Interview by Elif Kocaoglu Ulbrich
Dr. Ibrahim Karasu, Member of the Managing Board with the Association of German Banks (Bankenverband), has experienced different stages of the German banking sector during his 30 years of banking, lobbying, and management experience. His work was focused on forecasting technology’s potential impact on the industry, even before FinTech took over. He is the author of the article “Biometrie im Bankgeschäft,” dated 2007, and a book on the transformation of the bank IT systems dated 2012.
Mr. Karasu agreed to talk to us about the sector development and to give insights about the open banking applications in his busy schedule. We are hoping that our sector-focused talk will complement his recent interview in Manager Magazin, outlining his personal history.
Mr. Karasu, let’s start our talk with Bankenverband. What are the main activities of the Association of German Banks?
The Association of German Banks, or Bankenverband for short, represents more than 200 private commercial banks. We are an active player in regulatory and political affairs, while also steering industry standardisation initiatives in a wide range of business areas and supporting digital innovation and transformation of banking business models in Germany. In addition, we operate a deposit protection fund and offer a dispute settlement mechanism for customers of private banks (“Ombudsman Scheme”).
Digital transformation is one of today’s key challenges – not least for the financial industry. One of the ways in which the Association of German Banks is meeting this challenge is by cooperating with start-ups from the financial sector, i.e. FİnTechs. This cooperation has been formalised in the Bankenverband’s Digital Banking Project Committee, which is vigorously driving forward the cross-cutting issue of digitisation. The committee is a high-level body bringing together chief digital officers (CDOs) of banks and leading figures from the German FinTech scene. It is also instrumental in ensuring that common positions can be found in the German financial community.
We are going through a period that involves a lot of exciting developments, such as open banking, Libra, AMLD5, Artificial Intelligence and, so on. What are bankenverband’s current focus topics?
Many of these developments are as exciting as they are challenging for banks. For instance, Facebook’s announcement of Libra has attracted a lot of attention in the financial community and, quite rightly, also among politicians and regulators. A private currency can pose risks to financial stability and investor protection as well as with respect to money laundering. Libra has nevertheless drawn attention to the huge potential of programmable digital money, which is likely to play a major role in the future, especially in connection with smart contracts and the Internet of Things. This calls for a common pan-European payments platform for a programmable digital euro and we, together with our members, aim at playing a leading part in such an initiative. But in any event, we are convinced that a digital “currency”, be it Libra or a programmable version of the euro, should comply with the same strict regulatory requirements as a physical one. The fact that crypto assets have been included in the revised EU AML Directive (AMLD5) shows that legislators share this view.
Another current focus topic is data economy. The utilisation of data is an important resource for adding value for both customers and the financial industry. It can serve banks as an enabler of new business activities and generate new sources of income in the eurozone’s current low-interest environment. At the same time, a high standard of data protection and security is paramount, putting German consumers’ strong need for data sovereignty and privacy first. To this end, we see a need for practical transparency and oversight mechanisms to be developed and implemented in accordance with the European General Data Protection Regulation (GDPR). Another prerequisite for a viable data economy is wider data access and data sharing among various market participants beyond the financial sector. The increased use of data – especially in combination with artificial intelligence – holds great potential. Banks are already using the available data in a variety of applications, such as to support operational banking processes (middle / back office), in risk management, compliance and investment banking, in anti-fraud and cyber-attack defence, and also to communicate with clients using chatbots, language assistants or robo-advisers. Broader data access would increase the possibilities many times over. To achieve this vision, a joint effort and common standards are required. While we would prefer a market-driven initiative, a legislative approach similar to that chosen by European lawmakers to open access to payment accounts could play a complementary role.
In the past two years, no other topic exhausted German banks as much as PSD2 and open banking. What are your first thoughts after the execution? In your opinion, what were the right and wrong approaches?
From a German perspective, PSD2 implementation in Germany has so far mainly been a regulatory migration project: German bank customers have long been able to access their bank accounts via third party providers (TPPs) – either by screen scraping or based on existing banking standards. Initially, the new authentication process requires additional effort on the part of customers when they use their banking apps. Given changing user behavior and the ever-evolving fraud landscape, however, I consider this step towards strong authentication to be very important. PSD2 gives customers better control over their data and increases security for all involved. I’m certain that in the near future banking processes will be further refined and methods such as biometric solutions will improve user-friendliness again.
However, PSD2 may indeed turn out to be a catalyst for innovations in open banking. Most of our member banks, alongside many of their European peers, have implemented a common standard for TPPs to access payment accounts (Berlin Group API). This standard allows for the provision of additional services which go beyond the scope of PSD2, helping both banks and TPPs to develop new products and business models.
What are your recommendations to banks and regulators that are just starting the open banking journey?
There are two takeaways:
- Every actor in the ecosystem must benefit from open banking: the consumer, banks providing the APIs and TPPs using these APIs. This means it should also be possible to monetise the services involved. The worrying demand for a “free for all” infrastructure, as we have seen under PSD2, calls the development of a successful open banking ecosystem into question.
- Legislation should leave enough space for innovation in terms of technology and services. If legislation is too narrow, there will always be the risk of regulation lagging behind technological and market developments.
As a result, both banks and regulators have to face the fact that the market for many services has become a triangle. While in the past the demands and interests of end users and banks may have been the driving relationship, the perspective of TPPs is now being added to the equation.
Do you think open banking will stir market competition as much as expected? In the end, banks opening their APIs to third parties is not sufficient on its own; there should also be third party services in the market, which are in demand by the customers.
For customers, open banking means they can look forward to new banking services, convenient processes, integrated services, one-stop solutions and improved user experience. For banks, this is an opportunity to specialise and offer niche products, or to position themselves as a kind of financial front-end for their clients. That means using interfaces from other market participants and expanding their products. Given the increasing customer interest in smart devices with integrated payment functions such as the trending smart mobility or smart homes, open banking will play an increasingly important role. The API should be a win-win situation for the customer and the bank.
Do you think that the German consumers are sufficiently educated about open banking and its advantages? Does bankenverband have any initiatives about informing consumers on the topic?
I think consumers do not, and should not, worry about open banking but think in terms of products and services. It’s up to both banks and third-party providers to inform them about the associated opportunities and risks.
What are the main differences between Turkish and German banking sectors?
Let’s talk not about differences but about interesting similarities instead. For instance, both Turkey and Germany have their own card payment schemes, i.e. Troy and girocard respectively. We believe that domestic and regional schemes, be they card-based or otherwise, are an important building block for the digital independence of an economy. In Germany, we are working on the challenge of how to make girocard fit for the digital age and are closely following the related activities in Turkey.
I am aware of the collaboration opportunity between FinTechs and banks, under the bankenverband umbrella. Did this collaboration increase the communication between these two parties?
It did indeed. The intensive discussions between banks and FinTechs conducted at various levels in the Bankenverband have shown that, in addition to the always obvious contradictions, there are many common interests. Joint statements on further regulation have been drafted, for instance. We’ve also been able to improve cooperation between banks and FinTechs in a very concrete way: in November we are unveiling our “Guidelines for Improving Cooperation”, which introduce a new model for bank-FinTech collaboration. This instrument will greatly simplify the formal / regulatory integration of a FinTech into bank processes. Supervisors also see this model as a viable option that is now to be tested in practice.
How does the bank of the future look, in your opinion?
The platform economy, data usage, robotics and artificial intelligence will – just as in other industries – increasingly become key elements of banking. Banking will be both digital and personal, with a local view and an international perspective. That said, we have to strengthen customer centricity and convenience while at the same time understanding what technological trends will affect us. And most of these see the light of day in the USA or China.
Lastly, in the light of your 30-year experience, what is your advice to the readers interested in finance and future bankers?
In light of all the disruptive aspects we have discussed, it’s hardly surprising that I recommend every banker to be open-minded towards technological change. Ultimately, banking has always been and will always continue to be about trust. Technology may indeed be an increasingly important means of achieving this. But technology is no substitute for human interaction. Successful future bankers will therefore not succumb to technophilia alone but will constantly foster their relations with clients, colleagues, and friends and foes alike. Some things never change.