Interview with Brian Hayes, CEO, Banking & Payments Federation of Ireland (BPFI)

01 Jun Interview with Brian Hayes, CEO, Banking & Payments Federation of Ireland (BPFI)

Q: Ireland’s financial services sector is one of the country’s largest and well-established industries. It packs around 430 companies, including 20 of the top 25 global institutions. Ireland has seen massive growth in recent years in terms of GDP, with it now being the only nation in the EU to see projected positive growth rates this year. To begin the interview, how important is Ireland’s financial sector in boosting the country’s wealth and growth?

Brian Hayes: It’s crucial to Ireland’s success story, because the traders’ financial services sector in Ireland has grown exponentially over the past two decades. We’re about fifth within the European Union in terms of the size and scale of our financial services sector. Everything from  asset management to wholesale capital markets to the presence of very significant international banks here to our own banks and the footprint of financial services is crucially important. And then, when you add in the presence of so many big international financial services players with the presence of enormously big digital players, you get the potential for a kind of fintech hub. So you have very significant financial services, very significant presence on the digital, and both play off each other and create the opportunities that are here.

Ireland success story has been predicated on the exporting of goods and services, because we’re a small country, we can’t consume that which we produce, we have to export it. The presence of the European Union, being in the Eurozone, has really changed our dependence on the UK and created a much bigger market to play in, and we’ve shown that we can be open and we’ve shown that Ireland is a gateway into Europe for many US businesses: we’re a common law jurisdiction, we speak the English language, and even in the aftermath of Brexit actually the opportunities are really significant for Ireland. So financial services is a big part of the success story. I speak regularly to our CEOs within the international banking sector, from the biggest SSM banks, euro denominated SSM banks, to smaller national based here. They’re all in the process of expanding their operation. Where they may have come to Ireland 20 years ago as part of a cost reduction strategy for their group internationally, now they see Ireland not just as a place for cost reduction but a place for revenue generation. And a lot of what we’re seeing in recent times is this expansion of the international traded service sector. We have to be nimble, we’ve got to be quick, we have to be aware of it, because there’s a lot of competition in other parts of the Eurozone for this.  So Ireland has to be on its game, in not only keeping those who are here, but attracting more in and making sure we have the right skill-base, talent-base and the right mix of accommodation and tax offering, all of which is important in terms of making decisions in what is a very competitive global market. So we can’t rest on our laurels, we have to keep working at this and not take it for granted.

Q: How important is the Irish financial sector on a global scale, what kind of international influence does it have, and what needs to be done to compete with other financial markets?

Brian Hayes: It’s a crucial part of the EU offering. I was an MEP for five years, I’m member of the ECON committee and I can see that competition is crucial for the European Union to keep everyone on their toes. Things that were really important in Dublin like securitization, for instance, which really took a major dive after the financial crisis 10 years ago, that is now back in vogue because Europe wants to build a capital markets Union. There’s huge specialization, huge talent-base here for that. Those important ingredients for success like wholesale markets, deep liquid markets, securitization, are part and parcel of the EU agenda for capital markets union now. We’re just trying to encourage non-bank lending and encourage EU citizens to invest their savings in trying to build up new funds for new and emerging businesses in Europe. I try to really provoke venture capital, seed capital, so that Europe becomes a good place for entrepreneurship and becomes a place where big new businesses can be formed, nurtured and grow. 

There’s a lot of skill-base here within the financial services sector for that. And, traditionally, maybe Dublin grew out of the funds area encouraging investment products in certain areas. We have now to look to new opportunities. Huge amount of work is going in sustainable finance. For instance, more recently, for a very significant EU bond, a green bond, half of the loan origination happened in two businesses here in Dublin. The financial engineering behind a lot of the new products that are required to roll out sustainable finance, to roll out capital markets union, to be world leaders in securitization, all of these skills are present here in Dublin. A lot of those skills come from the international presence of banks that have been here for a long time.

Q: BPFI spins a massive web connecting all of Ireland’s financial institutions and services companies. Its importance in supporting companies and advocating innovation is paramount in Ireland’s overarching economy and connecting Ireland’s economy with the rest of the world. Can you give us an overview of BPFI’s operations in Ireland, and what parts of the organization do you see as crucial in this day and age?

Brian Hayes: We represent the retail banks here in Ireland, our major shareholders, and there are issues around the retail banks. We represent obviously the international banks here in Ireland, we represent the fin tech ecosystem here in Ireland, we represent the payment service companies, which is a huge growing sector, for EU and US payment service companies that have established Dublin and Ireland as their hub.  We also represent credit servicing firms and non-bank lenders as well. So we have the whole kind of ecosystem of banking, payment, fintech, all together.

The big driver is the adaptation and change agenda across the whole sector. We’re seeing as a consequence of COVID that has just multiplied in terms of the rapid change and use of technology: how branches are no longer as relevant as they were in the past to banks, how fin techs can help banks to sell their services online, how online banking has revolutionized the way in which people have relationships with clients, how fin techs can be used on things like AML, anti-money laundering, and things like compliance, and how we work on the instant payment platforms which are now so essential parts of the infrastructure within modern banking and modern payment. 

We’re members of the European Bank federation, long standing members of the EBF and we’re very much plugged into what’s going on in Brussels, in Frankfurt, obviously. This is a presence for our SSM banks which are retail but also SSM banks that have chosen Dublin as their head office for Europe, such as Barclays and also Bank of America; City Bank, another U. bank, is here over 30-40 years. So Dublin is growing in the number of SSM banks which, given the kind of direction of travel of banking in Europe, with the consolidation agenda, is good in that we have a large number of big players, which you need to have in a small market.

Q: Dublin’s financial sector has attracted more than its share of major international institutions to Ireland’s shore. What reasons is Ireland a good place to set up shop as a finance company, and how is BPFI looking to continue swinging the trend? What does BPFI do to directly support the Irish population? 

Brian Hayes: We’re strong advocates for our members across European engagement and national engagement with government here, but also with the Commission and the European Supervisory and Regulatory system, so we’re strong advocates. We recognize that change is already well underway within the sector in terms of the digital transformation and platform. And we’re also working on things like non-competitive bank collaboration, which also applies in other markets, instant payment being one, shared database being the other, and the establishment of an ID utility. We’re also encouraging our banks with diversification. We think that diversification into new product ranges new opportunities across the wealth market, pensions potentially, insurance; all of these areas will help to build up capacity within the financial sector here.  

We’re very supportive of what our international banks want to do, where they build out new opportunities, those who have come more in recent years because of Brexit and those who are here longer, how we can help in that agenda. We would be a very strong voice within the European Banking Federation, within the system or open markets, non-protectionist policy, competitive policy, seeing Europe as a kind of a gateway to the world. I’m trying to encourage that kind of policy drift in Europe, which is about an open Europe. The loss of the UK, in terms of financial services, is a significant loss. We’re ambitious for a strong UK-EU relationship of financial services in the future. We welcome the memorandum of understanding between Commissioner McGuinness and the British Government and we hope it will lead to further engagement. If we really want to have a strong capital markets union in Europe, we should work in partnership with the UK in so far as we can, and provide the kind of standards that we want to see in our financial services. The euro key issue is around financial stability. Europe and Ireland especially has gone through, 10 years ago, a terrible financial cliff-edge with the financial crisis. It’s really important that we learn the lessons, that we’ve well capitalized banks, well liquid positions, diverse banks that are operating under a cultural system that is clear for all to see. For instance, the government plans to introduce a new Senior Executive Accountability Regime, what we call SEAR which we’re broadly supportive of. It’s important for the future of financial services, not only that they’re well drawn, diverse and competitive. But, also that there is this system of accountability within them and strong financial stability, because that’s really important in terms of the future direction of Ireland and other small economies in Europe, which have built up a strong financial services sector

Q: The Covid-19 pandemic has caused unforeseen economic chaos and forced industry players of all kinds to streamline systems, cut excesses and completely renovate the way of doing business. What major sectorial economic crashes have most affected Ireland’s financial sector – be it aviation finance, investment management, real estate or others – and how is the financial sector reacting to promote regrowth?

Brian Hayes: Banks got a lot of things wrong in the past, but certainly the response to COVID was not one of those things. They moved quickly and consistently in putting in place payment breaks, which helped thousands and thousands of customers, private individuals, corporates and SMEs. It was as much an income liquidity support as it was anything else. Obviously, the cost of all of this will have to be worn out because of the loans that go bad. We know that across the banking sector alone 3 billion has been set aside for the provision of COVID-related loans that go bad. Really it’ll be the tail end of this year, going into next year, before we see the full extent of that liability in terms of MPEs and exposure of the banks. But I think the banks are so well capitalized now they can withstand even a very significant shock that will come from non-performing loans into the future. 

The other advantage of Ireland has, going into this crisis, which is under reported, is that, once the financial crisis hit 10 years ago, many businesses deleveraged their position. They actually paid down debt, had a smaller business in the future and they also built up significant cash. So they’re going into this crisis with less debt than was the case 10 years ago, but significantly greater amounts of cash. On one level it’s quite an efficient way of using capital to be relying on your cash for your investment, rather than taking out new credit. But going into this crisis that, actually, in the most exposed sectors, like transport, tourism, food distribution, hospitality, accommodation, in many respects they had to deleverage their position, sector by sector. That’s an advantage for all these businesses that make it through this period and when the government supports have to be unwound which they will, those that can get through this, will be coming from a position of not having huge amounts of debt, but also coming from a position of having some additional support to their own cash reserves. What would be crucially important, now in the post-pandemic period, will be to encourage the formation of new credit and encourage businesses to take out lending again, to get their businesses up and running again, to get their businesses invested in long term investment for future growth and export orientation. We think that’s going to be really important, given the fact that credit formation in recent years has not been as significant as once thought. There will be a price to be paid for this, there is no doubt. 

But there are other opportunities. The economy is going to grow something like 4-5% this year and next year, and there will be super opportunities from that. If you look at the area of sustainable finance, the government recently produced a law here which will get us to net zero carbon by 2050, and most of the heavy lifting on that must be done between 2018 and 2030. There’s an estimate recently in Ireland that about 130 billion of additional investment will be needed for that transition to occur to get to the net zero position. If only 20% or 25% of that will be by way of subsidization, the great bulk of it will be done by the banking and non-banking sector. So there are opportunities from the investment in a clean future. It will be hugely important for green bonds, green mortgages, green business loans and how we get that mix right in terms of the future viability of industry. 

Q: Following the March 31st deadline, financial firms operating in the UK from the EU and vice versa needed to restructure their cross-border business and effectively move into the respective markets. Alternatively, trade with Ireland’s closest trading partner fell 47% in the first month of Brexit and has been lagging. What impact has Brexit had on Ireland’s financial market, and what kind of changes were necessary to continue doing business?  

Brian Hayes: On the Brexit side it’s been nothing but a positive outcome in a sense, because we’ve seen businesses relocate here, we’ve seen new opportunities here. And it’s in Europe’s long-term interest that we have not just kind of Berlin and Paris as the main centers, that we have an Amsterdam and a Dublin and other centers. It’s really important for competitive offering on financial services across the EU. 

So regarding the Brexit issue, for financial services, we were well prepared, great operational resilience. There really were not major glitches. The Commission and others put a lot of resilience into the system and the Central Bank of Ireland helped in terms of working out some of those positions that needed a bit more time as existing decisions were extended beyond 12 month or 18 month-period to help our industry here. We keep a close eye on it. But the Dublin-London relationship will still be strong. We take our lead from Europe on this. And groups like the EBA, the SSM and ESMA, all of these, as going forward, will be watched closely here, as we work with all of our regulators and supervisors to have a really safe offering. On that level it has worked out well. The bigger challenge will be in agri-food and agri-services. 

There are also unintended consequences from Brexit. There will be significant change in trading platforms and trading routes. We’re already beginning to see more and more business particularly trading into the EU, wanting to go, rather than the land bridge across the UK which was the traditional route, but choosing now to go directly into the continent from new ferry routes that are opening up which is very interesting. It’s really significant that kind of direct route into the continent that has emerged. 

But probably the biggest negative effects could well be on the agri-food sector as it trades into the U.K. because the UK is a major player for our beef and dairy and many other aspects of our agri-food industry. But financial services worked well and the firms have shown a huge amount of work that went into Brexit planning, all kinds of worst-case scenarios. They’ve done a very good job, particularly during COVID but also as a consequence of the Brexit

Q: U.S.-Ireland relations have reached an all-time high. Ireland is now the ninth source of foreign direct investment into the States, and vice versa the US accounts for 20% of employment in the Emerald Isles with growing investments to the tune of $444 billion in the country. How has Ireland historically grown its financial relationship with the U.S., how significant is the bond, and what main reasons are the two economies so intertwined?

Brian Hayes: It’s really significant. The US-Ireland relationship is so important. But it’s not one way as you say you. Irish businesses frequently looked to United States as much as they looked to Europe and that’s really important for Europe.  A former Prime Minister here spoke about Ireland being an island between the continent and America. We have a very close affinity and connection with the Americans, because 40 million Americans are from Irish lineage. That’s very important for businesses and it’s a very important backdrop to the relationship. And it’s been to Ireland’s and the United States’ mutual advantage to have this relationship. We see the relationship going from strength to strength and I don’t think it changes because the Democrats either the Republicans are in government, on the contrary. We know President Biden regards himself as Irish. 

People abroad forget one thing about Ireland: this country has gone from a 1 million people to 2 million people that work over a 20-year period. There’s no other Western European country that has doubled its labor force in such a short period of time. When we joined the European Union, average pay in Ireland was 40% of what the average was in the rest of the European Union at the time. Even now, when a much bigger European Union, we are 25% more than the average in the rest of the European Union. When we joined the European Union 18% of our 18-year old cohort went to college, now it’s 65%. It’s been a combination of using the connections we have in America, a competitive offering here in terms of tax, and also a big investment in skills and education. We used the funds we obtained in the earlier part of the EU relationship for good effect. We invested in human capital in as much as we could have invested in roads and infrastructure. That helped really to sustain the economy in the most difficult of times. The numbers behind Ireland’s success story, it’s not just today or yesterday; it’s going back a number of decades. Most politicians accept that and realize the significance of that. 

Will that change? Things always change, so Ireland needs to be on guard, it needs to work hard, it needs to be as a Eurozone country. Ireland’s long term stability is predicated on adapting to a strong Eurozone economy. The kind of fiscal rules are important to Ireland because we have an economy that goes up and down very quickly and can create a lot of shock, because we don’t have a kind of domestically focused economy; we have an external economy. So it’s very important that we build in shock absorbers to the system or the economy goes down and we’re affected more dramatically. 

There is another big advantage for Ireland.  17% of the people who are here weren’t even born here. Ireland has become a magnet for employment for lots of European Union citizens and the population is growing quite radically actually. If the economy continues to grow, we will continue to grow as a population. Now it seems to me that growing populations is what Europe wants, especially younger people, particularly in the older parts of Europe. Because with younger people we have social entrepreneurs, we have new ways of looking at things, we have new business people, we have people who are prepared to invest and take risks. That’s the kind of mix that Europe needs frankly. And Ireland has this kind of attitude that in some way has a foot put in Boston and a foot put in Berlin in the sense of understanding how Europe is so significantly important to us as a relationship, but equally understanding the activities with the United States, and Irish people appreciate that.

Q: Recent digital advances have affected everything from the sale of boots to advancements in medical science – and the financial sector is no different. New innovations in fintech, big data, AI and blockchain have created platforms for greater efficiencies – but have also created a race to implement these new strategies to stay competitive. What are the biggest changes that the digital revolution has brought to the finance sector and what is BPFI doing to promote implementation of fintech in Ireland?

Brian Hayes: Obviously, on the digital revolution, you’re seeing it in online banking. Two years before the COVID stroke there was a reduction in ATM cashiers by 60%. Increasing the thresholds of contactless payments we’re seeing extraordinary rises in online payment. That brings challenges: potential fraud areas, anti-money laundering challenges, cyber security issues or issues to do with resilience. But that’s the direction of travel. So Ai, blockchain, fintech, data analytics, will be so important and are so important today. Underwriting that used to happen by human being is now being done through Ai, making an application for a mortgage end to end. Digital platforms are now becoming more normal.  We’re introducing later this year an instant payment platform that everyone can join, all payment service companies acquired everyone can join. That will make instant payments, to bank to bank, to non-bank, to credit cards, happen instantly, and then the potential for that to be rolled out across, what we call the P2B or the person to business sector as well. 

So we are moving towards that kind of cashless society. It will take some time to get there, but there are great efficiencies from that and there’s also a great opportunity to radically improve the relationship between the bank and an individual through their App, through their online, through their e-wallet or through all of the new technology that’s there.

One area that Ireland needs to improve is to have a skill-base ready to tap into the jobs that may emerge and to really be at the cutting edge. We need to have a very sharp focus on that. So we’re working closely with policymakers and with universities to make sure we have the right courses for the opportunities that many of these new jobs in fintech and data are going to present. We’re working constantly with our members on all these issues. Sometimes things can take a long while for change in the bank, but they now realize that the kind of opportunities of new digital fintech players is absolutely crucial towards their own viability into the future.

Q: In Ireland, consumer trust in digital banks has risen sharply. Recently AIB, Bank of Ireland, Permanent TSB and Belgium’s KBC joined forces to launch a digital payment app to compete with other digital options such as N26 and Revolut. What impacts have the rise in the use of digital banks had on traditional institutions? 

Brian Hayes: It concentrated the mind of the traditional banking sector to be more nimble and to invest more in digital transition. They have now done that in Ireland and hopefully later this year we will launch our own instant payment solution; the N26 and Revolut everyone else can join, which will be good for everyone. The other thing is that people like the experience of the digital app. They like the customer experience. And banks have been very much focused on delivering something similar within their own traditional payment channels, platforms and distribution system. It’s a combination of people, online, phone contact, and branches together. But then certainly it will transform the kind of distribution model the banking sector has for the purposes of getting a good outcome.

Q: Your long career as a public figure in government and finance is downright impressive. In an interview with Deloitte, you mentioned a planned move from politics to the private sector at the age of 50 – and here you are! You’ve held the reins on BPFI since May 2019 during a tumultuous time – no small feat! What past experiences in your career have been the most significant, and which ones are helping you the most with the role you hold today?

Brian Hayes: I was Minister of State at the Department of Finance for nearly 4 years, and it was during probably the most challenging period of time the country has ever gone through, We were in the midst of an IMF-EU program, where a lot of public sector reform and financial measures had to be employed to get the economy back on track again. It was a very intense period. I learned a lot from that experience about the need to have balanced budgets, the need to always be open for the private sector and the need for Ireland to remain globally focused, to be a kind of a strong beacon within the EU for competitiveness, openness, non- protection, but also a global approach to business. 

Ireland has really grown up because of the European Union; we owe so much to the European Union. And Ireland can be, because of our experience, a beacon to other smaller member states, where their economies may not well have developed in recent years, particularly in the East of Europe. That can help that there’s Ireland as a small country that has developed so rapidly, we can’t take for granted that development. But competition is important in the European Union. Creating new areas of competition is important for Ireland as it is for the European Union for everyone to remain on their toes on all these issues.

 My experience has taught me that Ireland, to be strong, needs to be absolutely the epicenter of the single currency in Eurozone, needs to follow and lead that debate on Eurozone integration. I’ve also learned the importance of balance budgets, as I said. I’ve lived to two major recessions in my life; we don’t want one again. That means you need to put money aside for a rainy day to kick whenever the bad day comes, and invariably it comes because of economic cycles. So they’re the kind of things I’ve learned in my political career, which are just as important for the private sector.

Q: Final Message. 

Brian Hayes: Ireland is open for business. And we need to get confidence going again. We’ve just come through a pandemic, it was no one’s fault per se; it happened, it could happen again. We need to learn the lessons of what we did right and wrong in the last 12 months and build for the future. What the European Commission is now embarking upon in learning those lessons is really important, not just the Commission but indeed for everyone, every member State in the European Union, and also think it shows the importance of solidarity across our Union, which is challenged by the rise of populism and neo nationalism. 

I’m very confident that those of us who have a global view of the world and believe that economics is important on a global basis, and why we need to be competitive and strong. Those who hold those positions, that’s the future of the European Union. We need to have much greater growth rates in the European Union, much greater agility. And we need to really find ways of encouraging our citizens who have funds, to invest in Europe and in our businesses and the future of those businesses, to build up equity in businesses which can then invest in technology and digital transfer and skill base, to really become world leaders. That requires less demand in the State and more demand in the private sector, to return equity to people who invested in businesses.

That’s a message not just for Europe, especially at this time where we’ve seen lagging rates of growth in some European Union member States and across the Eurozone. Ultimately, we are at some point on a move beyond Quantitative Easing and the lower interest environment, which has made investment more challenging because there are very little returns. And we need to do that in a sustained way. One of the outcomes of COVID could be this notching up towards the 2% inflation retarget which the CBS said. The best way to get rid of debt is to inflate the economy, and that means from the center out to buy goods and services, to get prices going in a moderate way, but in a way that helps reduce debt. At some point quantitative easing will end as we get closer to that magic threshold of 2% which needs to be reached. As we do that we can then leave behind the kind of debt-burdened economy to one side and really go for a more internationalist and growth-orientated strategy.