Digital and integrated – these are the two key words being used to describe the future of Europe’s financial services industry at a conference that was jointly organized by the ECB and the EU Commission on January 31. While the speeches and panels focused on single aspects of Europe’s future digital integrated market, the conference program itself unveiled the challenging road that lies ahead for the European banking sector – banks need to rethink their business models from interest based, to service-fee based. This would lead to growing the capital markets and shrinking the balance sheets of banks. In addition, a less fragmented and more efficient (single) market improves intermediation via financial and capital markets further challenging the traditional business model of European banks. How should this be reflected in the regulation of the banking union?

Positive impacts of streamlining and automatization of back office services, digitalization of document management and credit decisions on the cost/income ratio can be observed already today. Consumers are also quickly adopting digital banking and appreciate convenient, fast, cheap and secured banking services and many banks are investing huge amounts to digitalize their payment services to keep up with consumer demands. In the way of truly integrated European financial market, the continuous progress is needed in the areas of securities issuance and instant payment settlement.

• The retail payments market infrastructure in Europe is fragmented. Automated clearing houses (ACHs) still focus on their respective national markets. The availability of a safe and efficient market infrastructure that can guarantee the processing of instant payments across Europe is a prerequisite for the launch of pan-European instant payment solutions. Payment service providers should have the choice to either clear their instant payments through ACHs or use a settlement service for instant payments.
• In January, the Eurosystem launched a market consultation on user requirements and the expected volumes for a settlement service for instant payments in central bank money. The proposed TARGET instant payment settlement (TIPS) service would guarantee pan-European reachability for instant payments and give payment service providers the possibility to use their credit lines stemming from their collateralized positions in TARGET2. The Eurosystem will take a decision by June 2017 on whether to develop the service based on the results of the public consultation. TIPS could commence operations as soon as 2018.
• A European securities market should offer the possibility of issuing, settling and holding securities in the same way, regardless of where issuers and investors are located. A fully harmonized system of securities issuance could reduce the transaction costs for capital financing, make the European securities market more attractive in the global economy, and allow for an effective redistribution of private risk across EU markets. With TARGET2-Securities (T2S)* and related Central Securities Depositories Regulation (CSDR), the Eurosystem has created the basis for an efficient and effective settlement mechanism for securities in Europe. Clearinghouses are now migrating to the T2S platform in waves, and the migration of the German market in early February by Clearstream Banking migration is a huge step for a harmonization of the European securities market. The ECB is expecting that up to 90 % of total securities settlement volume will use the platform when all participating central securities depositories (CSDs) have migrated.

Banks call for a regulatory environment in which innovation can survive. However, given the breadth and depth of the implications from digitalisation and integration for the financial services industry, it appears difficult to derive necessary changes for banking – and capital markets union regulation at this early stage. The regulatory environment for safety and risk reduction, technology and business model need to be considered in a holistic and agile way. Digitalization is changing markets, and this is as much a challenge for regulators who need to be familiar with new technologies, ongoing innovations and how these affect banks’ business models in order to be able to link them to financial regulation, supervision and customer protection. The ECB is responsible for the safety and efficiency of cashless payments in euro. In addition, focus areas for banking supervision in 2017 and beyond include dialogues with banks in the areas of in-depth analysis of banks’ profitability drivers, non-bank competition, governance and risk management. Supervisory activities related to cyber risks are also being carried out on an ongoing basis – the market will be glad to see the evolution of a truly European and agile banking regulatory system over the coming years. An open and fact-based discussion of the opportunities and challenges from digitalization and integration trends, like the conference held by the ECB and the EU Commission, is the right first step on the path to the future of a European single market. Given the accelerating speed of technological developments, next steps should follow soon.