Thanks for the invitation to speak on this panel of experts. I am honored and humbled. It is great to be back in Madrid.

Financial technology or FinTech continues to change the banking landscape. Let me start with some valuation numbers. According to a report put out by Oliver Wyman this year, the top 50 FinTech firms globally grew from $.4 trillion to $1.0 trillion (150%) from 2011 to 2016 in terms of combined valuation. This is greater than the top 50 banks (58%), the top 50 insurers (79%), and the top five tech firms (140%).

Although the term FinTech might be relatively new, the concept has been around for some time. You can think of FICO or PayPal as FinTech startups from the past. However, with today’s widespread penetration of mobile technology and greater openness of proprietary networks, many innovations are brought to market by relatively small players and are layered upon existing rails to increase the reach of financial products.

Today’s plug-and-play technologies allow relatively small innovators to integrate into various platforms and provide a seamless customer experience. It seems like all one has to do is develop an APP and funding is right around the corner. I am sure everyone in this room knows this is not the case.

In my introductory remarks, I would like to touch on key areas were FinTech firms will impact financial services, discuss strategies for financial institutions, and some challenges that lie ahead.

FinTech firms are primarily focusing on: payments, lending and deposit products, investments, financial management, insurance, alternative currencies, and back office improvements. Given time limitations, I will only touch on a few of these areas. These firms look to reduce frictions, increase reach and reduce costs.

FinTech firms generally enter the market when there is sufficient friction that keeps costs high, makes the process cumbersome, or limits access to some customers. Furthermore, with today’s advances in computing, connectivity, proliferation of mobile devices, and artificial intelligence, opportunities exist to reduce these frictions while simultaneously reducing risks.

For example, in the United States there are many individuals that have thin (not sufficient borrowing history) or bad credit histories that prevent them from getting loans. Using large datasets including behaviors from social media, FinTech companies have developed credit scoring techniques that are able to pluck out relatively good credit risks and match them with investors that want a higher return on their investment.

The ability to process large amounts of data to make financial decisions is providing banking and non-banking institutions the ability to customize their products at lower cost with less uncertainty and greater reach.

On the investment side, sophisticated algorithms used by financial advisors are being offered to retail investors directly by companies such as Betterment and Wealthfront. While targeted at millennials, other age cohorts are using these tools although they have to overcome their desire to interact with humans. By reducing human interaction, these companies are able to reduce their operating costs significantly and pass on these savings to their customers.

On the back office side, the distributed ledger technology provides a record of every transaction that are authenticated and verified. This technology has the promise to significantly improve transactions and reduce the level of intermediation for all sorts of transactions such as currency and securities, trade finance, and home purchases.

On the payment side, I advise a FinTech company that provides conversion of cash to Bitcoin through ATMs or iPads. Bitcoin provides an electronic alternative to currency. Digital Mint started by installing ATM machines at check cashiers. Check cashiers are non-bank institutions that cash checks for a fee for those that do not have bank accounts or those that do have bank accounts but do not want to use them to cash checks.

While cash is the most popular payment instrument in most parts of the world at least by number of transactions, there are some transactions where cash is not accepted such as online purchases. Often purchases made online are more diverse, less expensive and more convenient. For those that do not have access to accounts at banks, Bitcoin may allow them to make such purchases. In addition, some online merchants are starting to accept Bitcoin because they are often less expensive to accept than credit cards.

Of course, most consumers and merchants do not want to take on any volatility risk with Bitcoin so they convert Bitcoin to goods and services or bank deposits in local currency relatively quickly.

This example fits in the broader category of financial inclusion. Financial inclusion or the access to basic financial products such as payments, savings accounts, and loans is a goal of most governments, especially in developing countries.

Governments have started to encourage non-cash payments in various ways. One of the byproducts of the Indian government’s replacement of over 85% of the value of its currency last November was to encourage greater digitization of payments. The government has been instrumental in getting biometric identification of over a billion of its residents that is a necessary precursor to financial inclusion. We can discuss more how successful this experiment was to move away from cash transactions during the panel.

Let’s now turn to what banks can do as their industry is being challenged by not only FinTech firms but technology companies as a whole. First, if banks do not start to digitalize their services, they will have difficulty to survive. The move to digitalize has to be holistic and with integration with all business lines. However, with financial products it is difficult to remove legacy systems quickly.

Second, banks must partner with FinTech firms and platforms to provide a seamless process. For example, financial institutions that offer car loans are now aiding in the search for cars. As a result, a financial institution was able to increase the amount of its car loans significantly (Oliver Wyman, 2017).

Third, banks must be aware of what their customers want. Many surveys indicate that customer service at banks is among the lowest when compared to other industries. Fourth, profit margins will see compression as competition heats up and further cost cutting will occur including reduction in staff.

Banks have argued that they face competitive disadvantages because they incur greater regulation vis-à-vis their non-bank competitors. Interestingly, some FinTech firms would like to have more regulatory structure on the services that they provide. In the United States, the OCC has introduced a FinTech charter whereby FinTech firms can have a national bank charter for certain types of products and be supervised by the OCC.

Some central banks have gone a step further by creating sandboxes whereby startups can get some initial leeway to enter markets while the central bank keeps an eye on the types of products.

As the last financial crisis demonstrated, financial innovations need to be understood and the risks and rewards transparent to participants and regulators alike. That being said, too much regulation may hinder the pace of the digitalization of finance that has the potential to bring enormous economic and social benefits. Let me stop here. I look forward to the remarks by other panelists and the discussion that will follow.