fact that the search for sustainable business models is not easy with a fixed idea to solve, not even with the platform strategy. Nevertheless, neither the previous business models nor the product possibilities seem to be mature.
Don’t forget the human factor
The personal relationship, the touchpoint between customer and consultant in the real world, has been increasingly reduced by the acceptance of digital banking. Nevertheless, even if a digital experience is a good thing for a modern bank, consumers continue to appreciate human contact points – especially in economically or politically turbulent times.
This is precisely the added value that banks can really deliver in this environment today. And this without having to rely on the healing promises of platform banking. Be a guide in the digital jungle and protect customers from ill-considered gut decisions. In addition, it is important to include the customer’s background, apart from monetary issues, in the decision-making process. This usually requires a counterpart. Not a digital one, but a human one. A person of heart and soul who generates trust and can provide a place for personal encounter. Today, it is the customer alone who determines where this is located and what it should look like. The same goes for when this meeting takes place. The modern customer expects the best possible service regardless of space and time, not only in view of the phenomenon of digital gadgets.