Journal of Financial Economics

REF 120 Innovation, Technolgy and Finance

Jean Saint-Geours, un « homme aux talents multiples », ainsi l’a qualifié le journal Le Monde. Parmi ces talents, il en est un qui nous touche particulièrement : sa proximité philosophique avec la Revue d’économie financière (REF). Jean Saint-Geours aurait pu être le parrain de la REF, et ce, pour deux raisons au moins. D’abord parce que la finance, le moins que l’on puisse dire, c’est qu’il la connaissait. [...]

For everyone, new technologies create a new link to the world and bring about a series of consecutive revolutions, both in our daily lives and in business. The first is a commercial revolution that turns relations between producers, distributors and clients on their heads, for the benefit of clients. The technological revolution also places employees at the heart of the company, with an impact on its organization. There is also the societal factor which is now decisive, as society is becoming a real stakeholder in business, driven by the internet and social networks.

The corporate bank, and more specifically the commercial bank, cannot avoid these upheavals ; on the contrary, they are at the heart of economic activity. The bank must thus reinvent itself, with no time to spare. People have as much need of banks and the personal relation remains a fundamental aspect of the banking profession. According to us, the only way forward is reinventing local banks able to promote "instant banking" which offers more convenient, relevant and personalized advice.

All the businesses and establishments of Group Société Générale have understood the "revolution" in behaviors and practices in the era of new technologies. A profound change, which strengthens relationships thanks to the mix of human and digital, is a real opportunity to become the reference relationship bank for all its stakeholders.

Leveraging on the digital and multitude era to carry out this transformation, Société Générale is releasing the collective intelligence of its staff, providing them with the right tools today, offering new spaces tomorrow, allowing them to open up to the ecosystem of digital creativity in order to innovate and be the actors in this digital transformation, which is well underway. Digital transition is an ongoing process product innovation becomes open and shared, innovation of client experience and disruption. Société Générale has chosen to understand, to accept these new challenges and to change deeply.

The banking industry is at a major crossroads, due to the exponentially increasing threat of disruption and disintermediation from non-traditional competition – notably FinTech firms and new more agile banks. Rapid innovations and technological advancements have made technology a cornerstone of driving competitive differentiation and driving sustainable profitable growth – by delivering superior customer experience and operational efficiencies. These changes require banks to integrate technology as part of their entire corporate DNA and business strategies to digitally transform themselves. It is no longer sufficient to simply incorporate technology into “business as usual”, what is needed is to put technology at the forefront of the business.

Capgemini’s TechnoVision provides bank executives and technologists with a clear framework and building blocks to re-shape their businesses for success in these more dynamic, fast-paced times. It also provides some guidance to banks businesses leaders on how leverage technologies in their transformation.

Four examples illustrate how digital impacts the operating model of financial institutions for their revenue generation streams but also the heart of the value creation itself. Beyond those examples, the author illustrates via examples the changes digital generates, often concurrently with some regulatory changes, under way in the revenue generation mechanism, in the costs management and on the P&L and balance sheet management.

The development of online banking services impacts competition in retail banking markets. Several non-banks (mobile network operators, merchants, start-ups, platforms) have started to offer payment services, to act as intermediaries between lenders and borrowers or to collect financial data about consumers. Regulatory authorities have therefore adapted the existing legal framework to encourage entry, while protecting consumers from the various risks that could emerge in the market. This article surveys the links between innovation, competition and regulation in the market for online banking services.

Data Scientist was declared the "sexiest" job of the 21st century by the Harvard Business Review. By what means can the treatment of massive data disrupt financial services and its pricing approaches ? What are currently the opportunities and threats of big data ? Despite miscellaneous constraints, opportunities pop up that the finance industry must seize now.

After a long period of stability, the payments industry must now deeply change along with the customer expectations in a context of innovation effervescence and increased competition. In order to meet these challenges, innovation is key to drive both added-value and differentiation. With the increasing porosity between physical and digital, only new payment paths can meet the fast-changing needs of consumers and merchants. Banks therefore take several initiatives in order to successfully achieve this mutation. By reshaping their systems and infrastructures, they strive to remain the central players in the payments landscape and avoid the loss of value due to disintermediation.

Can digital money replace existing currencies ? A detailed examination of the Bitcoin protocol shows that this conceptual and technical achievement is still far from becoming a full-fledged currency, but the innovations in financial technology that it spurred could have important consequences for payment systems.

Technological innovation and regulatory changes have favored the development of two growing phenomena associated with increased opacity in financial markets : dark pools and high-frequency trading (HFT). One out of every two transactions now emanates from HFT. Dark pools now attract 10 % of total trading volume in Europe and 20 % in United States, due to high frequency traders’ attempt to profit from uninformed investors who trade in these venues. Empirical studies show that transaction costs are at historical lows due to the competitive pressure of HTF. However, transaction costs have been unchanged since 2009 even though speed continues to increase. Market efficiency has improved through HFT arbitrage activity. Nevertheless, as more and more trading volume moves into dark pools, the risk of deterioration in market liquidity and efficiency will increase. This evolution also has implications in terms of competition distortion, operational risks, and technological risks. Overall, dark pools and HFT pose significant challenges to market regulators.

Fixed income markets are in a state of transition and this is accompanied by the perception of a decrease in liquidity and a risk for the financial system stability. The reality is more nuanced and traditional indicators sometimes appear in contradiction with participants’ intuition. The change in liquidity provision seems to affect most those market segments that are less deep than others, and is more visible through an increase in volatility and a reduction of the transaction sizes, than through the variation in its pricing. This evolution can be attributed to cyclical and structural drivers, one of the most important being technological innovation. By reducing transaction costs and widening market access, the rise of electronic trading has had a positive impact on liquidity. But it has also allowed the emergence of new competitors and their algorithm strategies, whose impact on liquidity can have a destabilizing effect. Authorities as well as private sector should then pursue their efforts to enhance transparency, while ensuring that they contribute to a level playing field and preserve trading intermediaries’ diversity.

Trading, clearing and settlement of financial instruments are not possible any more without technology. However technology alone is not sufficient to create a robust financial market infrastructure that meets the expectations of the regulators and the market participants to manage risks and ensure low operational costs. In this article insight is given how the public sector initiated and is overseeing two technology intensive programs -CLS and GLEIF- to mitigate the risks of market participants in financial markets and how the regulators are supported in their role to avoid and mitigate systemic risks in their economy. In both cases, public sector objectives can only be realized if public authorities and market participants cooperate in a concerted action.

New technologies foster the emergence of innovative financial intermediation channels and allow a better allocation of savings in the interest of investors and the economy as a whole. These can also help companies reduce their bank financing dependence. Through three examples, this article depicts new issues the financial regulator is facing. The rise of new technologies should be accompanied and encouraged but the regulator also has to prevent and take action against all abusive practices that may surface in the wake of online tools. Forex trading platforms provide a typical example of financial products that are not suited to individual investors. On the contrary, the introduction of regulated status and a label dedicated to crowdfunding help secure a new investment vehicle for investors which might diversify and supplement traditional financing sources for companies in the long run. Finally, this article focuses on social media as a new communication tool for financial agents. Social media allow professionals to offer particularly rich and innovative customer experience, and can contribute to strengthening the quality of the information provided to investors when good practices are met.

The payments industry is changing. This activity that was still reserved to banks a few years ago opened in recent years to new players, the so called payment service providers. Continuous innovation and digitization of the economy are once again shaking the market. Not only new competitors continue to appear on the market by attacking activities that banks used to monopolize, but in addition, new technologies are changing payments. Mobile payment, peer-to-peer, instant payments are revolutions that the market will have to integrate in the coming years. The legal framework had to adapt and allow new players to enter this market to make it even more competitive. The card market is not left apart, also covered by legislation that sets up a number of rules to make it more competitive.

Although cyber-attacks have so far had a limited impact on the French financial sector, they represent a serious threat to IT security, business continuity and data protection for banking institutions and insurance companies. The emergence of these new risks is a matter of special attention for the supervisors. Regulations on internal control and management of operational risk form the cornerstone of the prevention frameworks already in place, that have to be completed by the development of a proactive monitoring allowing to identify the evolving threats and to define the appropriate protection tools. The ACPR considers that progress has to be made in priority in implementing more efficient access right management and IT intrusion detection systems. Cooperation between public and private stakeholders is key, both for conducting industry-wide exercises allowing to test the companies’ robustness and for improving the identification of threats with an increased exchange of information. Finally, the action of the supervisor must be part of a European or international framework, in order to ensure the coordination of initiatives.

This article focuses on the systems covering the risks of banking failures, and more specifically the deposit insurance, in the context of a financial crisis. By nature, banking default risks present a strong analogy with “large risks” such as natural and nuclear disasters. These latter risks benefit from specific mechanisms regarding their management and financial coverage using specific instruments and governance. Such processes can inspire the current revision of the banking systems for hedging risk at the organizational and financial levels. We therefore consider the opportunity to compare explicitly banking risks, natural and nuclear disasters. This comparison leads to some recommendations for the deposit insurance system.

In this paper, we study the relationship between the long-standing rating system of the credit rating agencies that has become essential overtime, and another system, which needs to ensure its own legitimacy with controls based on ratings or comparisons, the Basel agreements. The three traditional locks – intermediation, regulation, compartmentalization – which served to safeguard national and international finance, have disappeared and the 3 D revolution (disintermediation, deregulation, de-compartmentalization) together with dematerialization, led to a dramatic increase of global finance. The ensuing serious imbalances have required ongoing monitoring and enforcement of prudential rules. These rules, difficult to build from scratch and to implement, benefited from the existence of rating agencies. In this article we seek to determine how rating agencies have developed and increased their power through the establishment of the successive agreements Basel I, Basel II and Basel III.