banking and insurance: a mixed bag of challenges to come.

At the end of December, all banks are starting their end-of-year project. This annual project involves ensuring that the transition from one year to the next will take place without a hitch and that all positions will be covered when the market opens the following year. It’s an intense period for both the business teams and the IT teams, which need to work together more than ever to avoid tarnishing the PnL of a 2021 that looks set to be “vintage” year. The end of the year is also an opportunity for everyone to take time out to look back at the progress made in their multi-year transformation plan. In the first half of the year, all goals were focused on banking institutions’ cost of risk due to their key role in distributing central government aid.

In October, Jean-Paul Mazoyer, Deputy General Manager at Crédit Agricole, announced that of the €140 billion in state-guaranteed loans (PGE), just €30 billion had been used – barely more than 20%. This is one of the reasons why banks have regained ground on the stock market: Societe Generale’s valuation since the start of the year has risen by more than 70%, with BNP Paribas also advancing by over 30%, as did Crédit Agricole, moving from €9.6 per share in January to more than €12.3 in mid-December (+28%). The end of the year is also an opportunity to focus on current and future challenges and the most effective ways of addressing them.

csr: an exogenous imperative.

More than ever, corporate social responsibility is a key challenge for those who want to be more inclusive and respectful of their environment. “Economic development is no longer conceivable without environmental and social progress” is how Société Générale describes this on its website. Christophe Leblanc, Group Head of Resources and Digital Transformation, shared a number of concrete initiatives put in place by the group at the Club Les Échos roundtable, including investment in less energy-intensive data centres, the development of eco-design uses when creating tools and more frugal consumption of the bank’s data to reduce the carbon impact. At the same time, the commitment to include more women in the management teams is also progressing, with the Group Management Committee now 25% female.

Other companies in the financial industry are also taking action. BNP Paribas was a pioneer in 2015 when it signed the L’Autre Cercle association’s anti-homophobia charter. These environmental and societal transformations join the growing number of regulatory subjects that have emerged since the 2008 crisis. To contend with this, new tools will need to be adopted, new methods and processes will need to be introduced and digital will play a dominant role.

a new systemic risk.

“The world is changing. The world is evolving. And so are the risks. I’d like to say today that the risk we’re monitoring the most closely at the Fed is cyber risk.” These were the words of Fed chair Jerome Powell during an interview a few months ago. Risks have always been classified in three ways. Firstly, market risks, which are inherent to market activities, such as liquidity, volatility and foreign exchange risk. They should be scrupulously analysed using IT tools to take the right positions and guard against them. Secondly, operational risk, which is the major risk for any company. If you no longer have power in your buildings after a flood, if your data centres have caught fire or if you are forming a Covid cluster during a seminar, you haven’t managed to properly cover yourself against operational risks. Thirdly, credit risk, which is when a person, either natural or legal, doesn’t pay back all or part of what they owe.

Returning to Jerome Powell’s quote, it’s worth noting that before hearing his answer, many observers thought he would say that his main concern was to do with the high valuation of the equity markets or that US students’ loans would create a new stock market crash. While these issues need to be monitored, they’re nothing compared to cyber risk, for the simple reason that it is systemic.

As during the subprime crisis, when all banks held “rotten” securities, gradually discovered them and increasingly paralysed the economy, a cyberattack on one player connected to others could have catastrophic and systemic consequences, resulting in a chain of institutions unable to operate effectively. For several years now, Chief Information Security Officers have seen their budget rise. Recently, we learned that at one of the major French banks, the budget allocated to the CISO would double again next year.

polymorphic competition.

Lydia has just become the 22nd French unicorn. This is once again excellent news for the French tech sector. By reaching this level and raising several tens of millions of euros, the company will be able to grow its business outside France and offer new services to current and future users. This money transfer feature won’t be making the company any money: it will utilise this new round of fundraising to set up and distribute new services – account management, micro-loans, trading, etc. Even though it will rely on other companies to distribute its services, by positioning itself in this way it has captured value in the traditional value chain of banks and insurance companies. This kind of story applies to many companies. Neobanks are the best known, although many new competitors are gaining market share in the sector. Payment is one example: in acquiring the former Casino bank Flor for €260 million, BNP Paribas decided to purchase a technology to quickly respond to new uses. Lastly, competition is coming from players that weren’t previously pictured in this segment, such as Apple. With its payment solution, as well as its insurance services, this GAFA company has taken market share from traditional players. Finally, according to Goldman Sachs, fintechs, which typically target the most profitable areas of financial services, will divert up to $4.7 trillion in annual revenues from the traditional players.

an inclusive approach to addressing challenges.

When paired with humans, digital technology is probably the most effective way to contend with competition and control its risks, in a green way. Although this seemed obvious, it’s often very difficult to align the planets. Take the aforementioned example of data centres. The machines used are likely to come from abroad and have a significant carbon impact due to the manufacturing and transport costs. Before they are delivered, there is also the question of where to install them. Although there are countries in the European Union where electricity is cheaper, are we sure it’s cleaner? The carbon content of electricity in Germany is three times higher than in France. Digital is also a way to make companies more inclusive.

Microsoft is investing in France with partners to train people from all backgrounds in the digital professions, with the Simplon schools. The Redmond-based leader is also implementing more inclusive solutions beyond subtitling in Teams. Lastly, like its rivals Amazon and Apple, it is at the forefront in reducing its energy bill and offering low-carbon digital solutions. This digital temperance forms the basis for a successful digital transformation in the coming years. Although the cloud, like the DevOps methodology, reduces time to market and enables more of a focus on uses, it encourages more data consumption. This consumption mustn’t come at the expense of damaging the environment – at least this is the conviction that growing numbers of us share.

Op-ed published on 24 December 2021 on LesEchos.fr.