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Banks’ digital transformation: where do we stand?

15 February 2023

Technological innovation triggers structural change in all areas of the global economy, and banking is no exception. Digital transformation is not just an option any longer for banks, but a necessity to remain competitive and continue meeting customers’ evolving demands.

There is no single understanding of what “digital transformation” exactly means. Still, it emerges as a broad concept embracing business models, processes, resources, and the cultural changes that the adoption of technologies enable.

While ECB Banking Supervision will maintain a neutral approach to business models and technology, one of the key supervisory priorities is ensuring that banks properly manage the long-term sustainability of their business model and the risks stemming from digital transformation.

As supervisors, we believe that banks can thrive thanks to opportunities opened up by digital transformation if, along the way, they prove capable of properly facing inherent challenges: strategic and execution risks, technology-related and operational risks as well as potential new emerging threats. Those risks need to be consciously identified, assessed and mitigated via upscaled governance and risk management frameworks as well as investments in capabilities.

In a first harmonised attempt to build supervisory knowledge at European level, in 2022 ECB Banking Supervision[1] launched two initiatives in this field. First, it engaged with consultants, banks, banking associations and technology companies to gain a general overview of market trends. Second, in the summer it conducted a survey among 105 large banks under direct ECB supervision to assess the status of their digital transformation.

The results of the survey vary across banks and further dialogue is needed to fully validate their self-assessment. Still, the survey itself and the market outreach already reveal some interesting trends worth highlighting and probing further.

The results relate to six focus areas (further details are available in the full overview):

  1. Digital strategy and KPI steering: almost all European significant institutions have a digital transformation strategy, although the degree of maturity differs. Main objectives are becoming more customer-centric in how products and services are offered as a lever to increasing revenues and improving operational efficiency by automating processes and modernising IT infrastructures. Most of the banks however still face challenges in developing Key Performance Indicators (KPIs) to monitor digital progress, quantify the impact of digital transformation on their profitability and track effectiveness of implementation.
  2. Digital business: most digitalisation strategies are focussing on improving the customer experience and offering digital services and products 24/7. However, keeping track of digital customers and sales remains a challenge.
  3. Investments and resources: most banks do not yet have a dedicated digital transformation budget, but on average one fifth of the IT budget is spent on digitalisation. Adequate financial investments and talented staff are confirmed as key success factors.
  4. Governance and cooperation: are key enablers of digital transformation. Banks themselves recognise the importance of setting an adequate tone from the top and an effective internal control framework. Having sufficient IT experience both in the board as well as the second and third lines of defence remains an attention point.
  5. Use of innovative technologies: cloud is most commonly used and seen as a foundation for the use of other technologies. Also, application programming interfaces (APIs) and artificial intelligence (AI) are used by most of the banks with increasing business relevance. Distributed ledger technology (DLT) on the other hand, is only used by a very limited number of banks, with crypto-related activities and related exposures being very insignificant so far.
  6. Risks: as banks open up their IT infrastructures and increasingly rely on third party providers, they face heightened risks of third-party dependency, money laundering, fraud and cybersecurity. These risks require further monitoring and must be taken into account in banks’ governance and risk appetite frameworks. These risks are also among the supervisory priorities of ECB Banking Supervision for 2023-2025.

In our upcoming supervisory activities, we plan to continue our work on digital transformation by complementing this preliminary analysis with further investigations in specific areas that require further attention. These include targeted reviews and on-site inspections, which will be conducted in the course of 2023 and communicated publicly via the supervision newsletter and website.

The results of those investigations will be part of our supervisory dialogue with banks and pave the way for shaping supervisory guidance and expectations in the coming years.

  1. The European Central Bank together with National Competent Authorities


European Central Bank

Directorate General Communications

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