Remarks by Supervisor of Banks Yair Avidan at the Institute of Certified Public Accountants conference – Challenges in a Changing Financial World
- In a revolutionary competitive world, the banks have many advantages. Public trust in the banking system is its main asset, which must be conserved and cultivated over time.
- Bank customers expected the highest standards. These standards must for the basis of the value that the banks and financial institutions offer their customers.
- The banks must place consumers at the heart of their business; provide products and services that respond to customers’ needs; maintain communication and contact with customers; not exploit behavioral tendencies of customers; support their customers in actualizing the advantages of the products and services they provide; constantly include their customers’ needs in their considerations; and make sure that their customers’ interests are at the center of their organizational culture.
- From the standpoint of the Board of Directors’ functions—the banks have a responsibility to act responsibly toward their customers. The Board of Directors must make sure that the banks properly fulfill their obligations toward their customer.
- The mortgage reform that was recently launched joins a series of measures, initiatives, and reforms that essentially implement the vision we have set out for the Banking Supervision Department: “To be a leading, professional, and proactive supervisor to benefit the public and the economy.”
- Society’s expectations of the banks are intensifying and expanding to issues that are taking on greater importance, including the demand for widespread social involvement and responsibility, strengthening and maintaining equality, financial inclusion of all population groups, and thinking about and dealing with weighty issues concerning the future of society and the future of the world in which we live.
- I understand the challenge involved in realizing these goals, certainly that some of them do not provide positive value in the immediate sense, and that some of them require either investment or expense and the allocation of additional resources. Still, I see a major obligation to think in terms of the long term, to examine all of the interests of the various players, and to believe that they can serve both the aim of the business and the aim of the society in which we live, so that we can live in a better society. These interests, despite their potential to conflict in the short term, will merge and interact in the medium and long terms
Good morning everyone.
I am very pleased to participate in the Directors Conference of the Institute of Certified Public Accountants in Israel.
I believe that the contacts and interfaces between the Banking Supervision Department and various entities in the Israeli economy, the financial system, parallel regulators, and other interested parties, as well as the Institute of Certified Public Accountant, is very important, and we are committee to continue maintaining and cultivating it.
I chose to use our time together to discuss the challenges that the changing financial world poses in general, and for the Banking Supervision Department in particular, and within that to discuss the Board of Directors importance in dealing with these challenges.
In recent years, we have witnessed the increasing intensity and pace of changes and developments, which are mainly driven by technology. The effects of these changes are not limited to technological fields, but have an impact on more traditional markets as well, and are reflected in many diverse aspects, including the dispersal of products and services among numerous providers, changes and diversification of consumption characteristics, value chains, supply chains, and processes. There is no doubt that the economic, technological, and mainly social impacts of the past two years, during which we dealt with the COVID-19 crisis, provided and additional significant push to this.
This phenomenon did not exclude the banking and financial market, and to some extent, it is even more prominent there than in other markets. The built-in conservatism in the world of traditional banking is fruitful ground for significant disruptive processes, which bring with them risks, but also opportunities. These processes remain factors in our ability to clearly state that the banking system is no longer on the slow and steady path of evolution, in which it advances incrementally in a measured and orderly fashion, but is now on an accelerated, dynamic, and volatile path that is more indicative of revolutionary processes, changing dynamically and rapidly. This revolutionary process is currently changing, and will continue to change, consensuses, processes, methods, and cultures that we have encountered, and will essentially create a different world.
There are many factors that create changes in the world of banking. Some are strongly interconnected, others are more distantly related, and some stand on their own. What is common to all of them is that, together, they are what create the real challenge we face. We cannot ignore, and it is important to remember, that every threat or challenge generally comes with an opportunity.
I will take the next few minutes to discuss a number of the main factors in the changes in that we are witnessing and in the challenges that are being created as a result. Each of these factors is certainly comprised of a large number of issues and ripple effects, and we can talk about them at length, but due to the shortness of time, I will try to speak generally, while focusing only on the most significant of them. It is important to remember that these ripple effects are sometimes very significant and cannot be ignored.
The competitive environment is changing before our eyes. The products and services that were once solely the purview of the banks are becoming more dispersed and are now offered on a wide variety of platforms and channels, and through advanced and innovative technology. Transactions that were previous made traditionally by the banks are now being made by technology firms and platforms (fintech and bigtech) and many other entities that provide a variety of services such as payment services, financial asset services, currency services, information services, and the list goes on. Innovation and competition, which create value for customers and well-being for consumers, are continuing to intensify and develop at a rapid pace.
All of these pose a significant challenge to the existing business model and a risk to the profitability of the traditional institutions. In contrast, they also provide an opportunity to take advantage of the competitive environment and create the proper strategic cooperation, think outside the box about the proper way to adopt these changes to strengthen the business model and to diversify sources of income. The company’s Board of Directors has a central function in dealing with the business model challenge, and it must map out a strategy for management to implement.
The changes, the terminology, the pace, and the complexity only bring the broad range of talents, abilities, challenges, training, and responsibility of each board member, as well as the responsibility of each organization as a whole, into sharper focus.
It is important to note that even in a revolutionary competitive world, the banks have many advantages. Public trust in the banking system (including criticism and cynicism, which are sometimes completely justified) is its main asset, which must be conserved and cultivated over time. Without taking anything away from other participants, which I encourage in all places and from all podiums to develop and to take a main part in creating competition for the well-being of consumers and of the economy, the public’s trust in the banking system is one of the assets that sets it apart from other participants, and this can create an advantage in a changing and volatile competitive world.
In this world of changes, and certainly in the financial world, the importance of technology and information is increasing. The adoption of advanced technologies is the basis for the developments that we have seen in recent years, and is perhaps the most significant change.
There is no doubt that technology and digitalization have the power to dramatically change consumption characteristics and to lead the market toward Embedded Banking or Seamless Banking, which will be able to strengthen the customer’s experience and ability to receive tailored value offers. From the standpoint of banking as one layer of activity, the integration of technology and digitalization will bring value to many other peripheral activities in the customers’ day-to-day lives.
In discussing technology, we must also deal with the core banking systems. The veteran core systems remain the backbone and foundation of the banking system’s technological activity, but here too there is significant change and development. Renewal, refreshment, and modernization processes are today considered essential in order to enable proper response times, and in order to actualize various advanced technologies. These processes become even more important in view of the difficulties in recruiting and retaining technology manpower. The effects of the COVID-19 crisis on the world of employment, intergenerational changes, and technological progress are creating a significant challenge that requires different thinking and the formulation of various tools and solutions. In this context, we view the leverage and utilization of outsourcing as important. This includes the use of cloud computing and “off-the-shelf” systems for applications and infrastructure where there is no added value in developing similar systems “in-house”, and as such, valuable development resources can be better used in places where the bank can generate added value and a competitive advantage. We recently published regulations that for the first time enable the use of central core systems on the cloud. This is likely correct for implementation in other significant corporations that are not banks.
Technological progress creates opportunities for financial firms to rethink, refresh, and challenge the way in which business and operational processes are conducted, and to redefine them by using advanced technologies, including robotics. By doing so, they can improve performances, reduce and minimize risks, and improve operating efficiency, all with the aim of providing better and more dependable service to customers.
It is technology that is creating the change, but it is information that is motivating technology. The world of data enables the banking and financial systems to better know their customers in order to design and adapt the supply of services and products. The world of information enables firms to build advanced models and capabilities based on technology such as artificial intelligence (AI), machine learning (ML), big data, and analytics, all of which have many uses.
However, we must not forget the immense challenge that comes with the “information asset”, and how to deal with the challenge through the proper use of the information. Issues such as the permitted use of information, privacy protection, absence and prevention of discrimination, model challenges, deviations in the models, information security, and no less important (and even more so) information literacy on the part of the customer. There are those who say that it is not the shekel, the dollar, or cryptocurrency that is the main currency, but information.
In this framework, and particularly in the context of information, we must also discuss cyber risk. Cyber risk has been intensifying in recent years, and is now one of the most (if not THE most) significant risks. The high usage of information and the digital revolution significantly increase the attack platforms and the built-in risk operations. Another component that intensifies the risk is its nonlinearity. Well-known financial risks generally develop in a linear fashion over time. Cyber risk is different, in that it can be realized as a stress scenario from one moment to the next. Informed cyber risk management is required for any organization that wants to survive, and certainly for financial institutions and banking corporations. If we are talking about the tool box of the typical director and the aggregate capabilities of the Board of Directors, there is no doubt of the importance of understanding the threat and risk components, and the corporation’s means of protecting itself and lowering the risk.
Information challenges, like other challenges discussed here today, are not solely our domain. They are complex issues and challenges, with which many entities operating in various markets are dealing. But many challenges come with no solace. We must continue working to attack these challenges and harness the power of information to our benefit. And when I say “we”, I am not excluding the regulator from all this. Handling the issue through regulation is certainly getting a lot of attention in order to examine how we can enable the provision of banking services alongside permitted business developments and accompanying services.
Due to the importance of technology and information, and the challenges and risks that it poses for various organizations, we issued a requirement a number of years ago that at least one director on the Board of Directors shall have knowledge and proven experience in the area of information technology. We also required an additional compulsory subcommittee to the Board of Directors, called the Information Technology and Technological Innovation Committee. We explicitly set out a minimum list of issues and areas that the committee would deal with. We can state that these requirements had a significant impact on the work of the banks’ Boards of Directors in the area of technology, and that they significantly strengthened the existing knowledge and experience among Board members in this regard.
In parallel with the developing competitive environment and the central role technology plays in our lives, we must also look at changes in public opinion and taste, and on the supervisory concept of transferring power to the customer and the customer’s place at the center of the ecosystem.
Banking system customers have always expected and demanded trust and fairness as a basic condition, but it seems that the required level of trust and fairness is increasing. Customers expect higher standards, such as those that may accompany other products and services. These must form the basis of value orders by the banks and financial institutions to their customers.
Seeing the customer at the center becomes even more important in view of the increase in life expectancy and various social and ethnic aspects, alongside the ever-expanding range of products and services. The increase in digital services that the banking system offers its customers has contributed greatly to the increase in consumer well-being and to the banking customer’s service experience.
From this stage, I would like to define expectations as part of the duty to the consumer. Banks must place consumers at the heart of their business; provide products and services that respond to customers’ needs; maintain communication and contact with customers; not exploit behavioral tendencies of customers; support their customers in actualizing the advantages of the products and services they provide; constantly include their customers’ needs in their considerations; and make sure that their customers’ interests are at the center of their organizational culture.
From the standpoint of the Board of Directors’ functions—the banks have a responsibility to act responsibly toward their customers. The Board of Directors must make sure that the banks properly fulfill their obligations toward their customer.
And still, the road is very, very long. As we speak, the banking system needs a lot of examination, including the Supervisor of Banks, in terms of the pace with which the Bank of Israel’s interest rate increases are rolling over to the public’s deposits, compared with the rate at which they are being rolled over on the loans side.
We are continuing to work with the aim of strengthening the customer’s strength in his interactions with the banking system. Just a few days ago, a significant mortgage reform took effect, which is expected to simplify mortgages and make them more accessible, as one of the most complex and significant products for households. It will enable a simple and easy comparison between various offers, using advanced technology and with short and defined timetables. And as we are talking about the Board of Directors, its composition and its capabilities, we can certainly note the importance of understanding aspects of behavioral economics, terms and processes from the customer’s experience, customer interfaces, and more.
The mortgage reform joins a series of measures, initiatives, and reforms that essentially implement the vision we have set out for the Banking Supervision Department: “To be a leading, professional, and proactive supervisor to benefit the public and the economy.”
I will not list all of these measures here, but it is important to at least mention the open banking reform that will create a real revolution in the Israeli banking industry. The reform simply states that information on the customer’s financial activity is an “asset” that belongs to the customer, and the customer can therefore decide to whom he wants to give the right to use that information. In other words, the reform enables customers to share financial information from their bank accounts or credit cards with third parties, and thereby enables new participants, including fintech firms, to offer valuable financial services that are tailored to the customer’s needs. The reform will contributed much to increasing the customer’s strength, and will help increase competition by creating transparency regarding the customer’s information assets. It will also increase the market’s openness to competition and the dispersal of products.
I will also mention the “one-click mobility” initiative that was launched about a year ago. The initiative enables customers to move most current account activity from one account to another in a synchronized way between banks that is user-friendly and fast. It is important to note that increasing the customer’s strength and enhancing competition between banks are not necessarily reflected in an increase in the transfer rate between banks. Sometimes, just providing a real and easy option such as this to the customer is enough to increase his power and improve competition. In the past, prior to the mobility reform, there were certainly customers who avoided the “travel experience” of switching banks due to the complexity and confusion involved in the process. Today, however, the power has shifted to the customer, whether in order to improve the terms and services obtained, or whether moving to another bank through a simple and easy customer experience. If financial institutions know that the customer has this ability and power, that should lead them in advance to improve the service experience and terms that the customer receives.
Digital activity and operational efficiency create a built-in tension vis-à-vis the deployment and availability of the traditional branches and services, which is reflected among various population groups. This requires all of us to make sure that we don’t leave any population group without the services it deserves.
The development of financial products, the digital and technological world, and information aspects, pose great challenges for the interface with the customer and enhancing the customer’s financial, digital, and information literacy. These are certainly among the issues facing Boards of Directors. It is very important that we neither leave behind nor create weak population groups.
This corresponds with the banking system’s functions and challenges in the socioeconomic fabric and the importance of it having an influential role. The effect must come from the perception of values and the assimilation of such a culture. This concept has something much broader than marginal activity or momentary profits. It has a kind of vision, a long-term view, that requires investment, and that creates a real and deep impact on the communities in which we operate.
Such a concept can isolate the banking system from the developing competitive environment, and utilize the “interruption” to strengthen and leverage the contact with customers and with society as a whole, while increasing dependability and trust.
Society’s expectations of the banks are intensifying and expanding to issues that are taking on greater importance, including the demand for widespread social involvement and responsibility, strengthening and maintaining equality, financial inclusion of all population groups, and thinking about and dealing with weighty issues concerning the future of society and the future of the world in which we live.
I understand the challenge involved in realizing these goals, certainly that some of them do not provide positive value in the immediate sense, and that some of them require either investment or expense and the allocation of additional resources. Still, I see a major obligation to think in terms of the long term, to examine all of the interests of the various players, and to believe that they can serve both the aim of the business and the aim of the society in which we live, so that we can live in a better society. These interests, despite their potential to conflict in the short term, will merge and interact in the medium and long terms.
In this context, we must also not the ESG field that is gaining ground. The Banking Supervision Department is investing much in learning and gaining experience in the fields of corporate responsibility and environmental and climate risk. We continue to act to expand mandatory disclosure on the issue and are advancing toward binding regulation on climate risks. As I have noted, the Board of Directors plays an important role in formulating corporate responsibility that takes all interested parties into account in a long-term view that will benefit the company, the public, and the economy in which the company operates.
We all have an obligation to support and assist in the handling of these issues. This is our job—mine as the regulator supervising the banking system, yours as directors and senior executives in the banks, and everyone’s as citizens and as people.
The Banking Supervision Department views the Board of Directors’ activity and its impact on society as immensely important. Due to this perception, we began publishing circulars and directives regarding the Board of Directors’ activity in a banking corporation back in 1985, and we have made more than 30 changes, amendments, and adjustments since then.
Our main directive on the issue is a broad and comprehensive directive that relates to the function, authorities, and composition of the Board of Directors, and practices for its efficient functioning. The directive also relates to the qualifications of directors and the features of the Chairman’s work. The directive essentially adds to and expands upon the Companies Law, all with the aim of ensuring that the Board of Directors at a banking corporation will act in the optimal manner and will take care of the interests of the bank and its customers.
The Board of Directors is a central part of the banks’ corporate governance structure. The proper, high-level functioning of the Board of Directors is immensely important to the proper management of the bank. I cannot exaggerate the importance of the Board’s activity, particularly as it relates to laying out strategy and policy, and closely supervising and monitoring what happens at the bank.
Despite the fact that the Board’s traditional function hasn’t significantly changed in recent years, the challenges it faces have changed quite a bit. The intensifying and developing risks, some of which I have mentioned here, alongside the opportunities and the development of appropriate strategy and business policy, require additional qualifications, education, and experience. They also require the Board’s attention, and meticulousness regarding the composition, diversity, and quality that can result from a variety of learned opinions around the Board table. And in regard to diversity, it is worth noting the importance of equality in general, and of gender equality in particular, when evaluating the composition of the Board of Directors, among other things.
In my past, I have served as a member of the Board of Directors both in Israel and abroad, and even as the Chairman of the Board of a banking corporation. I have a close, in-depth awareness of how a Board of Directors operates and of the importance of this activity for the organization and its management. I believe that the organizational culture as a whole, and certainly where it concerns the control environment, is derived from how the Board functions, which leads to the Board’s decisive importance.
I wish you an enjoyable and productive conference.