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Digitalisation in European banking: no time like the present

Keynote speech by Pentti Hakkarainen, Member of the Supervisory Board of the ECB, at the 28th RegTech Convention

Frankfurt am Main, 23 November 2021

One of the mantras of banking supervisors across the world is technological neutrality. In other words, supervisors should not be influencing banks’ decision-making when it comes to technological strategy. Such decisions are best made in the private market, by those who will ultimately deal with the consequences.

The ECB subscribes to this approach. Nevertheless, while we are neutral, we are still paying close attention. In my remarks today, I will explain what I personally see when I look across today’s technological banking landscape in Europe.

I will note that there is a certain inevitability about the continued – and likely ever accelerating – technological change in the banking sector. And I will argue that the impact of these changes will generally be positive for banks’ customers, who will benefit from better and more convenient services, and for the economy at large.

However, for banks, the trends associated with technological transformation will not all be benign. For business models to remain sustainable, banks cannot afford to stand still when it comes to technology. Customer demand for convenience will inevitably increase, so banks should feel a sense of urgency to push their work on digitalization forwards as fast as possible.

The inevitable drivers of modern customer demand – convenience and choice

Customer behaviour has been moving towards more digitally oriented consumption of banking services for some decades now.[1] It was already clear before the coronavirus (COVID-19) pandemic that the move away from branch-based banking towards online banking was well under way.

The pandemic has accelerated this existing trend.[2] Some of the innovations that were already available to banks’ customers – in particular contactless forms of banking and payments – suddenly became very attractive when social distancing was the norm.

In this context, the European banking sector has seen the number of digital users increase by 23% since the start of the pandemic.[3] This reinforces the banking sector’s position as the industry where customers are most willing to connect with their service providers via online channels.

In some ways this is a testament to how well banks have managed to build and retain customers’ confidence that online services can be delivered conveniently and effectively. Recent surveys on digitalisation confirm that bank customers broadly approve of innovative banking solutions. Respondents report a high level of satisfaction with banks’ online services, which they see as easy to use, fast, and delivered via attractive websites or apps. For these reasons, it is perhaps not surprising that of those who switched to online banking during the pandemic, 87% plan to continue using banking apps after the risks associated with the virus recede.[4]

It is similarly unsurprising that use of online banking is higher among young people. Even my generation quickly understood the advantages of digital banking, especially in terms of convenience. However, it took time to change our old habits and beliefs, and this slowed down our shift to the most modern applications. For the digitally native younger generations, online is the default option. They expect financial services – like other online services – to be available without any extra effort.

So, by this point, it is clear that European customers have for some time been on an inevitable path away from traditional physical branch-based banking and towards online and mobile alternatives. It is also clear that this will mean that online service applications must become more and more convenient.

Implications for market structure

One of the implications of this online shift relates to the structure of the banking market. As customers have become more willing to consume all kinds of products online, they have also become more open to buying financial services bundled with services provided by non-bank entities. Often these other service providers have more information about their customers than banks.

Traditionally, banks tended to enjoy market power because of their status as protected, quasi-public firms. And nobody knew a customer’s financial health and prospects better than their banker. Banks had uniquely privileged access to relevant data, and this was complemented by the expert judgement of locally based loan officers who often had a personal relationship with prospective borrowers. But all this came with high fixed costs owing to their branch networks and their involved procedures for managing customers.

None of these advantages are quite as useful as they once were. The fixed costs for potential market entrants are lower, as branch networks are less important. The willingness of customers to do their banking online increases the range of options that are locally available to them, diminishing the market power of incumbents to set prices. Technologically sophisticated new players have to a significant degree usurped banks’ role as gatekeepers of customer information. What’s more, these tech companies are able to assess the financial credit and bankability of individuals – even without any financial history. This means that the “incumbent’s advantage” that banks have traditionally enjoyed is shrinking, even in their core territory of customer understanding.

This leaves banks open to challenges from other market players, such as specialist fintech firms and big tech platforms. These platforms enable customers to unbundle their consumption of financial services and offer them a wider range of choices beyond the familiar banking names. When choosing payment methods or taking out a loan, customers have access not only to banks but also to unbundled specialist providers.

Crucially, this range of choice can be provided very conveniently, with tech firms using their expertise to create attractive and easy-to-use customer interfaces.

Nothing about this trend of unbundling and re-bundling is particularly revolutionary. Customers’ preference for convenience has always been a big driving factor. Banks used to benefit from this, as customers found it more convenient to group their financial services with a single bank. All they had to do was walk down to the branch at the end of the street and possibly have a few face-to-face interactions with some familiar faces.

Nowadays, the online option – opening an app wherever you are and taking a few seconds to make some swipes and clicks – is even more convenient. Naturally, customers are keen to go for this time-saving and efficient option, not least as some also realise that the wider choice can also mean that there are some valuable savings to be made.

On the whole I am optimistic about what these technological changes will bring. For customers, I see the benefits of the increased choice and stronger competition. These forces should drive the market towards useful innovation as players seek to respond to the demand for convenience, security, and good prices.

Investing to compete – the technological response of European banks

So how should banks respond to this changing environment?

To answer this question, it is perhaps useful to recall the world banks are coming from. As a former banker I can share a joke from that time. The comfortable world of banking operated according to the 3-6-3 rule – give 3% interest to depositors, lend the depositors’ money at 6%, and then be on the golf course by 3 p.m.

Times are now very different. Even for the golf enthusiasts who are still in the banking industry, this comfortable world is long behind us. Banks are facing intense competitive pressure and they must meet their customers’ demands for digital convenience. To remain relevant, banks need to be available for their customers 24 hours a day, 7 days a week, 365 days a year – and the only way to do this is to embrace the effective use of modern technology.

So, let’s take a moment to check in on where European banks are in their adoption of technology.

First off, banks have actually always been close to the cutting edge of technology adoption. Given that banking is such a data-driven industry, the advantages of investing in IT became apparent early. As I mentioned in one of my previous speeches[5], I am personally familiar with the race to become efficient via IT investment, as I experienced this first-hand when I worked as a bank CEO in the 1990s.

Reflecting this industry awareness of the need for technology, banks have been steadily making big investments to keep up to date. This has notably also meant being sensitive to the demands of their customers, who, as I mentioned, want convenient digital and online options for using banking services.

The COVID-19 crisis has to some extent shown that banks’ digital investments have delivered – at least in terms of ensuring operational resilience. Major challenges have been thrown at banks, with more than half of bank employees sent to work from home and more than 20% of branches closed. Banks’ operating models had to flex very quickly to absorb the move to remote working and the fast rise in the volume of customers using online banking. This was not a small task, but banks’ IT infrastructures proved to be up to the job – service continuity was smoothly and securely maintained.

In the light of this experience, lasting lessons can be learned on how to run a modern-day bank efficiently. A recent survey of European retail banks indicated that 90% expect one-quarter to half of their workforce to continue working from home.[6] Further reductions in branch networks may also be expected – potentially covering the remaining half of the 75% overall reduction that recent research has suggested as a relevant industry benchmark.[7]

Of course, in the competitive environment that banks now work in, operational resilience alone is not enough for long-term survival. They must also invest in optimising the customer experience they are offering.

Following the onset of the COVID-19 crisis, I had some concerns that a worrying number of European banks were thinking too defensively in their investment responses to the changing environment.[8] Whilst 20% of the banks directly supervised by the ECB were planning to accelerate their IT innovation and digitalisation work, 30% of these banks intended to postpone things – presumably to “wait and see”.

Since then, there are signs that this “wait and see” camp may have woken up. More recent survey evidence – though limited in scale – indicates that 90% of responding banks plan to speed up their efforts on digitalisation within the next five years.[9]

There are also emerging signs that competitive forces are pushing banks in Europe to achieve tangible improvements in their digital service offerings. For example, processing times for major digital banking products are speeding up. In 2015 only 8% of European banks could process a mortgage digitally within two days, whereas by 2020 this figure had risen to 46%. Similarly, in 2015 only 21% of European banks could process a consumer loan on the same day, whereas by 2020, 74% were able to.[10]

The message I take from all this is that European banks are – on the whole – aware of how crucial ongoing digital transformation will be to their future survival. Furthermore, there is evidence to show that efforts to invest in improving services are already bearing fruit – and these payoffs are there for banks’ digital customers to see.

It is too early to tell whose efforts will be enough, and whose won’t – the market will decide this over time. However, one thing is clear: the most crucial arena for banks to prove their continuing worth to consumers is the digital space.

Leaders in the banking industry should therefore be impatient and feel the urgency of making further digital progress. I can see signs that this impatient attitude – which is actually sensible – is beginning to take hold. For example, a recent study focusing on German, Austrian and Swiss regional banks highlighted various frustrations regarding the speed of change. Of the banks surveyed, 30% complained of a lack of focus and prioritisation, 45% mentioned a lack of determination on implementation speed, and 17% cited challenges related to the sheer costs involved.[11]

Supervisory and regulatory attention

Given that digital transformation is crucial to banks’ continued business model sustainability, this will be a priority area for our supervision in the next three years. Among the various strands of work, next year we are planning a focused information gathering exercise on bank digitalisation.

The information collected will ensure we have full knowledge of where banks are on their digital transformation plans, including who is ahead – and who might be falling dangerously behind. In turn, building up this detailed horizontal picture will enable us to keep an informed dialogue going with banks on their digitalisation activities and business model transformations.

This dialogue will also cover the manner in which banks are partnering and contracting with technological experts outside of the regular banking realm. Such collaborative arrangements are important opportunities for banks, but – of course – they also come with the responsibility to ensure risks are managed.

In particular, the development and expansion of cloud computing has had a significant impact on how banks structure their business. The line between what banks choose to do in-house and what they prefer to outsource to external service providers has shifted. We supervisors carefully monitor such arrangements to ensure that outsourcing arrangements do not result in banks becoming empty shells, or that they otherwise create obstacles to effective supervision.

Meanwhile, we are also paying attention to our own need to use modern technology in our supervisory work. This is particularly relevant in the area of data collection, where there is much scope for reducing existing burdens – both for the industry and for the public authorities that are processing and analysing the data. Work is being done to streamline reporting lines and to integrate reporting frameworks via the development of a single data dictionary. In time, I expect technological advancement to allow for more radical improvements. This could include the building of systems that would give supervisors direct access to banks’ data systems, allowing them to simply and efficiently “pull” the relevant data as and when needed.

Finally, our upcoming work in this area will include active and ongoing contributions to regulatory and legislative debates. The time is particularly ripe for such discussions, as European legislators seek to ensure appropriate frameworks are in place to maintain prudential safety and soundness in a context of dynamic technological change.

Such efforts are proceeding within the Commission’s digital finance package, including within the digital operational resilience act (DORA) and the regulation on Markets in Crypto-assets (MiCA).

It is encouraging that legislators are taking steps to create harmonised European approaches to ensuring that new ways of delivering services are adequately regulated and supervised. The aim of these efforts should not be to impose a one-size-fits-all approach to handling different players, because the regulatory requirements and supervisory approach must be calibrated to the risks involved. Banks require special treatment that recognises their maturity transformation function and the run-risk that inherently arises from this. Unbundled specialist providers focusing on particular segments of the market are fundamentally different from banks, and their treatment in rules and supervision must reflect this.


To conclude, today I have outlined some supervisory perspectives on the digitalisation of European banking.

It should be clear that we remain technologically neutral. Our approach seeks to ensure that banks have the space to continue making their own commercial decisions on how, where, and how much to invest in modern technology. These decisions belong in the private sector, and it is the competitive marketplace that will dictate which approaches succeed, and which fail.

However, while we supervisors are technologically neutral, we closely observe and monitor trends in the use of technology within banking businesses. We see the competition that banks face becoming more intense, including via the rising trend of unbundling and re-bundling of traditional banking products by new market players. Likewise, we are keeping a close eye on banks’ digital transformation activity – recognising that the success of this work will be key to banks’ ongoing business model sustainability.

The banking business has become ever more demanding, driven by the high speed of change not only in the IT environment but also in the context of the growing need to find new ways to service customers. The urgency of this work also applies to supervisors, who must keep abreast of swift market changes.

All this considered, if I were to ask myself “when would be the right time to get more ambitious and accelerate work on digitalisation?”, the answer would certainly be – there’s no time like the present.

  1. Hakkarainen, P. (2018), “The digitalisation of banking – supervisory implications”, speech at the Lisbon Research Centre on Regulation and Supervision of the Financial Sector Conference, Lisbon, June.
  2. Enria, A. (2021), “Digital innovation in the banking sector: pay-offs and perils”, speech at the Spanish Banking Association Conference organised by the Latin American Federation of Banks (FELABAN) and the Spanish Banking Association (AEB), September.
  3. McKinsey Digital (2020), Europe’s digital migration during COVID-19: Getting past the broad trends and averages, July.
  4. Mastercard (2020), Global State of Pay, October.
  5. Hakkarainen, P. (2020), “Technology exposes banks’ vulnerabilities”, speech at the Institute of International Finance Digital Interchange: The Global Dialogue on Digital Finance, September.
  6. Roland Berger (2021), “Is digital transformation picking up momentum in retail banks, and what is the impact of COVID-19?”, 4 European Retail Banking Survey, September.
  7. Autonomous Research (2021), “Bankosaurus Techs: Running Out of Patience”, July.
  8. See footnote 5 above.
  9. See footnote 6 above.
  10. See footnote 6 above.
  11. Zeb Consulting (2020), “Digital Pulse Check 4.0: Study on the digital transformation of European banks – more speed and focus required”, November.

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