Thank you for inviting me to this event the main issue of which is precisely a fundamental axis of our work at Central Bank. We all dream of a country with more financial inclusion, and a deeper, more dynamic and developed financial system that is a vehicle to materialize the dream of having a country that ensures equal opportunities into reality.
The motto of this Congress is “travel to the future”. I want to thank the organizers for giving me the honour of being their first pilot in this trip and I will also take this opportunity to invite you to think with me about what the future financial system will be like.
Sometimes we have such an accelerated lifestyle that we cannot perceive the constant changes around us. In this regard, a 30-year old person in 2016 is not the same as a 30-year old person in 1980. The words “internet”, “smartphone”, or “3D” were unknown in 1980. So were “online banking” or “CBU” [single banking code].
The financial system adapted itself to these changes and, in only 30 years, we have progressed in terms of means of payment more than in the previous 100 years. Never did this sector progress so much in history and Argentina’s financial system cannot be left outside this real revolution.
Looking ahead, I imagine that the future Argentine financial system will be active, dynamic, deeper, and more far-reaching than the current one. Transactions will be carried out from home or from supercomputers in our pockets. Banks will have a lot of personal information about us and this will allow them to make a silent risk assessment, almost automatic and very thorough. The financial sector will allow us and help us save and will provide us with financial instruments that will allow us to reduce our labour and financial risks.
Access to financing will be directly related to our preferences and our way of living. The relationship with the financial sector will be richer, and far more complex and interactive. In such a future, probably near future, employees from retail- and consumption-oriented banks will be mainly educators, social assistants and psychologists.
As far as lending for commercial purposes is concerned, companies will access products that will allow them to forget about many of their current contingencies. For example, loans will be backed by several insurance policies that will dilute risks in a more complete fashion than what we have today. It will obviously be a world where physical capital will be replaced by knowledge capital. A lot more of our financing will be channelled towards education and investment in knowledge. A lot less will be aimed at physical capital. Productive structures will use less tangible capital: fewer offices, less transport, less equipment, fewer machines but a lot more of intelligence, more software and more automation.
Saving will be more abundant than today due to demographical changes and higher income levels; therefore, there will be unprecedented low interest rates. It will be easy to access loans at a young age. The young will be more empowered and independent. More universal access to capital will result in a more balanced economy in geographical terms. Capital will be available regardless of where you may be. Access to capital will be universal in nature and abundant and this will pave the way, for the first time, to a world with equal opportunities, just like the French revolution promoted equal opportunities to access land and property or like the revolution and massification of educational systems generated greater equality to access knowledge. The revolution of a world with financial inclusion and low capital cost will create equal opportunities to access capital.
Who can deny that we envisage a promising future?
Finally, it is needless to say that it will be a world without cash; in fact, by that time, cash will not have been used for many years and it will be remembered just like today we remember merchants who used to trade in salt. By that time, the use of cash will have surely been prohibited by law and it will only be an instrument with which a significant part of the informal economy and crime will have disappeared (1). In a book published last week in the United States, Kenneth Rogoff makes a strong case on how, in the past few years, the rise in money—especially high-denomination banknotes—has nothing to do with the use of cash for transactions but only to maintain the informal economy and illegality.
That is where we are heading. But, where are we today? I would say we are far from our destination but we are on the right way.
However, I want to start by identifying a systemic change that the Argentine financial system will experience in the near future.
In the past few years, the financial sector received a considerable subsidy: the tax on inflation. As you already know, inflation is one of the most regressive and distortive existing taxes; it is a tax that has undermined Argentinians’ purchasing power as well as their saving and investment horizons.
However, and paradoxically speaking, although this tax has weakened the Argentine financial system and swept away any growth possibility, our financial system is one of the main beneficiaries of this tax because when it takes sight deposits (either in checking or deposit accounts), it does so at a null or virtually null cost; but then a financial institution invests such funds that it takes almost for free by granting loans or through financial instruments that have a positive yield. The higher inflation is in the country, the higher that difference between deposit and lending rates is and, therefore, the higher profitability is.
Now, once inflation turns down in Argentina—which has started to happen and will gradually be consolidated—, this implicit subsidy will be dramatically cut down thereby lowering the sector’s profitability and, in turn, making financial institutions have lower profits.
In this context, I believe there are two supplementary paths that the domestic financial system will have to take to face this challenge. Firstly, the sector will have to grow, expanding its scale; to this end, it is necessary to take transactional deposits as well as deposits representing the use of the system as a saving vehicle. Secondly, a full reorganization of financial transactions will have to be carried out to improve the scope and reduce fixed costs of transactions.
Regarding the first item, I am not saying anything new by affirming that our financial system is one of the smallest in the region. For example, while private sector domestic deposits account for only 15% of our GDP, they represent 57% of Chile’s GDP and 62% in the case of Brazil, and 65% in the case of Bolivia. We are even farther from what happens in developed nations, such as Korea, where private deposits account for 139% of its GDP or the United Kingdom, where they represent 140% of GDP or Japan were such ratio stands at 236%.
This phenomenon comes as no surprise if we consider how much the Argentine depositor has been punished throughout history. To illustrate the size of this punishment, you should ask yourselves: how much money would a person that invested $1 in a time deposit 30 years ago in the Argentine financial system and who has successively renewed it to date have today in real terms? Think about it for a second.
Well, the answer is that that person would have less than one and a half cent of that initial peso today. Yes, one and a half cent. That is primarily why the Argentine depositor does not channel his savings through the domestic financial system. That is why the financial system is basically transactional in nature and its total deposits cannot even compare to those of other countries having characteristics similar to those of Latin America.
Clearly, without deposits there is no commodity to expand credit. In other words, Argentina cannot have abundant credit to develop its productive sector if the financial system does not have the commodity to grant it. Therefore, lending to the private sector in Argentina only accounts for 12% of GDP whilst—in GDP terms—it represents 85% in Chile, 73% in Brazil and 49% in Colombia. If we leave Latin America aside, we can see that lending to the private sector in many developed and emerging countries easily exceeds 100% of GDP, like in the case of Australia (172%), Switzerland (171%), and the United Kingdom (140%), to name but a few. I make reference to these cases so we can visualize the potential and room for growth that the Argentine financial system still has.
Why is it important to have a developed and deep financial system? Because it is one of the most important mechanisms to guarantee equal opportunities and development with social equity. The existence of abundant and affordable credit makes it possible for all Argentinians to have essential resources to start their projects and materialize their ideas. If there is no credit, only those that already have funds can invest in their projects. Thus, abundant affordable credit is so important to drive development by materializing projects and ventures of all the population.
Then, what can we do to increase deposits, essential commodity for lending? We need to revert one of the past realities that I have just mentioned. In other words, depositors need to be remunerated properly so that they channel their savings towards the domestic financial system and the financial system can turn such funds into long term lending aimed at stimulating local production.
It is within this context that instruments known as Housing Unit (Unidad de Vivienda – UVI) have gained relevance; these instruments have been fostered by this Central Bank and the recently enacted Law on Saving System for the Promotion of Investment in Housing -“Saving House” (Ley de Sistema de Ahorro para el Fomento de la Inversión en Viviendas “Casa de Ahorro”). This type of deposits allows Argentinians to save in something that preserves the value of the results of our efforts throughout time. It also guarantees long time funding thereby becoming a valuable source to grant loans at even longer terms.
The main characteristic of this initiative in the Argentine context may be observed in the success seen in transactions carried out with UVIs in the short time that has elapsed since they were implemented. Around 10 million pesos in UVI mortgage loans are currently being approved on average on a daily basis. Therefore, this transaction scheme will have a key role in our country shortly.
However, the enthusiasm evidenced in the granting of UVI mortgage loans has not been observed in the same degree in the case of financial institutions’ granting of saving opportunities in UVIs. It is essential to understand that such elements may not exist independently. Nevertheless, I believe that it is just a matter of time until institutions understand that their challenge is to grow and not to be safeguarded under the protection of an inflation tax that, as we said before, only damages society in the short term and structurally.
I will now refer to the second path I mentioned that the financial system will have to take for its development in a context of a falling inflation rate. As already said, the Central Bank will continue registering a restrictive position in monetary terms until the inflation rate reaches its 5% annual inflation target in 2019.
Within this framework of monetary stability with a positive real interest rate, there is a second key change not only in the operation of the financial system but in the entire economic system given that the management of working capital or of inventories is remarkably different if the real interest rate is negative (like in the past) rather than positive (as will be in the future). Nevertheless, banks will have to be with their clients upon the resetting of their transactions that will necessarily take place in view of this reality.
The margin reduction resulting from the fall of inflation will call for an improvement in transactions’ efficiency. In this regard, the BCRA has been taking many measures targeted at reducing costs and debureacratizing financial transactions so that this results in financial services that are more dynamic, inclusive, cheaper, with a better quality and more transparent for all the society.
For example, the procedure to approve branches was eased and practically eliminated. Building requirements for bank branches were reduced thereby facilitating the expansion of institutions countrywide. In turn, and having a more federal criterion, we stimulated the creation of “mobile agencies” and “automated offices” to have greater financial inclusion in such regions where the setting up of traditional bank branches is more complicated. In addition, we have significantly eased regulations regarding cash-in-transit companies (Communication “A” 6002) and the transport of cash itself in order to minimize transactions costs related to these activities and stimulate competition in the sector, which will, in turn, allow reducing operating costs for the entire system and, more importantly, for all financial users. We have also extended the period for the mandatory closing of accounts from 180 to 730 days (Communication “A” 5986), this is relevant, for example, in the case of seasonal jobs, where the use of a specific account is only necessary for a few months a year but institutions were forced every year to close and open accounts for this type of workers. In addition, the BCRA has actively promoted the digitization of all files and dockets of the financial system as a matter of policy to protect the environment and speed up procedures and processes. In this regard, the digital opening of accounts will add to this trend just like the fact that, today, it is not necessary to take checks to a branch as they may be simply deposited by taking and sending their photograph from a mobile phone.
Regarding this issue, it should be underscored that by virtue of Communication “A” 6037 dated August 8, 2016, we finished eliminating most of the restrictions resulting from foreign exchange barriers (cepo cambiario) that hindered and complicated all transactions in the Foreign Exchange Market. Now we have a really more dynamic and free market where exchange transactions are carried out in a much simpler fashion. This deregulation will shortly expand to bureaux of exchange providing a legal framework to transactions that, to date, had many incentives for them be carried out illegally.
This is supplemented by an expansion in the possibility to use deposits in dollars for loans channelled to exporting companies which, in only a few months, increased the amount of funds awarded in this kind of loans from 2.5 billion to over 7.5 billion at present. In turn, it is also supplemented with the fact that, last week, the Trade Secretariat extended the term to settle exports to 5 years. In this way, Argentine companies will be able to, for the first time in many years, use this financing—which is currently granted at rates ranging from 2% to 6%—to operate internationally offering financing to their clients.
The real “Revolution in Means of Payment” that the Central Bank intends to promote takes place in this context, the present and future of this revolution lies at the heart of this event. We, as the monetary authority, see that this process has two supplementary axes: one of them clusters the introduction and implementation of new technologies in the entire System of Payments whilst the other axis focuses specifically on minimizing the use of cash on a daily basis and the total bancarization of transactions.
The Central Bank has been implementing a significant amount of initiatives in furtherance of this Revolution that is intended to take place in Argentina’s means of payment. It should be noted that Argentina, in turn, is a favourable country for this development because, on the one hand, there is high penetration in the use of bank cards. In fact, there are 75 million outstanding cards in the country at present (around 39 million are debit cards and 36 million are credit cards). On the other hand, there is very ample coverage of mobile telephony; around 45 million mobile phones are frequently used out of which 80% have 3G and 4G technology (45% would be smartphones). In other words, the infrastructure to jump to a more digital environment is quite positioned. It is just a matter of being brave enough to use it.
Communication “A” 5982 dated June 3, 2016, was a cornerstone in this regard. Under this regulation, new channels were implemented to transfer funds through the Mobile Payment Platform. The purpose of this measure is to increase the number of payments made through transfers between accounts; to this end, mobile devices—such as mobile phones and tablets—need to actually be “wallets” with which it is possible to pay in shops and carry out other transactions through banks’ mobile applications. Financial institutions were also ordered to provide applications in the form of a “Payment Button” for all clients receiving funds and for which they may receive instant transfers from their respective buyers.
I want to stop here for a moment and talk to the smallest banks in the system. A user may use any bank’s payment button and such bank may charge the user for all transactions exceeding a certain monthly amount. This provides equal conditions in terms of competition for all banks in the system. A small bank could, for example, approach companies such as Carrefour, Garbarino, Rodo, or Coto today and offer them a payment button at a commission below 3%, which is the amount paid today for online sales conducted through credit cards. It is a huge business and an extraordinary competitive opportunity. I am sure that many have already identified this business opportunity.
Finally, financial institutions were also ordered to offer their clients the possibility to make instant fund transfers through security devices to validate their transactions (“dongles”). Several mass consumption companies having large distribution networks visited us a few days ago to tell us they would be giving dongles to all their points of sales to abandon, more and more, the cash circuit.
This set of measures is just the beginning of the real change the BCRA is promoting. The horizon is a society using less use of cash leading to higher security in transactions and less informal economy, and, therefore, a more equal distribution of the tax burden for all the society.
We, at the BCRA, have taken many measures to promote the economy’s full bancarization. In March, it was ordered that all savings accounts be free-of-charge; in addition, such accounts are no longer restricted in terms of amounts or opening, maintenance or renewal costs. In addition, all transfers are also free-of-charge, regardless of how they are carried out—through bank tellers, ATMs, or internet banking in the case of natural persons—; in the case of companies, the minimum amount on which commissions may be charged was raised to $250,000. Furthermore, instant transfers currently pay tribute to their name as they are truly instant and may be made 24x7x36; additionally, debits from source accounts and credits to target accounts will now be made online instantly. Finally, as from Friday, August 26, people may open saving accounts by only producing their National Identity Document (DNI) thereby significantly expanding access to the financial system.
However, this process must be accompanied by strong stimulus to competition in this sector. We also know—as evidenced in the excellent report by the National Commission for Competition Defense CNDC (2) (which I highly recommend that you read it)—that our credit card segment is defective in terms of competition and we must repair this. I think it is important that we understand this, keeping in mind that the target is a dynamic and competitive business as opposed to a profitable business. In fact, we believe that the opening of the market to new players, new methods, the opening of the acquisition market—one of the CNDC’s recommendations—will lead to a much broader market. I am sure that you will all have a better experience in this market, per volume, but, surely, with lower margins per client or transaction.
In turn, this BCRA will do everything within its power to improve the financial service user’s wellbeing guaranteeing maximum standards of transparency and competition. On the same day we removed ceilings and floors applicable to interest rates, we asked that the Total Financial Cost be highlighted; we subsequently prohibited the compulsory charge of a rate on life insurance which simply reduced the transparency level of financing granted. A few days ago we promoted greater competition between banks through Communication “A” 6042; under such communication, financial institutions may open salary accounts at a worker’s request and, consequently, employers’ involvement is no longer necessary. Moreover, this measure also establishes that time deposits may be transferred from one bank to another should the client decide to change banks. Workers then are free to choose the bank where they wish to collect their salaries; to this end, we have also made sure to provide them with as much information as possible about the service conditions of every bank. The information on such services is available and updated on our website; banks have also been requested to inform the commissions charged by their competitors every time they may change the conditions of their services.
All in all, as you can see, we have taken a fascinating and vertiginous trip. We need your bravery, enthusiasm and attention to make this trip gracefully; this trip will be fun, interesting, profitable, filled with opportunities and new things and it will allow the sector to comply with its fundamental role as never before: to build and consolidate equal opportunities in our country.
(1) Kenneth Rogoff (2016): The Curse of Cash, Princeton University Press.
(2) Resolution Nº 17 issued by the National Commission for Competition Defence (CNDC), Trade Secretariat, National Production Ministry, August 29, 2016, available at: http://www.cndc.gov.ar/CNDC_Resol_InvMerc_Tarjetas.pdf..
September 5th, 2016