European private banks and digitalization: the pioneers of a new era

European private banks and digitalization: the pioneers of a new era

If fintech startups have been on the frontline of financial innovations for the last few years, that time might be over. As big lenders seem to have realized that buying each single one of those newcomers is not effective enough, a new trend is blooming: general digitalization of financial services. In the second round of that now lasting war, European private banks take the lead with major players massively investing. Who are those banks taking over the market, what do they do exactly and how do they do it? To answer those questions, let’s go through the two episodes of the modern financial revolution.

Episode 1: Fintech awareness on the rise

Startups have been showing the path for about 15 years already, but it is only for the last five ones that major companies have come to realize capitalizing on fintech is but unavoidable. The main reason behind that new investment trend lies into a simple question: why not making the most out of the ones who have been excluded from traditional banking system so far?

Born from globalization and digital transformation, many profiles such as digital nomads are, by nature, difficult to integrate into classic business models. However, new challengers such as Google are transforming social and financial landscapes by creating a data economy, giving value to individuals by monetizing their data. Until very recently, bank’s lack of imagination has been preventing them from turning customers informations into profitable elements. But they have changed their approach by becoming active buyers of fintech startups.

If a fintech company sometimes sees big enough for buying a bank, the trend is indeed mostly about following the process the other way around. It might even not be unwise to consider that untaken market will entirely fall soon into traditional financial institutions common assets. With funding operations coming to reach $8 billion in the USA and $7 billion in China at first, fintech industry seems to have been geographically spotting two countries for its rise over the ten first years.

Besides, figures are changing from a small numbered pattern to a different level with $44.6 billion at the end of 2019. Geographical representations also might be hard to recognize soon as European private banks are moving fast.

Late bloomers but fast challengers: European banks on the frontline

Weighting in 2019, right after the USA, for 24% of the total fintech investment volume, Europe is now among the global leaders in the fintech development initiative. As for knowing where it comes from, that all is owing to European private banks. Buying one by one every promising startups, they seem to be shaping a new era. A list quickly emerges, while looking at the main products European private banks are interested in:

  • Blockchain technologies;
  • Data analytics;
  • Personal finance;
  • Wealth management;
  • Capital market software;
  • Lending;
  • Payments and settlements;
  • Regulatory technology;

It has become clear that choosing to consistently invest into Blockchain technologies, personal finance and capital market software, European private banks are mostly following a safe introductory rule of thumb to build a healthy diversified portfolio. As for determining the actual players, the following names remain the most active ones:

  • Santander;
  • Crédit Suisse;
  • UBS;
  • Barclays;
  • BBVA;
  • BNP Paribas;
  • HSBC;
  • Deutsche Bank;
  • Société Générale;
  • ABM-AMRO;
  • ING;
  • Crédit Agricole;
  • The Royal Bank of Scotland;
  • UniCredit.

A few examples might be useful to understand how those players lead the game.

Digital wallet: Société Générale and Tagpay

As mobile wallet becomes a very convenient and safe payment tool, Société Générale has been increasing its personal finance investments in its fintech portfolio. For instance, the French giant has been acquiring a stake in Tagpay, a digital wallet service company.

Santander InnoVentures for Blockchain mastering

Santander chooses mainly Blockchain for its fintech journey. That’s about $100 million the bank has been giving to a very promising fintech startup: Ripple. “With RippleNet, Santander launched the world’s first mobile application for cross-border payments, One Pay FX” says Ripple’s website.

HSBC and Xenomorph: wise move at the big era data

At the era of Big Data, personal finance and Blockchain technology are not the only sweet investment spots anymore. One of the most appealing ones is data analytics. HSBC London knows it and has decided to ensure its future by investing into better tools for questioning the present. Lending to Xenomorph, a fintech company specialized in financial analytics and data management, HSBC tries indeed to determine how right are the projections about banks stress test bad outcomes.

Episode 2: Banks counterattack, a disruptive scheme for traditional needs

Fintech companies have been answering so far to specific basic needs, namely: bank account eligibility and payment tools. But while those represent a profitable market indeed, a lot of long-lasting needs have known no or very few innovative answers.

For example, personal finance advice but also loan and secondary financial products investment applications have stayed put. While investing into fintech industry, European private banks have noticed that and have realized in the meantime their main markets have changed quite a lot. Besides, a few hints have been provided on the way by experts such as Roland Berger, who designed its third European retail banking survey in August 2018, giving insights about how banks have been managing until then, but also pointing out what investments are to be done for them to succeed. We notice that, in mid-2018, 83% of European private banks have decided or already begun the end-to-end digitalization but also:

  • 64% are already implementing digital platforms;
  • 61% are developing or using instant payments;
  • 48% have adopted an open architecture;
  • 34% have got their hand dirty with robotics;
  • 32% have started their data monetization;
  • 20% are using artificial intelligence;
  • 27% propose voice-controlled banking;
  • 10% have blockchain assets;
  • 19% are into crowd finance;
  • 5% have invested into virtual reality.

Along with those insights, recommendations have been made by Boston Consulting Group, namely through 2018 report for Unlocking Success Through Digital. Following fintech adoption initiative, four pillars of transformation have been listed for the banking system to adapt:

  • Reinvent the customer journey;
  • Leverage the power of data;
  • Redefine the operating model;
  • Build a digital-driven organization.

Half of those goals at least are moving in the right direction for banks. Let’s see how.

“A truly different customer journey”

With new fintech tools, traditional bank clerks and specialists have never been that powerful. Where most of industries labor workers think “modernization” rhymes with “job loss”, banking system can now empower its actors with more means to effectiveness than ever. The consequences shall be positive, both for banks and customers in Europe and elsewhere. The ones have understood that foreign markets can use same schemes while the others have come to realize they can now be a part of a classic money circuit.

However, “classic” needs to be redefined there. The main point indeed, as Asia Pacific financial technology lead James Lloyd emphasizes, is building with fintech “a truly different customer journey”. He adds that turning bank products into digital formats won’t be enough. To that extent, it seems European private banks such as Spain’s have successfully taken the lead by adopting an appropriate mindset. In early 2019, the Iberic bank has indeed announced it would invest about $20 billion euros into digital transformation and information technology in the four following years.

Customer chatbots, automatic and real-time connected calculators, digital assistants for advisors… those are a few of what European banks now propose, as an answer to BCG advice.

Unveil the power of data

New Open Banking framework that PSD2 in Europe now helps to implement is a call to action for many. As European private banks are deploying new data models, payment providing leaders are now considering monetizing data itself. Reuters reports, for instance, BBVA strategy. The financial institution monetizes its customers data by offering to third-party companies the opportunity to buy them in order to shape persona and determine latent markets.

Behind that sole example, European private banks are the perfect illustration of the emerging ecosystem. Both front and back-end business and retail banking organizations are transforming, turning customers data into value, and optimizing decisions through data-driven processes.

Where payment-wise self-sufficient platforms such as Amazon and Alibaba were labeled as “ecosystem actors”, N26 as “focused digital player” and UBS as “trusted advisor”, private banks can extend their role by competing with each of the aforementioned companies’ prerogative. Doing so, European private banks are on their way to truly become poles of a brand-new ecosystem.