Category: Digitalisation

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Establishment of banks: an option for corporations? – Part 2

As explained in the preceding post regarding the recent PwC-Whitepaper “Establishment of banks: an option for corporations?”, the establishment of corporate-owned banks is not a strategic option for the german industrial sector even though the automotive industry is using them with great success.

These results contrast with the high demand for individualized financial services. Every other surveyed corporation wishes for increased efficiency and professionalization of financing activities within the firm. Beyond that working capital-management (36%), securing sales (34%), securing the supply-chain (27%) and diversification of business activities (27%) were central needs.

Commercial banks will not be troubled by emerging competition in terms of corporate-owned banks for now but they must not feel too secure as this is not due to the quality of their service but rather the enormous barriers of entry for corporations. The Whitepaper provides not only fields of action – especially in terms of consulting and product design – but also opportunities for the development of new business areas. Proposed actions might be structured financing for sectors or unions, supplier credit platforms, joint distribution activities or the offering of white-label-products. However, corporate decision-makers have to get themselves into banksided innovations and try to comprehend and exploit their potential together. Financial Covenants are agreed upon increasingly but are often seen as a burden for corporations. If those risk management benchmarks are individualized to fit specific sectors or corporations, they will have a positive impact for both parties. While various forms of cooperation between commercial banks and cooperations may appear promising, each party has to be aware that the realization of actual surplus value requires honesty, timely exchange of knowledge and the willingness to progress.

Establishment of banks: an option for corporations? – Part 1

It’s hard to imagine an automotive industry without corporate-owned financial institutions. Sector expertise concerning customer data, residual values and distribution channels allow for lending and leasing as well as the offering of appropriate insurance-models at attractive terms. In addition to these products the corporate-owned banks also offer classic banking products such as day-to-day money or credit cards. Thus they do not only optimize corporate financial activity but also enhance customer loyalty. Are corporate-owned banks therefore the next logical step towards an evolved industrial business model and can increased establishment be expected in the future?

The latest PwC-Whitepaper “Establishment of banks: an option for corporations?”, which can be obtained from PwC, deals with this exact question. According to the whitepaper the establishment of their own bank is not a strategic option for the vast majority of corporations. Only 6% of the 90 surveyed decision-makers representing corporations with a total of 177 billion € stated they would be considering it. There are multiple reasons behind the restraint. The most central being their size (31%), the remoteness to their core business (22%) and the effort that comes with regulatory compliance (18%).

Also read our next post regarding this issue. It deals with motivators explaining the urge to establish their own banks and tries to define fields of action and propose actions for commercial banks.

Bitcoin and Bitcoin-like payments

Bitcoins (BTC) are increasingly used as a virtual currency for purchases of goods and for the remuneration of works or services. There are other, similar currencies such as Litecoins and PPCoins. According to the daily newspaper Die Welt, Bitcoins are now accepted by more than 75,000 companies.

Bitcoins are created using a mathematical process. Anyone who has a powerful enough computer can access that process by logging into a peer-to-peer system. The individual participants (clients) create the currency by solving CPU-intensive cryptographic tasks (so-called mining). For mathematical reasons, the possible number of Bitcoins in circulation is limited to approximately 21 million units (Extract from the Annual Report 2013 of the Federal Financial Supervisory Authority – BaFin – regarding trading in Bitcoins, dated 17 June 2014).

Since their introduction, Bitcoins have been subject to strong value fluctuations: Exchange rates ranged from the single-digit to the high triple-digit Euro area; the current exchange rate is about 215 Euro.

Although most Germans have probably not used Bitcoins yet, it can be assumed that the majority of the population has at least heard of them.

Given the widespread acceptance of Bitcoins by companies, it cannot be ruled out that they fulfil a monetary function and therefore could fall under the legal definition of “money”.

Regulatory classification

In a first step, a legally binding determination of the regulatory nature of Bitcoins was made. At the end of 2013, the BaFin released an article about Bitcoins and structurally similar virtual currencies. According to BaFin, Bitcoins are financial instruments and specifically fall under the subgroup “units of account”. Therefore, certain activities associated with Bitcoins can trigger a licence requirement pursuant to the German Banking Act (Kreditwesengesetz – KWG). Such a licence is required for e.g. purchasing and selling Bitcoins in the institution’s own name for the account of others (principal broking business) as well as on behalf of and for the account of others (contract broking), the purchase of Bitcoins at the institution’s own risk for placing in the market or the assumption of equivalent guarantees (underwriting business), provided that the activity is carried out commercially or within a scope which requires a commercially organized business. Also, investment advice, the operation of a multilateral trading system, placement business, financial portfolio management and the practically significant proprietary trading can be subject to BaFin authorization, when associated with Bitcoins. For more details, see the mentioned BaFin article.

Since from a legal point of view, Bitcoins are neither regarded as money nor as e-money, they shall in principle not fall within the scope of the German Payment Services Regulation Act (Zahlungsdiensteaufsichtsgesetz – ZAG).

It remains to be seen whether the e-money definition is going to be adapted with the result that it will also include Bitcoins and similar virtual currencies or if those currencies will per se be subject to regulation pursuant to the ZAG as a separate instrument. This could have far-reaching consequences for payments with Bitcoins and Bitcoin-like currencies. In light of the hazards and risks associated with Bitcoins (value fluctuations, data theft), the decision to set up a regulation may well be taken.