Time is on our side: Embracing digital change while ensuring stability

Keynote speech by Pedro Machado, Member of the Supervisory Board of the ECB, at the SSM Conference on Digitalisation

Frankfurt am Main, 16 October 2025

Welcome to the 2025 Single Supervisory Mechanism (SSM) Conference on Digitalisation, hosted by the European Central Bank.^[1]

Today’s conference comes at an important moment for the banking and financial sector. The convergence of societal, political, technological, environmental and economic developments is shaping banking strategies, introducing new risks and altering the competitive landscape.

Geopolitical tensions and fragmentation, climate and environmental crises, societal and demographic changes, and rapid technological advances are all major challenges that compel the sector to adapt. Technology, in particular, has emerged as a driving force of change, with the digital transformation of banking services gaining momentum since the early 2010s, further accelerated by the pandemic. Customers now demand seamless, instant and more tailored services. This encourages competition from fintech firms, big tech players and neobanks, which are reshaping parts of the banking value chain and increasing competition for traditional players.

In response, banks must rethink their business models and transform operations, while paying attention to areas such as governance, risk management and compliance with evolving legislation including DORA^[2], MiCAR^[3], the Digital Services Act^[4] and the AI Act^[5]. At the same time, digitalisation also offers significant opportunities for innovation and growth. I am looking forward to exploring these challenges and opportunities from diverse perspectives over the course of this conference.

My remarks today will focus on three areas: the future of banking and emerging digital trends, the implications for banks in terms of opportunities and risks, and the impact of digitalisation on banking supervision.

The “bank of the future’’ and emerging digital trends

The banking sector is undergoing profound changes driven by three key trends: shifting customer preferences, rapid technological advances and the emergence of new competitors. These changes are further shaped by the evolving regulatory landscapes in the United States and the EU.

Between 2019 and 2024, the share of cash payments at the point of sale in the euro area fell from 73% to 52%, while digital payments accounted for nearly half of all transactions. Customers increasingly demand a seamless, omnichannel, real-time and hyper-personalised experience across digital channels. Online payments, digital onboarding and tailored financial products have all become baseline expectations rather than value added services.

Banks are adopting solutions such as application programming interfaces (APIs), cloud computing, instant payments, open banking and generative artificial intelligence (AI) – while exploring blockchain technology – to meet customer expectations and stay competitive. AI adoption, in particular, has surged, with 88% of significant institutions now using it in fraud detection, personalised customer engagement, compliance checks, regulatory reporting and operational efficiency. Developments such as APIs, cloud computing and AI may pave the way for more decentralised models in some areas of banking. One concrete example is embedded finance, which enables financial products to be seamlessly integrated into non-financial ecosystems, streamlining customer experience. The large-scale development and use of generative AI is also an important trend, with the potential to reshape banking operations across front, middle and back offices.

In parallel, the industry is shifting from centralised models, where traditional banks act as intermediaries, to decentralised ecosystems based on distributed ledger technology. This transition is increasing banks’ reliance on data, software and big tech platforms, driving innovation but also introducing new dependencies and risks.

Fintech firms and neobanks are leveraging their agility, scalability and lack of legacy IT systems to disrupt the market with online-only services and lower operating costs. However, within the EU’s banking landscape, traditional banks and their digital subsidiaries are still dominant – there are currently over 50 digital banks under the ECB’s supervision, most of them subsidiaries of large banking groups. Fintech firms remain a minor player in terms of deposit volumes.

The pace of digitalisation is also prompting adaptations in regulatory frameworks. In the EU, legislation such as DORA, MiCAR, the Digital Services Act and the AI Act is introducing strict standards for governance, risk management and operational resilience, concerning technologies like generative AI and blockchain technology in particular. Meanwhile, the United States seems to have adopted a more technology-friendly approach, especially regarding AI, blockchain and crypto-assets. Banks must adapt to these evolving frameworks while embedding compliance in their digital transformation strategies.

The financial landscape, and the payment business especially, is evolving with the emergence of stablecoins, central bank digital currencies and instant payment systems. Stablecoins – crypto-assets pegged to traditional assets – can provide faster and potentially cheaper transactions but also raise concerns about regulation and systemic risk.

In summary, the convergence of customer demands, technological innovation, competitive pressures and regulatory changes is transforming the banking industry. To remain resilient and competitive, banks will need to adapt their business models to the opportunities and risks of digitalisation.

The impact on banks

To strengthen the sustainability of their business model, banks need to define a clear, sound and effective digital strategy, based on a thorough assessment of their business environment.

Opportunities for digitally advanced banks

Let me now highlight some of the opportunities that present themselves to the most digitally advanced banks.

Such banks are investing significant amounts in modernising their core systems, with cloud computing solutions, for instance, playing a key role. Cloud solutions offer flexibility, scalability and speed, helping banks stay competitive. IT spending by global systemically important banks in the EU is in line with similarly sized US banks, although it is significantly smaller in absolute terms compared with the largest US banks. While IT spending by significant institutions has risen since 2019, much of it is still focused on “run the bank” operations rather than transformative “change the bank” initiatives. At the end of 2024, digital projects accounted for only 5.3% of IT budgets of significant institutions.

Moreover, digitally enhanced banks are transitioning from partial online services and physical branches to fully online services, reducing their physical footprint and allowing employees to focus on high-value tasks. This improves productivity and customer satisfaction but may require steps to address the needs of less tech-savvy customers.

In 2024 a total of 572 digitalisation projects – accounting for €4.1 billion of investment – were recorded in banks under the ECB’s supervision. The main areas of investment were foundational (42.5%), retail banking (35.8%) and corporate and investment banking (13.1%). Banks were mostly investing in IT developments (core banking system and cloud adoption) while targeting their efforts on improving their digital retail proposition.

Digitally enhanced banks leverage emerging technologies. Generative AI has the potential to support more tailored financial products and services, automated customer service, fraud detection as part of risk management, enhanced decision-making processes and improved operational efficiencies. Meanwhile, stablecoins – such as those launched by some globally active banks – are meant to facilitate faster and more secure payments, potentially reshaping payment systems and cross-border transfers. However, stablecoins pegged to foreign currencies in the euro area could pose risks to monetary sovereignty and financial stability.

Furthermore, banks can offer a more personalised and seamless customer experience thanks to the use of data. Another opportunity lies in the ability to harness big data, which can provide insights into customer behaviour, market trends and operational efficiencies. This data-driven approach can lead to more informed decision-making and an increase in the revenue stream. Banks can also generate new revenue streams by expanding their services – for instance with digital wallets, peer-to-peer payment systems, alternative payment systems or robo-advisory services. In this regard, partnerships with fintech firms, technology providers and other institutions offer opportunities for banks to develop innovative solutions and expand market reach.

Challenges and risks of digital transformation

Banks face execution risks that can impede the implementation of their digital strategic initiatives. These risks stem mainly from the complexity of integrating new technologies with legacy systems, which requires substantial investments in infrastructure and expertise, and entails potential disruptions during the transition. Effective project management and governance are essential to mitigate these risks, as is the involvement of the risk management function acting as the second line of defence, and internal audit as the third line of defence.

In addition, the increased reliance on digital technologies heightens cybersecurity risks. Protecting customer data and ensuring the security of online transactions are key. Banks must invest in robust cybersecurity measures and continuously update their IT security protocols to mitigate these risks effectively. Growing dependence on digital infrastructure also makes banks more vulnerable to IT disruptions and downtime. Comprehensive business continuity and disaster recovery plans are essential to minimise downtime and ensure operational resilience.

The increased reliance on third-party providers, particularly software developers and cloud service providers, also introduces risks. Managing these relationships and ensuring high-quality, reliable and secure services can be a challenge. Banks must conduct due diligence, establish clear contracts and implement robust outsourcing frameworks. The collapse of Amsterdam Trade Bank in 2022 highlighted the dangers of over-reliance on third-party providers without adequate risk management.

Effective governance frameworks are essential to steer digital initiatives. Banks should ensure that strategic objectives are met and that digital initiatives are aligned with their overall strategy, with supervisory and executive boards of directors actively monitoring progress and market trends. Additionally, fostering a digital-first culture within banks requires change management strategies to overcome possible resistance and embrace agile working models. “Digital labs” – networks of small digital start-ups, each focused on a specific business domain – have emerged as a sound practice for driving innovation.

Lastly, the evolving regulatory landscape demands significant resources and expertise, which can be challenging to maintain. Banks must integrate compliance into their digital strategies to navigate these complexities effectively.

While opportunities from digital transformation are vast – ranging from improved efficiency and customer experience to new revenue streams – the challenges are equally significant. By proactively managing the risks, banks can thrive in a rapidly changing financial landscape.

Implication of digitalisation for banking supervision

Digitalisation has been a supervisory priority since 2022, reflecting its critical role in banks’ business model sustainability, governance and risk management, and emphasising the importance of these for financial and operational resilience. Over the past three years, we have gained valuable insights into banks’ digital strategies through data collection, self-assessments, interviews and sharing best practices. This collaborative approach allowed us to integrate digitalisation into our supervisory practices by adapting the existing supervisory approach. It culminated in the publication of the report entitled “Digitalisation: key assessment criteria and collection of sound practices” in July 2024.^[6]

As technology, regulations and banks’ practices evolve, we will continue to scale up our capacity with a more targeted approach. Currently, we are assessing the implication of digitalisation for revenue generation and cost efficiency in payments and retail business lines. In parallel, we are evaluating the impact of AI and generative AI on banks’ business models, profitability and risk profiles. To this end, we have been engaging with banks through dedicated collaborative workshops. We plan to expand the scope of our assessment to new use cases, possibly reflecting on generative AI, given its fast-paced adoption that presents opportunities but also risks.

As we update our capacity and improve our supervisory toolkit, our focus remains unchanged: we want to understand ongoing innovation, learn from it, and assess its impact on risks. This will help us identify what measures are necessary to preserve the safety and soundness of the banking system, while supporting responsible innovation. Therefore, it is essential to preserve this collaborative spirit: the more banks collaborate openly, share their practices and demonstrate the soundness of their digital innovation, the more positive the supervisory dialogue will become.

Conclusion

Let me conclude. Digital transformation is gradually changing the way banks operate and how financial services are delivered to customers. This is driven by customers increasingly expecting a seamless and real-time online experience, pushing banks to innovate. At the same time, it remains important to consider the needs of customers who are less comfortable with digital solutions.

With new actors such as fintech firms and neobanks standing ready to tap these opportunities, competition is increasing and traditional banks are responding by embracing innovation and transformation.

As supervisors, we are keeping up with this fast-changing environment to help ensure the banking sector remains stable and resilient.

The aim of today’s conference is to delve deeper into these topics, and it provides an excellent opportunity to exchange insights and collectively map out the path forward. I am looking forward to the discussions ahead and the opportunity to engage with all of you.