This is an excerpt from The Future of Digital Banking in Europe 2023, a Money 20/20 special edition.
Digital transformation is an intimidating project and altering a business’s strategy cannot be done at the flick of a switch. While change is challenging, recent developments across technology have revealed that transformation does not have to be arduous,
but departments, companies and industries must reach an inflection point before unpacking the layers of complexity of legacy banking platforms.
With thin margins and high costs, for large traditional lenders, change usually means making a dent in the operating budget and in some cases, there is hesitance to not follow the status quo. Considering the cloud again, because legacy infrastructure is
static, high maintenance and cost inefficient, changes in strategy and utilisation of this technology will allow financial institutions to meet customer demand, improve speed and security, and allow for greater expansion.
But what needs to be considered when mapping and scaling a digital banking strategy? Kilian Thalhammer, global head of merchant solutions - fintech and platform, Deutsche Bank AG also expands on how technology can be used to accelerate and scale new digital
banking strategies. In Thalhammer’s view, simplicity, agility and flexibility are key and he continues to say that “in many cases this statement is focused on the technology and architecture, however, to be truly effective in deploying a digital strategy in
any industry, it is essential to also ensure that all components apply the same logic.
“From operations procedures through to business processes, it is the end-to-end holistic simplification and automation of processes and procedures across sales, product, technology and operations combined that differentiate a technology strategy from an
overall digital strategy. Within this, it is also key to be pragmatic and foster a culture where it’s acceptable to fail as long as you fail fast, learn and move on.
“With this modus operandi, institutions are able to establish a trial-and-error framework that creates a more out of the box thinking, creates a safe space to incubate innovation and entrepreneurial mindsets and result in greater outcomes for the firm, Thalhammer
mentions.
McKinsey outlined six strategic action areas that could help European countries catch up with fintech leaders.
1. “Drive the alignment of market structures within the European Union
An overall simplification and harmonization of fragmented national country regulation is already taking place in the European Union, enabling fintechs to understand key pillars of legal frameworks and to focus on regional specifics. Cultural exchange among
countries can equip fintechs to understand key customer needs outside their home market. Meanwhile customers may catch up with a more digitalized way of living.”
2. Encourage more diverse, ‘homegrown’ capital
Local political players and regulators have an important role to play in shaping restrictions on institutional investors’ access to growth capital. For example, they could create stronger incentives for venture capital and private-equity investments compared
with debt investments. Relaxing investment restrictions for capital accumulation institutions could also make a difference. For example,
only about 10 percent of German insurers’ investments are currently in alternative assets such as venture or private capital, whereas in the United Kingdom this share is approximately 30 percent.
Exploring a similar perspective, Merve Ferrero, chief strategy officer, Zopa, states that the “so-called ‘fintech winter’ has abruptly ended an industry model that traditionally prioritised vanity metrics and ‘growth at all cost’ that often yielded frothy
valuations. While growth is of course one of the many ingredients for success, sustainable growth is the secret sauce for exceptional outcomes for customers and shareholders alike.
“How do we look to create good outcomes for our customers? We keep three simple things at the heart of all our products and services: value, ease and transparency. Through all our products and services, we aim to improve our customers’ financial resilience
and well-being. Customers will advocate for those banks that enable great outcomes for them. We also believe that scaling a digital banking strategy needs a profitable, sustainable business model. This allows to attract capital for further growth and innovation.
That is why achieving and growing our profitability is also key for us and, ultimately, our customers.
3. Foster regulation with an innovative mindset
The aim here is to create a regulatory framework that fosters innovation and provides companies with the necessary conditions to compete domestically and internationally, while ensuring stability and protection of both investors and customers. Programmatic
coordination aimed at strengthening fintech ecosystems is particularly important in this context. Specifically, this can mean minimizing the administrative burden and associated costs for fintechs, adapting regulatory requirements where necessary, and making
implementation more customer friendly.
Sendi Young, managing director UK and Europe, Ripple, explores regulation while considering a different technology: blockchain. “When scaling a digital banking strategy underpinned by crypto and blockchain technologies, businesses need to consider the individual
regulations of the markets they plan to operate in. At present, there is no global standard meaning collaboration with regulators will be essential to navigate different landscapes.
“They must also build a strong partner ecosystem, which will involve engaging with financial institutions, payment processors and technology innovators to ensure interoperability of solutions. Another fundamental consideration will be ensuring availability
of liquidity to help financial institutions bridge between traditional fiat and crypto assets. This will allow businesses to streamline consumer and business transactions, treasury management and other applications.”
4. Become a magnet for global talent
Fintechs can do their part by offering attractive jobs with excellent development opportunities. They can also commit to creating a modern work culture that responds to a diversity of backgrounds and needs. For example, the ability to work remotely without
an in-person office requirement can be a valuable offering for many prospective employees. Political players and regulators can also help establish modern ways of working within their countries and make the tax framework appealing to foreign talent.
5. Enable fintechs to thrive in target markets
Fintechs may be able to make more informed decisions about future target markets if all stakeholders—from investors and incumbent banks to public players and regulatory bodies—bundled their insights on foreign markets with the respective foreign regulations
and industry requirements in one central hub.
On this point, Victor Trokoudes, CEO and founder, Plum, reveals that to meet changing customer expectations, “those scaling across multiple markets must take into account the different approach of customers from country to country. Right now, the cost of
living crisis is affecting everyone across Europe, but each region is reacting differently, and needs its own tailored response from digital companies. In the UK, for example, inflation remains stubbornly high, and brings its own set of challenges that fintech
can help to solve. Meanwhile in Ireland, inflation is lower, but interest rates on saving accounts have remained at rock bottom for the majority of banks, despite rises from the European Central Bank. It is definitely not a one-size-fits-all approach, particularly
in these turbulent times. But for those who can provide real value, there is a great opportunity.”
6. Increase customer choices and access
If fintechs put as much focus on product safety and stability as they do on customer experience, they might be able to avoid some regulatory challenges from the start. For example, they could go beyond established data and customer protection norms and be
more transparent about securities and the inherent risk to customers before trading. Political players and regulators could also develop Europe-wide initiatives to make it easier for fintech companies to demonstrate their credibility to customers.”