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The first lesson from the pandemic: state-of-the-art technology is vital

Blog post by Pentti Hakkarainen, Member of the Supervisory Board of the ECB

8 May 2020

Numerous predictions have been made over the years about when and how an increasingly digital society would provoke the technological transformation of traditional banks. The current pandemic has fast-forwarded us to the future. This crisis has revealed the need for banks to fully embrace the latest technology – or risk going extinct.

Technology has kept the show on the road

During this crisis, the sustainability of businesses has hinged decisively on technology. Banking is no exception. With the vast majority of people forced to work from home, banks have had to rely on digital and remote solutions to handle their daily business and continue to deliver their services to clients.

Naturally, banks that had a strong digital presence were best able to cope with the lockdown demands. Most of these banks were, in fact, already running all their operations online and relying heavily on automated front and back-office processes. And as physical branches and retail shops were temporarily closed, providers of digital payment solutions, bank account services and online financial products were able to continue serving their clients. Some of the most advanced providers have even attracted new customers by offering swift client onboarding solutions.

But this new reality clearly raises additional challenges. As banks transfer their processes to contingency environments, many of which run on outdated security systems, their exposure to cyber threats increases, as does the risk of IT failures. Nonetheless, the largest euro area banks have so far maintained robust operational resilience, and even as malicious activity spikes, they have not suffered any major setbacks.

ECB Banking Supervision has had to adapt as well. Relying on our substantial experience with remote working and virtual meetings, we smoothly switched from a physical to a virtual workspace, we further equipped our staff with hardware and software for remote working, and we rolled out a series of web-based training courses to inform our staff on how to use our IT systems securely from their homes. We scaled up our internet bandwidth capacity. And we are in regular contact with the national central banks and supervisory authorities to keep a close eye on digital security threats across the euro area.

This crisis creates opportunities to accelerate digital transformation

The first months of this pandemic have forced some lessons on all of us – and banks are no exception. Those coming out of it in good shape will have learned how to ensure operational resilience while running operations in an entirely digital environment. They will have designed risk management processes that will remain relevant in the face of heightened cyber and operational risks. They will have tested their automated wealth management models through extreme market volatility. And they will have upgraded their digital channels and their operating models to the new, digital normal.

Of course, the trend towards digital was already well under way in the banking industry long before this crisis. Customers were increasingly using digital platforms to conduct their banking operations and attaching a higher value to convenience, customer-friendly apps and cheap banking products. In fact, convenience is now one of the most important factors for customers when choosing their financial services providers.

These preferences have been magnified by the current crisis. To enlarge their customer base and face up to the competition generated by newly licensed and digitally-savvy providers, incumbent banks will need to scale up their digital solutions. At the same time, they must also retain the ability to provide personalised, face-to-face services to some of their customers, in particular wealth management and advisory services.

As new non-performing loans loom on the horizon and pressure on chronically low banking profits mounts further, the need for banks to cut costs will be more pressing than ever. Most banks seem to have concluded that investing boldly in innovation and building their digital presence is critical for the sustainability of their business models.

However, ambitious digitalisation plans are not always matched by the size of banks’ innovation budgets, and proposed improvements can face challenges and delays in execution. In addition, banks need to ensure that they allocate sufficient resources to data and cyber security.

The circumstances created by this crisis will bring all these issues to the fore. Strategies that forego investment in innovation and instead focus on short-term fixes for legacy IT systems will cost banks dearly. To succeed in the race to digitalise, banks must continuously invest in building skills and expertise in the use of new technologies – at both operational and board levels. It is also crucial that banks firmly embed their innovation strategies at all organisational levels, and closely monitor them through both financial and non-financial metrics.

How will tech shape the future of the banking sector?

Although we cannot be sure about the long-term implications of this crisis, there is one thing we can be fairly certain of: digital is here to stay. Digitalisation is and will remain fundamental to the way that financial services are delivered.

The importance of digital was undeniable long before the crisis, and growing every year. Since the revised Payment Services Directive became applicable in January 2018, an increasing number of innovative regulated entities have entered the market and heightened competition in the banking sector.

Fintech firms and bigtech companies bring entirely new elements to the financial services business. They are not burdened by legacy IT systems and large branch networks. They can unbundle the fully integrated banking services currently provided by incumbent banks into their component services, and serve the market for each of these separate services in innovative, more convenient and more efficient ways.

The latest data on small, digital-only banks demonstrate their cost efficiency. They have an average cost-to-income ratio of 47%, which compares favourably with an average of 73% across all less significant banks. And they are more profitable, too. In 2018, the return on equity of these digital banks was 19.6%, up from 7.2% a year earlier. Traditional small and medium-sized banks in the euro area, on the other hand, yielded a return on equity of just 4.7%[1]. However, we should bear in mind that there are still only a few digital-only banks in Europe, with widely differing operating models and results, and at different stages of development.

Profitability indicators thus clearly show that digitalisation offers a route for traditional banks to cut costs. It can streamline and speed up their internal processes through improved computing capabilities and increased availability of data – and thus restore some of their competitiveness. As proven by this crisis, those banks which have been faster in deploying new technologies to improve the quality, pricing and convinience of their products are in a more future-proof position.

And as banks become more digital, supervisors too should be prepared to deal with heightened operational and cyber risks. In ECB Banking Supervision we are working hard to adapt our methodological toolbox and adjust our supervisory recommendations across all prudential risk categories to this new, fully digital reality.

First, we will continue to monitor banks’ capability to implement their business continuity plans in the current circumstances. Banking services becoming unavailable, or major cases of fraud, could have serious consequences for customer satisfaction and trust, and this could create prudential problems.

We must also keep a close eye on new emerging risks. For example, with banking operations running remotely, concentration risks are heightened. Banks must retain control of their operations and avoid becoming too dependent on certain technology and IT infrastructure providers, including cloud services. Outsourcing arrangements must have clear terms and conditions and allow banks to monitor the performance of their providers at all times, as well as ensure the protection of their customers’ data.

Moreover, banks’ boards and internal control functions must fully understand the main risks related to innovative technologies and the operational challenges associated with this new and more digital normal. Banks’ IT systems must be resilient enough to withstand the current heavy reliance on remote working and servicing. There must be robust cyber incident protection procedures in place adjusted to the new remote working conditions to face up to the heightened cyber threat. And finally, banks need to step up their investment in real-time backup systems so that they can keep customer data secure.


Everyone has had to adapt quickly to being fast-forwarded to the future. Banks that were ahead of the digital game have had an advantage navigating the transition to a remote environment. In a future where banks continue to struggle with low profits, high costs and fierce competition, they have a responsibility to implement credible innovation strategies that meet changing customer demands while managing new risks responsibly.

Banks should start on this today. Because this pandemic has made one thing clear: the future is already here.