Imagine you are walking down High Street in the city centre and fancy a coffee. On impulse, you purchase a deluxe Matcha soy latte for £4.95 using your credit card. You are just about to take your first sip of the steaming elixir, when your phone buzzes. It’s your bank which notifying you that you have spent £123.50 on coffee in the last month! (That’s interesting, you knew you drank a lot of coffee but didn’t realise it was this much.) Furthermore, the message from the bank suggests that if you had saved all the money spent on coffee in the last year in an exchange traded fund offered by the bank, focusing of course on environmental and social governance compliant stocks, you could have earned an additional return of 20% on the savings. (Wow, you think!) The notification then offers a direct link to setting up an investment plan, which can be implemented within minutes with a few easy clicks. The user does not need to enter any additional information, as it is already pre-filled. Furthermore, the bank offers to set up a reminder whenever you purchase coffee again, so as to put you into a good habit in the future.

The above scenario is not feasible at the moment but it nevertheless shows the potential for digitalisation of banking, including the use of artificial intelligence and process automation. Most people don’t get any pleasure from banking, and see it purely as a necessary evil, as a means for an end – i.e., for processing credit card transactions when you buy things, getting a loan for purchasing a new car, and so on. But digitalisation offers the chance for banks to offer solutions tailor-made to the needs of the individual, which can truly enhance the quality of their daily lives. And the banks that invest early to offer such high-quality services will have a significant first-mover advantage.

Digitalisation of banking is a somewhat ethereal topic. Most users might assess a bank’s progress in digitalisation simply in terms how good its mobile banking app is. This is indeed a major element. But a superficially attractive front-end interface or app is not necessarily sufficient. It needs to be combined with the right back-end systems in order for users to be able to reap the full advantages. Otherwise the functionality on the website or app will remain very limited and inefficient. That is why the potential benefits of digitalisation for banks are still huge. Different additional services, such as asset management functionalities and robo-investment advisers, could be provided to the clients in order to shore up banks’ profits. Sophisticated data analysis capabilities already employed by Big Tech companies for tailored advertisements are also increasingly crucial for cross-selling purposes. Most banking apps offer only a fraction of these functionalities so far.

The current COVID-19 pandemic has acted like pouring rocket fuel on bank’s digitalisation strategies. Even before the crisis, increasing numbers of people access their bank accounts through their phones or via the bank’s website – in fact, more than three quarters of Americans have used their mobile to check their account balance in 2019.  With branches closed during the lockdowns, people were forced to resort to using their mobile phones to access their accounts and make payments. According to a survey conducted by Deloitte on 1,500 working-age individuals living in Switzerland, almost 20% of all retail banking customers have used at least one online service for the first time during the crisis, and only 6% of people made no use of them at all. Once people see how convenient mobile banking is, it is unlikely they will revert to their old habits. With new payment possibilities like Apple Pay becoming widely accepted, it will become unnecessary even to visit a branch to withdraw cash. This cashless trend has also accelerated as a result of COVID as people wanted to avoid touching “virus contaminated” notes and coins.

Digitalisation has been on top of the agenda of many management teams of global banks for several years. In June 2019, they expected that investing in digitalisation could bring an improvement of 3-5% of the cost-to-income ratio over the next five years. An article in the Economist from April 2019, quoting an ECB staff study, found that investment in IT and digitalisation was one of the main factors in a bank’s future success, along with geographical diversification and tight cost control.  At the same time, digitalisation is currently not a major factor driving the banks’ share prices. In fact, until fairly recently, digitalisation still came some way down on most investors actions list since the benefits of such a tectonic shift would only be felt in the longer term, while the IT costs would hit the bottom line now. Instead, investors wanted to see banks – at the same time at least – cutting costs by closing their practically empty branch networks. Investors are also concerned that banks, in their exuberance to make quick progress, may be pumping huge amounts of money into digital projects which are poorly thought out and simply a waste of money.

At the same time, the threat from more digitally advanced competitors as well as from new market entrants such as fintechs is real. Doing nothing is not an option. Banks realise that if they fail to digitalise their services quickly enough they could well end up like the High Street bookshop after the emergence of Amazon. In Europe, the revised Payment Services Directive (PSD2), implemented in 2018, allowed third party companies to have access to your bank account data if you authorised it. As a result, banks’ worst nightmare would be to end up as simply a back-end processor of transactions, with a company like Google acting as a ”bank account aggregator” providing an extremely nice front-end interface for the user, combined with a powerful back-end system. Banks would lose their direct contact to their clients and also those juicy margins on selling additional services, like loans, fund management, and insurance.

This makes the topic an extremely challenging balancing act. Replacing legacy systems is extremely costly and fraught with uncertainty. At the same time, taking incremental steps towards digitalisation would risk being far too slow. Furthermore, banks not only need to spend huge sums of money on new IT systems, but need to completely re-invent their business models. Even more importantly, and also the most challenging bit, bankers need to change their mindsets and culture, so that the bank can become a primarily data-driven and customer-centric company, as well as one that embraces so-called “agile” practices to promote innovation and change. Banks will increasingly need to see themselves as tech companies rather than financial services companies. Surveys show that the inclusion of executives with IT skills on bank boards, in particular people who have worked at one of the Big Tech companies, improve the chances of success.

This article ends with a quote from Jack Ma, founder of the world largest e-commerce platform Alibaba, as well as a large fintech and payments firm Ant Group, which is a major competitor to Chinese banks:

Fintech takes the original financial system and improves its technology. TechFin is to rebuild the system with technology. What we want to do is to solve the problem of a lack of inclusiveness.”

Already the leading players in the industry are thinking beyond simply digitalisation of finance. Unfortunately traditional banks have a serious amount of catching-up to do.

Authors’s disclaimer: The views expressed in this article are our own and do not represent those of Banca d’Italia or the European Central Bank.



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Benedict Weller is a principal supervisor in the Single Supervisory Mechanism at the European Central Bank. He was previously principal economist in risk management at the ECB between 2012 – 2016, senior expert in TARGET2 securities between 2009-2011, and prior to that economist in the ECB’s monetary policy operations from 2001-2008, focusing on liquidity and collateral management. Between 1998-2000, he was editor of the Central Banking Journal in London. He has a BA and a master’s degree in economics from Jesus College, Cambridge University.

Michelangelo Bruno is an on-site inspector in the financial supervision department at Banca d’Italia. Previously, he was supervision analyst in the ECB’s Single Supervisory Mechanism between 2015 – 2017 and research and teaching assistant at Bocconi University’s finance department between 2013 – 2014. He holds a MSc in accounting, financial management and control from Bocconi University and a Master’s in political economy from LSE.