Address by Supervisor of Banks Mr. Yair Avidan, at today’s Banking Supervision Department Conference on “Disruptive Banking – Challenges and Opportunities”
- The competitive environment is changing before our eyes. The products and services that were once the exclusive province of the bank are becoming separable and are offering on a broad range of platforms and channels using advanced, innovative technologies. All these pose a significant challenge to the existing business model, coupled with a threat to the profitability of the traditional players in this domain. At the same time, there is also an opportunity to exploit the features of the competitive environment to develop effective strategic collaborations, out-of-the-box thinking about the best way to adopt these changes to reinforce the business model and to diversify sources of revenue.
- Technological developments create opportunities for financial corporations to rethink, revitalize, and question their current business processes and modes of operations, and redefine them using advanced technologies.
- Society has increasing expectations of the banks, and these expectations are extending to issues that are becoming of top priority. These expectations include the demand for banks’ extensive social engagement and responsibility; efforts to reinforce and guarantee equality, fairness, and financial inclusion of the entire population; and for banks to consider and address weighty issues that concern society and the future of our planet.
- Assuming a forward-looking perspective, the regulator’s role is certainly challenging. I strongly believe that we should do everything necessary today so that the future regulator will also be able to optimally regulate and lead the industry, and take initiative and facilitate the initiatives of others.
- This perspective is represented in the vision that we defined for the Banking Supervision Department: “to be a leading, professional supervisor that initiates action in the interests of the public and the economy.”
- The enhanced competitiveness in our environment and the fragmentation of the products and services that exist and are being developed in this market have a direct impact on the complexity of the regulatory challenge, and on the structure and the responsibilities of the various regulatory authorities. This complexity is sometimes further complicated by new statutes and legislative action.
- In this regard I should also mention the Committee for the Examination of the Structure of Financial Regulation, whose establishment was recently announced and whose recommendations and implications will be clarified when the Committee concludes its mandate. In our own operating sphere, we have an obligation and a responsibility to act in a professional, respectful, and unbiased manner, to ignore considerations involving prestige, status, ego, and honor, and to do everything possible to ensure that the markets for which we are responsible enjoy stability and prosperity, and fulfill their proper function within the socioeconomic fabric of the Israeli market.
I am delighted to open the 2021 Banking Supervision Department Conference this morning. I am very pleased to renew this distinguished tradition after the short interruption due to the COVID-19 pandemic, and I am especially happy to see all of you here today in person. I believe that the connection between the Banking Supervision Department and the various participants in the Israeli market, the world of finance, and the banking system is an extremely important one, and we are committed to cultivating and strengthening these ties. Today’s conference is certainly an important element in these ties.
Thank you to the Governor of the Bank of Israel, Professor Amir Yaron, who honored us with the keynote talk. I am sure that the Governor’s statements gave everyone many topics to think about during the conference and afterwards.
This year’s Supervision Conference centers on a forward-looking perspective of the challenges and opportunities facing us. Predicting the future is a presumptuous task, and some would say pretentious. Peter Drucker aptly described this when he stated, “the best way to predict the future is to create it.”
So I will not try to predict the future or create it, but I would like to use our time together today to define the term “disruptive banking” and mention some insights about the challenges and opportunities we face today. Our responses and resolutions are destined to affect the future of the banking and financial market and consequently affect the society we live in.
What is disruption? A disruption is a break or interruption in the normal course of a specific event, product, or market. One widely accepted examples of disruption comes from the field of technology, where a radically new development is called a “disruptive innovation.” We are surrounded by numerous success stories of technological innovations that created completely new markets within a short time, disrupting and replacing existing technologies.
In recent years we are seeing disruptive processes and events occurring in the technological world at an accelerated pace, with effects on more traditional markets as well. I also believe that these effects will be catalyzed by the economic, technological, and especially social implications of the COVID-19 virus. Disruption is also affecting the banking and financial markets and in a real sense, its effects in these markets are even more significant than in other markets.
The inherent conservatism of the traditional banking world is fertile ground for significant disruptive events and developments. As a result, at this point in time we can clearly state that the banking market is no longer on a slow and steady evolutionary course, in which the system moves forward in a moderate, gradual process: Today’ its course is revolutionary, and it is subject to rapid and dynamic change. This revolutionary process has already quickly transformed, and is expected to continue to transform, conventions, processes, methods and cultures, and to create what is effectively a new world. I believe that the new situation will stabilize and when it does it will become the “new normal,” different from what we know today.
How different? I don’t think that this is a question we can answer with any reasonable degree of confidence, if we can answer it at all. I think that the accuracy of the answer is less important, but it is certainly the case that all the elements of our ecosystem are trying to navigate the disruption while minimizing their risks and exploiting their opportunities and prospects. Be sure, the disruption that we all are experiencing offers numerous opportunities as well as threats.
There are many factors that create disruption in the banking world. Some are closely connected, some are remotely linked to others, and some are independent. The common denominator of all these factors is that together, they create the disruption, and that each one holds a genuine threat and challenge yet at the same time represents a significant opportunity.
I will use the next several minutes to review some of the main causes of disruption. Obviously each of the causes I mention comprises a large number of issues that warrants an extended discussion, but due to the time limit I will try to speak in general terms and focus on the most significant of these causes.
The causes of disruption can be divided into three main categories:
- the competitive environment
- technology and information
- changes in public opinion and taste
The competitive environment is changing as we speak. Products and services that were once the exclusive province of banks have become more fragmented and are now being offered on a broad range of platforms and channels, using new, advanced technologies. Operations that were traditionally performed by banks are now being executed by Big-Tech and Fintech firms and platforms and other firms that offer a variety of services including payment services, financial asset services, currency services, and information services, and this list will only grow longer. Innovation and competition, which generate value for customers and increase their welfare, are increasing by leaps and bounds.
All these pose a significant challenge to the existing business model and threaten the profitability of the traditional players in this domain. On the other hand, there is, of course, also an opportunity to leverage the features of the competitive environment to build smart strategic collaborations, promote out-of-the-box thinking to adopt these changes in a way that strengthens their business model, and to diversify their sources of revenue.
It is important to stress that banks have many advantages in a revolutionary competitive environment. Customers’ trust and the public’s trust in the banking system is the system’s primary asset, an asset that must be protected and cultivated over time. But not at the expense of other actors. Trust in the banking system is one of the assets that distinguish the banks from other actors in the market, and in itself has the power to create a competitive edge in an unstable, constantly changing competitive world.
Technology and information are playing an increasingly important role in the world, and this is especially true in a world of disruption. Adopting advanced technologies is the foundation for the developments that we have witnessed of late, and it possibly constitutes the most significant cause of disruption. It is certainly reasonable to assume that even traditional banks should prepare for the future and view themselves as technological corporations that offer financial services.
Technology and digitization certainly have the power to dramatically change consumption patterns and lead the market toward “seamless banking” or “embedded banking”, which will enhance customers’ experiences and make it possible to develop tailor-made value offers. Banking will be viewed as a single arena of activity that integrates technology and digitization to enhance customer interfaces and add value to many related activities in customers’ lives.
On the topic of technology, we cannot avoid talking about the core banking systems. These veteran systems remain the backbone and the foundation for the banking system’s technological activities, but even these systems have also undergone considerable change. Efforts to refresh, revitalize, and modernize systems are now necessary in order to guarantee adequate response times and utilize the features of various new technologies. These efforts are becoming even more important in view of the difficulty in recruiting and retaining technological personnel. The effects of the COVID-19 pandemic on the world of work, inter-generational changes, and technological advances pose a significant challenge that requires a new way of thinking, new tools, and new solutions. We therefore believe in leveraging and using outsourcing options by incorporating cloud capabilities and off-the-shelf systems in applications and infrastructure where in-house development offers no added value, and instead invest precious development resources in those places that will yield added value and create a competitive edge for banks. In fact, with respect to cloud technologies, as a regulator we are also working on new directives to facilitate and expand such options.
For financial corporations, technological advances are creating opportunities to rethink, rejuvenate, and challenge their operating procedures and how they do business, and to redefine these processes by incorporating advanced technologies including, for example, robotics, to improve their performance, reduce risks, and increase operating efficiencies—all in order to provide better and more reliable service to their customers.
Technology drives change, but information drives technology. The world of data makes it possible for the participants in the financial banking system to know their customers better and consequently design customized product and service offerings to adjust the supply of products and services. The world of data supports the development of new, advanced models and technology-based tools such as artificial intelligence (AI), machine learning (ML), and Big Data and their many applications.
Let us not forget the enormous challenge of possessing and properly using “information as an asset”. These include issues such as authorized uses of information, privacy, preventing discrimination, information security, as well as customers’ information literacy, which is equally important. It has been said that the primary currency in use today is not the shekel, the dollar, or a cryptocurrency: it is information.
The challenges of information, as well as other challenges that were and will be discussed today, do not affect the banking system alone. Many actors in other markets face the same complex issues and challenges. Of course, this does not ease our own burden or responsibility. We must continue to address these challenges resolutely and to harness the power of information for our benefit. And when I say “we,” I am not excluding the regulator from these obligations. We are certainly devoting considerable attention to addressing and regulating this issue by examining how to permit banking service offerings while facilitating the expansion of authorized lines of business and related services.
As we look at the evolving competitive environment and the key role that technology and information play in our lives, we must also look at the changes in public opinion and customers tastes.
The banking system’s customers have always expected and demanded fairness and trustworthiness as a basic condition, but it seems that the required degree of fairness and trust is growing. Customers expect the banks and financial corporations to present value offers based on the same high standards featured in other products and services.
A customer-centric focus becomes all the more important in view of increasing life expectancy, and other social and ethnic factors, as well as the growing range of available products and services. The expansion in the digital services that the banking system offers its customers has significantly enhanced customers’ welfare and service experience.
Digital operations and efficiency are in inherent tension with the geographic distribution and availability of bank branches and traditional services, and this tension affects various population groups differently. As a result we are all required to be attentive, sensitive, and compassionate. Yes — we should show compassion.
This issue resonates with the banking system’s role and challenges within the socio-economic fabric as a whole, and its significant influence in it. Influence must be guided by certain principles and culture. Such a perspective is much more meaningful than a marginal activity or temporary profits. It represents a vision, a long-term view, one that requires investment and creates a genuine, deep-seated impact on the communities in which we operate.
Such a view has the potential to differentiate the banking system from its evolving competitive environment, allowing the banks to exploit the disruption and to leverage their relationships with their customers and with society at large while increasing public trust and loyalty.
The public’s growing expectations of the banks are expanding to new issues that are assuming central importance. These expectations include extensive social engagement and responsibility, and maintaining principles such as equality, inclusiveness, and addressing weighty issues related to the future of society and the planet we live on. While the banking system is not required to be a leader in such activities, it must not lag behind.
We have an obligation to give support and assistance to resolve these issues. They are happening on our watch.
At the same time we cannot ignore the regulatory world that affects and is affected by these changes and by disruptive elements and the challenges of disruption. The various regulators face the significant challenge of keeping up with the pace of changes affecting the industries that they regulate. Complexity is growing, risks are increasing, and there is a genuine need to revise and reinforce technological tools (SupTech), capabilities, resources, work procedures, professional knowledge and infrastructure, which also includes the legal foundation that allows regulators to enable and support change in the market itself.
Within such a forward-looking view, regulators’ role is undoubtedly challenging.
I believe that it is extremely important to make changes today to ensure that future regulators are able to optimally regulate the market, and to initiate, support, and lead change.
This is reflected in the vision we defined for the Banking Supervision Department: “to be a leading, professional supervisor that initiates action in the interests of the public and the economy”.
We also defined targets and tasks to achieve this vision. I call on you to continue to push us and challenge us to achieve this goal. It is also fitting at this point to thank the staff and managers of the Banking Supervision Department for their dedicated work. When I assumed my current role one and a half years ago, at the height of an unprecedented global pandemic, I found a group of determined professionals working in difficult times out of a deep sense of commitment and mission. This is also an opportunity to thank all the professional functions at the Bank of Israel that assist and support our department’s work.
It is important to state something that might seem obvious although its intensity and impact is difficult to conceive for someone who is not in my shoes today. My current vantage point creates a unique understanding of this statement: We are not operating in a vacuum.
The growing competitive environment and divisibility of existing and evolving products and services directly impact the complexity of the regulators’ consequent challenges, and regulators’ structure and responsibilities. New laws and legislative actions may also add to the complexity of these challenges. In this regard I will also mention the Committee for the Examination of the Structure of Financial Regulation, whose establishment was recently announced, and whose conclusions and recommendations will be made public when the Committee completes its work.
In our sphere of operations, we have a duty and responsibility to act in an unbiased, profession, respectful manner. We must ignore considerations of prestige, status, ego, and honor, and do what needs to be done to ensure that the markets that we are responsible for benefit from stability and prosperity and fill their proper role in Israel’s socioeconomic fabric and economy — so that we all live in a better, fairer, and more egalitarian society. That is the goal before me and before all of us.
In summary, our professional domain is changing in front of our eyes at great speed. We are in the midst of a significant disruption. I recently read a professional paper on the revolution of risk and the effects of Big Data on risk management. The revolution in the world of risk is succinctly described by the acronym VUCA - volatility, uncertainty, complexity, and ambiguity. These are the causes of this significance change
Failure to respond and adapt to these changes is not a feasible option. This is our watch and these issues are our responsibility.
On a more personal note, I am a great believer in the motto “slow and steady wins the race”. The point is to continue to take steps in the right direction. Today, as we look at the accelerated pace of change, we must walk faster, and press on in order to meet our challenges with success.
I would like to take this opportunity to thank the speakers and panelists and everyone who assisted in organizing this conference, and thank you for your participation today.
As the Hanukah holiday is just beginning, I will use this opportunity to wish you all a Happy Hanukah and good health. I hope you have an interesting and beneficial day.