COPENHAGEN (BLOOMBERG) - After living with negative interest rates longer than anyone else, bankers in Denmark need to prepare for the next big threat.
Lars Rohde, the governor of the Danish central bank, says the finance industry must decide whether the business model it's relied on in the past is fit for purpose in a world shaped not just by negative rates, but also by a new kind of competitor.
"The sector will have to see if the business model holds," Rohde said in an interview in Copenhagen on Monday (Dec 2).
The competitive threat he's referring to comes from technology behemoths. What's more, companies like Apple and Facebook are moving into finance without feeling the sting of negative rates or stricter capital requirements. That could put the finance industry at a disadvantage, on its own turf.
Banks "will be challenged by others without legacy costs", Rohde said. Technology giants can deploy "a distribution system born in another age, with different compliance demands and lower initial costs", he said.
As a result, banks are facing "some quite powerful structural consequences", he said.
In Denmark, where banks have lived with negative rates since 2012, it's now clear that life below zero isn't about to end any time soon. People need to understand that it's "lower for longer", Rohde said. And that will "definitely" have negative consequences for lenders, he said.
The industry has already pivoted towards asset management and other business areas that generate fees, in an effort to cope. At the same time, banks across the Nordic region are trying to set up their own infrastructure for online payments to make it more difficult for tech firms to get a foothold. But years of negative rates, tougher regulatory requirements and, in some cases, out of date technology, have put some banks on the back foot.
According to a report in Borsen on Tuesday, Apple Pay has now established itself as a considerably more popular app among Danish shop owners than a local mobile payment solution offered by Nets A/S, which has so far dominated digital payments within the Nordic region.
Denmark, which uses monetary policy to defend the krone's peg to the euro, has seen an increasing number of banks pass negative rates on to retail customers as the industry tries to adapt to the monetary environment. For now, lenders have drawn the line at 750,000 kroner (S$152,000), which is the threshold below which deposits are covered by guarantees.
Lenders already face narrower interest margins as they compete for corporate customers, the central bank said last week in a report on financial stability.
The Danish Bankers' Association has complained that negative rates have seriously dented profits. But Rohde says the picture is mixed, and points to lower loan losses and higher fees as a result of a spike in mortgage refinancings.
Instead, Rohde has urged the industry to scale back its ambitions when it comes to investor returns. And last week, the central bank pointed out that some firms, including Danske Bank, should focus on topping up their capital buffers.
Ulrik Nodgaard, the head of the Danish Bankers' Association, says the industry faces multiple challenges such as increased compliance costs.
"It will be very important for lenders to focus on costs," Nodgaard said. "But there are no quick fixes."