Toespraak van minister De Jager bij de WCIT2010 conferentie over innovatie en de invloed van innovaties in de financiële sector.
Ladies and gentlemen,
Enterprise and money: these are the two ingredients needed for innovation, and innovation is needed for economic growth. That was my experience when I was in business, and it is still my experience as finance minister. And this doesn’t apply only to new windmills or new cars, new energy sources or new consumer goods, but also to new financial products.
It’s not so long ago that workers received a pay packet, that the rent man came to collect the rent and that we paid for a new bike with hard cash. In recent decades, all that has rapidly changed. First we were given the option of paying by cheque and sending money by mail. Today, it is perfectly normal for us to pay by debit card and to carry out all our bank transactions on the internet. In the stock exchange, jobbers and traders have largely been replaced by monitors and computers. And more and more people are now trading on the stock exchange direct from their homes, by means of online brokers.
Online banking and our do-it-yourself culture spell the end of the direct relationship between bankers and customers. You used to go to the bank on the street corner to open an account. And you stayed with that bank for the rest of your life. That’s where you received your salary and discussed a mortgage or loan with the bank manager. And if you went into the red, the bank invited you for a chat.
Money used to be tangible and personal. But now it is virtual and remote. Even if there is a bank run, this no longer takes place at the bank, but at home, in front of your laptop.
Clearly, the financial sector and the movement of capital have changed radically over the past twenty years, mainly due to new technology. On the whole, that is a good thing.
For instance, it means more competition in the financial sector: the internet makes it easier for consumers to compare different products from different providers. It’s the same in the insurance sector – direct writers can offer insurance policies efficiently over the internet.
Technology has also transformed the way we pay for things. Online banking lets you see your income and expenses in real time. Paying for online services with, for example, iDeal or PayPal is only the start of a digital payment revolution.
All over the world, and especially in the United States, the financial sector has been deregulated. This has boosted technological innovation. But for the financial sector in particular, all these new developments, all this virtual money, and the rise of electronic transactions, pose a danger: it’s all getting very complicated and very impersonal.
In an interview with a leading Dutch newspaper, former ING boss Aad Jacobs said that he used to receive endless memos about new products. With wonderful names such as the ‘double butterfly’, and other constructions such as the ‘spider’ and the ‘condor’. He would always make a note in the margin, suggesting we were ‘trying too hard for our own good’.
All these efforts led to more and more new financial products and complicated models, which were impossible to explain. They were often so hard to understand that even many bank managers no longer knew what kinds of products they had on their balance sheets, let alone what their effect might be on customers and society.
Credit was increasingly granted on the basis of a mathematical formula, instead of common sense and personal knowledge of customers. In the securities trade, too, money and shares became increasingly volatile, for example through flash trading.
Competition naturally played a major role. And as Citigroup CEO Chuck Prince said in 2007, entrepreneurs tend to feel that ‘as long as the music is playing, you’ve got to get up and dance’. But the system became unbalanced. And this led to the credit crisis.
One of the main lessons of the credit crisis is that innovation is always a step forward, but we can take two steps forward if we provide a proper framework for the changes.
Yes, I am a strong believer in innovation. I am convinced that innovation is the perfect enabler to restore the financial markets to their former health and strength. Why? Because innovative technology can realise more efficient supervision and – at the same time - lower administrative costs. Of course innovation is always an integral part of its context, so we should always look at the added value that innovation offers people and society. This is the responsibility not only of politicians and administrators, of legislators and supervisors, but also of the directors of financial institutions and, not least, consumers themselves.
The core business of the financial sector is providing good services. The interests of individual customers and those of society as a whole should be central. In recent years, the distance between financial institutions and their customers has grown larger. But by means of smart, practical technological applications, we can turn any disadvantages into advantages. Technological innovation can and will play a key role.
How can it do this? By expanding the possibilities offered by online banking. And by making them more customer friendly. You may no longer have cash in your pocket or get printed bank statements any more. But with online banking you can check your balance and see your latest transactions 24 hours a day, 7 days a week.
To help consumers keep better track of their day-to-day spending, banks are developing electronic housekeeping books for people who do their banking online. They are also working on setting budget limits and sending a text message alert if you go into the red. I have even heard of applications where, if you’re with friends in a pub or restaurant, say, your bill is divided up and everyone pays by telephone. A whole new approach to ‘going Dutch’!
An innovation that I’m very proud of is the electronic tax return in the Netherlands. This year, people can even go online and just have the confirmation sent tot the tax administration, with most of the items already filled in in advance by the tax administration. This saves everybody time and trouble.
In the world of pensions, too, there are big technological changes in the pipeline. From 1 January 2011, all members of the public should have access to the new Pensions Register on the internet. It is designed to give them an overview of their pension situation via a single electronic gateway. It will show the total pension rights and entitlements that they have built up – both with pension funds and insurers, and under the General Old Age Pensions Act. The Pensions Register will also show where your rights have been built up, and so where you can go for more information. This is another fine example of how innovation makes life easier!
Financial advisers are also making increasing use of new technology. Comparative websites and calculation tools give you the chance to look around before you buy. You can work out, for example, the maximum amount you can borrow. Then you can fine-tune your preferences using an electronic decision tree. And you can even discuss all the ins and outs with your adviser via your webcam.
These are just a couple of examples. There are certainly many more possibilities.
As I’ve already said, deregulation has given a major boost to innovation in the financial sector. But what is the impact of regulation and supervision? I certainly don’t believe - as is often claimed - that regulation kills innovation. Yes, regulation is necessary to provide guidelines but that will only ensure that innovation truly benefits the market as a whole.
What does this mean? I’m talking here, for example, about how legislators should handle the relationship between sellers and buyers when it comes to complex financial products. We need to ask ourselves whether customers really know what they are buying. And whether the product matches their objectives, means, knowledge and risk profile. Regulation can help by laying down general guidelines that market players can then implement themselves. For instance, by providing technological tools, such as user-friendly advisory software.
The regulation of the financial sector is also receiving attention at European level. For example, the Markets in Financial Instruments Directives (MiFID) is being revised, partly to solve problems connected with high-frequency trading.
Efforts are also being made to make it easier to compare complex products aimed at capital accumulation. Here too, new technology can offer a solution.
I should also mention the Payment Service Directive (PSD), which took effect in November 2009 and sets requirements for the speed of payment transactions in Europe. Harmonising direct debit payments and funds transfers in Europe will certainly present tremendous technological challenges.
Technology will play a key role in efforts to find solutions in the areas I have just mentioned. The market is using more and more electronic processes, and technological solutions will increasingly be needed to ensure proper supervision and control.
I hope that this conference will help us find these solutions. And that you will all play a role in devising useful and practical innovations for the financial sector. That is what we need to restore confidence!/p>