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European bank transformation: banks must accelerate tech innovation to survive

John Lyons, Dr. Philipp Wackerbeck, and Daniel Zeiter
November 30, 2021

Banks are now competing with nimble tech innovators with lower costs and appealing products and can no longer take their customers’ loyalty for granted

Time is running out for traditional banks. BigTech companies dwarf the largest global banks with their spending power and market cap, and they have the financial services sector firmly in their sights thanks to the huge potential to offer cloud-based services. Meanwhile, smaller FinTech companies have rapid and low-cost access to these newer cloud-based technologies and are developing innovative, best-in-class solutions that address a number of the pain points that are costly for traditional banks to deal with and create friction in the customer’s digital experience.

Look at how your customers use your services today. They expect convenient, personalized ‘mobile first’ banking, as well as the ability to switch seamlessly between these and other channels. BigTech and FinTech players are the party crashers, enticing long-standing customers with the superior ease, convenience and functionality of their preference-based digital experiences. Unfettered by legacy IT systems, these nimble innovators are able to move quickly, plugging in new features via their chosen cloud-based, API-enabled technology platform.

This speed and adaptability allows market disruptors to keep costs low and compete effectively against the larger but less efficient incumbents. The truth is that established banks that do not respond to this new competition face an uncertain future. Technology is the key enabler of the radical, holistic transformation required by European banks and is one of the five major challenges they must address, alongside credit, cost, consolidation, and ESG. More detail on our overall transformation approach and how to address all the key issues can be found here.

Banks must accelerate tech innovation to survive

Time to adapt at speed

Banks can no longer rest on their laurels in the way they could afford to when very few customers switched banks and changes in the market happened over decades. A number of forces are transforming market dynamics and European banks are only just starting to respond:

When technology flies When technology flies

The speed of technology cycles and the growth in challenger banks and FinTechs means market dynamics are likely to change over years not decades.

When loyalty expires When loyalty expires

Customers are getting used to BigTech brands delivering services in many aspects of their lives, including getting more comfortable with, and trusting of, them providing banking services.

When investment is turbo-charged When investment is turbo-charged

The sheer level and growth of investment in FinTechs over the past three years has been exponential, bolstering the viability and attractiveness of these companies as employers and as service providers to customers.

When open banking finally takes off When open banking finally takes off

The growth of open banking may have been slower than expected but many newer innovations are leveraging the open banking infrastructure to provide value-adding services, and we are starting to see an uptick in usage.

When doing everything yourself is out When doing everything yourself is out

The ability to configure end-to-end solutions leveraging best-in-class technology from third parties at unprecedented speed is a real game-changer. It radically reduces time-to-market and the cost of change, and builds in unparalleled agility to respond to changing market dynamics. Interoperability and the explosion of APIs is becoming the new standard.

When new threats appear When new threats appear

With increasing digitization, new attack surfaces arise and are confronted by even more powerful AI-enabled attackers. The complex edifices of legacy technology still used by banks are fragile, and closing cybersecurity vulnerabilities is an expensive endeavor.

To survive and thrive amid these changing market dynamics, banks must accelerate their digitization journeys, with modern technology capabilities that are adaptable, light-touch, and easy to roll out at speed.

A key part of the solution is strategic partnership management. With so many advanced plug-and-play financial features to tap into in the wider market, via digital, cloud-based banking platforms, the opportunity to augment and eventually phase out legacy core systems with modern customer experiences is ripe for the taking. This collaborative approach to capability integration is already well proven and highly cost-effective1.

1 Ten UK Fintechs Brought Together By PwC to Show the Future of Banking is Personalization, The FinTech Times, April 2021

Staying in control of compliance and risk

At the same time, banks must remain in full control of compliance. As they look to cloud platforms and new tech partners for advanced capabilities, they must understand the risks involved. As tools and data move outside proprietary data centers, they must ensure that appropriate provisions are in place – to keep data secure, backed up, and within the local jurisdiction.

European banks are already subject to extensive regulatory commitments (PSD2, MiFID II, Basel III, DORA), as well as strict data-protection controls under GDPR. As more sophisticated services become digital, regulators will keep adding to those controls to protect customers’ interests. Hence, banks should be prepared to:

  • Improve their third-party management in order to identify any concentration of risks and define proper exit strategies
  • Embed compliance-by-design into their new delivery models
  • Build up capabilities around responsible and auditable AI solutions
  • Introduce automated and preventive controls to replace the often manual, after-the-event systems used currently
  • Demonstrate the effectiveness and efficiency of their cybersecurity and compliance investments

Maintaining continuous vigilance and compliance must be an integral part of any bank’s digital transformation agenda.

Making tech-enabled transformation happen

The difference between successful banks and those that will struggle to deliver acceptable shareholder value will be the speed at which they can adapt their pace of change. This isn’t just about their change functions and delivery methods, but as much, if not more, about the customer-centric strategies they choose, their speed of decision making, commitment to modernize points of friction in the end-to-end journeys, and the extent to which they leverage partnerships.

All sorts of legacy thinking and structures will be a drag on this process – outdated ways of working, organizational resistance, historic risk and control thinking, the complexity and size of the technical debt built up by choosing quick easy fixes over long-term solutions, and finally, having the sheer determination to see it through. Too many banks persist in seeing tech transformation as a technology-only issue in the domain of the CIO, when it is an executive committee and board-level challenge up there with the largest risks that traditional banks face.

Successful banks need to create their own adaptable digital foundation by modernizing their existing tech stacks, reviewing their internal tech-planning capabilities and reshaping their organization, considering both humans and machines, in order to innovate quickly and deliver value for their customers.

We are focusing on advising banks in three key areas needed to make true technology-enabled transformation a reality:

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1. The most effective ways to adopt and leverage modern, cloud-based technologies and the journeys that traditional banks can take to deliver this complex transition effectively

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2. The architectural thinking and approaches that will build in current and future agility to your technology and operating models

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3. Transitioning to new ways of working that will allow banks to leverage their technology investments and deliver an environment of incremental, continuous change, enabling experimentation and innovation to flourish

Reaping the benefits in four focus areas

As banks commit to continuous, controlled innovation and timely delivery of return on investment (ROI), our experience working with clients shows that focusing on four areas – underpinned by an adaptable digital foundation – ensures optimal results:

Simplification and optimization

This is about reducing costs and risk exposure around existing processes, freeing up budget and creative resources to invest into more of the services and experiences customers want now. Emerging technologies present an opportunity to rethink processes, removing the legacy inefficiencies that have held banks back.

Banks must continue to do their core business well, but few would deny the scope for improvement – whether in cycle times or out-of-hours transaction processing – which will require greater use of automation to simultaneously reduce costs.

Continuing to try to build new experiences on top of rigid IT infrastructure could store up new problems for the future. Reducing reliance on systems that are no longer fit for purpose is an essential part of any transformation roadmap.

Personalized services

With a more consolidated and streamlined IT estate, banks should be looking to create highly personalized digital interactions, based on new insights from customer data.

This is where new challenger service providers are gaining ground, responding to customers as individuals, remembering their preferences, and meeting them where they are in their everyday lives.

This, along with the next point, will pave the way for new revenue growth and healthier margins.

Evolving business models

To secure a viable and profitable future, with still-relevant customer propositions, banks should be looking toward new ways to deliver services, even beyond banking. This is likely to involve strategic partnerships with external innovators such as FinTechs, but also start-ups or established companies transforming customer experiences in other sectors, such as car leasing or home-buying.

Partnering laterally will enable banks to reimagine customer relationships and reclaim their share of the embedded financial services market, where savings, loans, and other offerings are packaged as part of a broader proposition. This will allow banks to stay closer to customers and understand more about their individual needs, differentiate their brand, and improve margins.

Proactive threat management

The more that services and customer interactions become digital, the greater the potential surface area for attack by cybercriminals, so banks must be on their guard and proactively looking out for emerging threats.

Critical capabilities include anticipating new threats before they occur and near real-time response to any suspicious activity. AI will play a significant role here. Along with regulatory compliance, proactive security measures will be critical to containing risk and building customer confidence in digital services.

Choosing the right technologies

The step changes banks need to make across each of these four focus areas, based on their adaptable digital foundation, cannot be solely delivered by the technologies they currently use. With strategic goals agreed and the beginnings of a roadmap underway, banks will need to review and filter the numerous and still-emerging technology options available, and assess which will take them closest to their goals in their ideal timeframes.

This is easier said than done: at the last count PwC’s Emerging Tech Radar assessed over 265 emerging technologies against business trends in banking. They spanned those for transforming core banking (for example via analytics and routine process automation); ‘impact technologies’ (natural language processing, customer experience management capabilities, prescriptive analytics); and more strategic/ visionary technologies (including automated statistician, behavioral analytics and deep learning tools).

With so many options vying for attention and budget, banks need to be able to distinguish those with genuine ROI potential (intelligent process automation, for example) from those that are still unproven. Assessing each opportunity against its potential linked to the four focus areas above is a good place to start.

We advise that banks look to core tech options to fill or prevent gaps in essential capabilities; to pilot impact technologies with a view to developing tomorrow’s capabilities; and to track and evaluate visionary options with a view to future prototyping.

The ability to stay open and agile is critical, too. Learning from the past, banks can’t afford to make fixed choices now that will limit their versatility in the future. Embracing a more experimental culture, a characteristic of FinTechs, will be important. By accepting that some failures will occur as a part of learning and improvement, banks will find they can accelerate the journey to what works well, provided that risks are quantified and mitigated as part of this process.

Hiring people from other industries can also help to change the bank’s culture and mind-set, introducing new ways of thinking about technology and its place in shaping the customer experiences of tomorrow.

Tech transformation case study: Starling Bank

Having successfully supported the launch of Starling Bank’s personal banking offer in the UK, PwC worked with the new digital bank to design a radically different experience for small to medium-sized businesses (SMEs).

Although technology would be at the core of the company’s business banking service, it needed to be customer-driven. We gathered insights from more than 20,000 SME customers to understand their real needs and mapped the ways they use their banks. We then developed a new customer-centric proposition, with accompanying features and functionality.

We worked directly with the CEO to craft a brand that would support this proposition and help Starling stand out in a saturated market. Our mission was to create the world’s best business bank, connecting businesses with the financial solutions they need to thrive.

After developing and testing the new service blueprints, we moved to rapid prototyping and validation, through quick testing and iterative refining. Today, Starling is a multi-award winning digital bank, with a customer satisfaction rate of 98.6 percent. Our work with Starling continues as we help the bank innovate and expand internationally.

Stay open to all possibilities

As the pressures increase for banks to intensify their transformation efforts across all aspects of their operations, underpinned by enabling technology, boldness will become increasingly critical. Certainly, advanced technology options are multiplying all the time, demanding that banks are able to continuously bring online new capabilities without being tied to a particular software provider. Banking leaders need to be switched on to all of the possibilities and work with both the business and third parties, including BigTech and FinTechs, to drive the necessary degree of change.

Contact us

John Lyons

John Lyons

Partner, PwC United Kingdom

Dr. Philipp Wackerbeck

Dr. Philipp Wackerbeck

Partner, Strategy& Germany

Daniel Zeiter

Daniel Zeiter

Director, Strategy& Switzerland

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