Second pillar should be made more flexible

PHOTO: Tairo Lutter

CEO of Swedbank Robert Kitt is worried for people’s future and afraid pensioners will not have enough money in 30 years. Instead of talking about abolishing the mandatory second pillar of pensions, it should be made more flexible by allowing people to pay in more than 2 percent.

The CEO talks about the situation of the banking sector, Estonia’s nonexistent capital market, and the future of the economy and banking in this end of the year interview.

Because this is an end of the year interview, I will waive a long introduction and ask straight away what are the three (or more) keywords that best describe our banking sector in 2017?

My first thought is that while things were good for the Estonian economy in the past three or four years, it did not reflect in economic growth figures. We can say that the fundamental situation has not changed, all the trends remain the same, but there were no one-off changes to negatively impact growth this year.

Rather we saw strong tailwinds. This year we saw growth reach the level it could have been at several years ago. Statistics from 2017 finally paints a realistic picture of the Estonian economy.

My question concerned more specifically the banking sector.

Banking reflects the economy. What we started seeing in the second half of 2016 and that continued this half-year is investments. If for the past four or five years the keyword in investments was efficiency, over the past 12 months we’ve seen volume, new products, and new turnover so to speak.

Supportive outside environment has made it possible to generate additional turnover. This has in turn improved company finances. While for banks investing in new volumes means there is business to pursue.

Financing the economy is the main activity of banks, and we have done a fine job of it as a sector this year. We have had things to finance.

We introduced the Smart ID secure third-generation identification solution this year that has found 130,000 users (market total – ed.) in nine months. That is another keyword and a tool that allows clients to identify themselves without code cards. Regulation was passed this year to retire code cards from summer of 2019. We need to be ready for that. We still have a lot of clients who use code cards.

The third keyword is regulation. From European: all manner of capital directives, financial markets directives, the European crisis management fund. Europe-wide directives are bidirectional. Ones are aimed at security, others at competition. The keyword for next year is opening the banking market to payment services providers.

I stand by what I’ve said in terms of there being fierce competition in the sector. Looking at housing loan interest, rates major companies are offered compared to bond markets – these figures speak of competition, and it will only get fiercer.

That is where I was aiming. We have seen the entry of two new banks. While successors of earlier banks, they have vowed to bring new concepts, new energy.

Inbank entered earlier.

I’m referring to Coop and Luminor.

I would say that the two new banks are Inbank, that broadened its scope, and Coop, both of which are aiming for small loans, while Coop is also shooting for accounts. As concerns Luminor, I would say that in a situation where two banks disappear and one bank enters, mathematically we have one fewer bank. However, as concerns focus of activities, we are seeing new players.

I believe competition will become tighter on the payments market – there will be more credit mediators.

To what extent are fintech companies affecting the banking market?

I have a figure for that. We announced our open banking platform, where fintechs can attach themselves to Swedbank, in four countries in early November. If the interfaces match, these companies can then offer services to Swedbank’s clients.

We were contacted by 700 fintech companies in just six weeks that set about testing their interfaces. Of these, 400 are from Sweden, 40 from Estonia, and roughly 75 from Latvia and Lithuania. I would repeat our call to fintechs: contact us and try to link your interfaces. We are ready. Until now, banks have wanted to do everything themselves; the open platform logic is a recent phenomenon. We have two very good experiences from the Baltics from 2017.

Our products, services, and solutions are very much like a fintech. The difference is that we are not allowed to fail. If you’re a startup, failing is expected. Swedbank cannot fail.

Society is worried robots will take blue collar jobs away from people. It seems to me that developments in the field of AI place white collars in even greater peril. Former head of Citigroup Vikram Pandit said a few months ago that 30 percent of banking sector jobs will disappear in the next five years. Do you agree?

I agree completely, whereas the logic is very simple here. IBM’s Watson artificial intelligence won Jeopardy in 2011. This has been widely covered. What has not been widely covered is that IBM was approached by two sectors after the event: surgeons and lawyers. Watson can manage the epicrises of hundreds of thousands of patients in a single smartphone. No doctor can do that.

Banks mostly have standard solutions. The sector is openly talking about automatic credit decisions based not on artificial intelligence, but simply algorithms. I believe that robots used by white collars are still macro software in charge of routine processes, but it’s just one short step away from AI – someone will learn the rules and answer the phone.

SEB has said it is working on AI. What about you?

(As a throwaway line) So have we.

Returning to more earthly topics, I must ask you, as someone with a financial markets background, what do you take away from the situation of our financial and capital markets. News seems twofold. The Eften real estate fund was recently listed, while three banks have promised to follow suit inside three years. At the same time, recent news (sale of Tallink – ed.) suggests a third of the market value of listed companies might disappear soon.

The government has also agreed to list two infrastructure companies. I don’t know how far along are these processes.

One of them is quite ready, while there is doubt concerning the other.

Let’s start from the beginning. We do not have a capital market. We cannot say it is poorly developed as we just don’t have one.

I’m not talking about resuscitation but rather a qualitative new turn. We have savings now. Second pillar pension funds are worth €3.5-3.6 billion plus the third pillar, and these savings are looking for investment opportunities closer to home, things we know better. We need demand, which pension funds kind of offer. Supply. Do we really lack business plans in need of financing? The stock market is a place of involving capital by definition. We do have business plans. The problem is that our companies are too small, they do not qualify for the exchange. They cannot observe the reporting requirements.

Things could be improved by concentrating on corporate governance. We would not even have to list state companies; we could just have non-strategic companies comply with the Tallinn exchange’s reporting obligations. What could it hurt if State Real Estate AS published all its decisions in accordance with stock exchange rules.

Listing is a little more complicated. There is often talk of changing ownership relations, or listing of share capital. We have major energy companies, Eesti Energia, Elering. Why couldn’t they list their bonds on the market? Yes, I know it is difficult for the CFO; however, it improves environment. Estonian people would also gain realistic alternatives for relatively safe investment.

There are many steps one can take before an IPO of Port of Tallinn and Eesti Energia, while I have heard of no one wanting to take them.

The second pillar of pensions has been criticized virtually since it was created. Recently, we have heard calls to abolish it or at least stop state payments. What is your take?

The demographic situation in Estonia is such that even without population decrease, the relative importance of working-age people will continue to fall. All forecasts suggest the situation will only get worse. It would be entirely irresponsible to take saving away from people in this situation.

We need more savings, not less. The second pillar should be made more flexible. People could have the chance to pay more than the current 2 percent. The 6 percent currently sent to the second pillar allows for modest capital accumulation.

People live longer. We just talked about Watson helping to fix up people, which is why that money will be even more necessary.

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