Banking
WHAT BANKS CAN LEARN FROM SILICON VALLEY
Published
4 years agoon
By
admin
Bertrand Lavayssiere, managing partner at international financial management consultancy, zeb
Five success factors which explain why Europe’s most digitalised banks outperform their peers
More than a decade after the global financial crash, most of Europe’s banks are profitable. It is therefore tempting to assume that the region’s banking sector has almost fully recovered from the 2007-08 meltdown, but this is to miss a crucial point. Overall, Europe’s top 50 banks earnings are insufficient to cover their cost of capital, meaning that their core banking services might lead to long-term stagnation and decline.
There is, however, a promising escape route from this grim fate for banks with sufficient foresight, as revealed in zeb’s latest annual European Banking Study. Digitalisation—the hottest topic across the whole industry—could be the “silver bullet” that delivers long-term profits. Research by zeb reveals that banks which are digitalisation pioneers outperform less digitalised peers across all significant banking and capital market KPIs.
Further analysis shows that these pioneers have absorbed the example set by Big Tech giants such as Google and Amazon and focused on five key success factors that are equally applicable to the banking industry: a consistent customer focus, a simple, flexible product portfolio, an innovation-led operating model, an expandable infrastructure and omnipresence in their customers’ daily lives.

Bertrand Lavayssiere
Look at the earnings profile of many European banks and one can see immediately why it is no longer an option to rely on traditional, pre-digital solutions to restore long-term profitability. Based on data compiled by zeb, average post-tax return on equity (RoE) among Europe’s top 50 banks reached 7.2% in 2018, 0.6 percentage points higher than in 2017. On paper, the region’s leading banks look like they are moving closer to delivering the returns expected by investors, with a current cost of equity of around 8.0%. However, appearances are deceptive.
When we drilled deeper into these numbers, we found that the incremental increase in the top 50’s RoE over the last five years was solely due to non-operational factors: principally, reduced loan loss provisions, lower litigation costs and lower taxes. In stark terms, Europe’s largest banks are making less money from their core banking services than five years ago.
How, then, can Europe’s leading banks boost their earnings in a stagnant market with a host of new competitors, from digital start-ups and personal finance portals to online brokerages? In this difficult market, we believe banks have four strategic options. They can consolidate and gain economies of scale through M&A; specialise by focusing on certain products, customers and sales channels; break up the value chain by outsourcing and concentrating on core banking products and services; or go “beyond banking” by building or joining ecosystems. For all four options, digitalisation is the key enabler.
The next question is how far Europe’s top 50 banks have pursued digitalisation and it is not easy to answer this in the absence of external benchmarks. In our study, we measured the degree of digitalisation across all banks using a proprietary zeb algorithm which determined how often these financial institutions referred to digitalisation in their annual reports, not an exact measure but something which revealed very stark results. This enabled us to cluster banks into three groups: 13 digitalisation “pioneers”, which emphasised digitalisation very early and continue to stress it strongly; 14 digitalisation “challengers”, which took longer to start communicating on the subject and still do not emphasise it greatly; and lastly, 23 banks that we classified as digitalisation “followers”. Of course, the bias is the potential discrepancy between the intensity of the communication and the reality on the ground.
Meanwhile, the difference between the performances of these three groups in recent years is striking. On average, digitalisation pioneers outperformed challengers and followers according to every significant banking KPI: for example, pioneers registered an average post-tax RoE of 8.7% between 2013 and 2018, compared with 6.0% for challengers and just 2.1% for followers. In the same period, pioneers increased their average operating profit by 5.1%, while the average returns of challengers and followers shrank by 10.1% and 9.6 % respectively. Digital pioneers were also clearly ahead of the other two groups when comparing efficiency ratios and especially the cost-income ratio. Given this performance gap, it is hardly surprising that digital pioneers generally performed better on capital markets than challengers and followers. Indeed, pioneers were the only group that achieved a price-to-book ratio of more than 1.0x (while BigTechs are largely above 10).
It is not enough, however, for banks simply to entrench digitalisation across all operations for profits to follow. Digitalisation will only work for banks which understand its implications for their businesses. In this regard, there is no better role model for Europe’s profit-starved banks than US technology giants like Google, Amazon and Apple, the original digitalisation pioneers. To complete our study, we looked in depth at these tech giants’ business models and identified the five key success factors, based on digitalisation, which banks need to adopt.
Arguably the most important lesson for banks to learn from the tech giants is that digitalisation is not an end in itself. A banking app on a smart phone is not automatically a profit generator any more than the latest back office banking software. Instead, banks need to see digitalisation as a means to achieving sharper, value-adding customer focus and engagement, combined with efficient, scalable delivery of offerings.
Our research indicates that even Europe’s digitalisation pioneer banks have yet to absorb this lesson fully. For instance, pioneers have to become faster and more dynamic in expanding their offering and in using customer data to tailor products and services to individual needs, without increased complexity. Meanwhile, followers and challengers are in a catch-up race where they must still address such basic issues as developing authentically customer-centric businesses and automating back office systems.
The hopeful conclusion from our study therefore comes with a cautionary note. Digitalisation can indeed be the “silver bullet” that enables Europe’s banks to return to stable profits. As with any bullet, though, one must aim accurately and pull the trigger at the right time, because banks need to apply digitalisation in line with their own digital maturity. Above all, they must make sure not to mistake the means for the end.
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Banking
Are SaaS platforms challenging banks for a piece of the payments pie?
Published
2 days agoon
September 26, 2023By
admin
Attributed to: Ralph Dangelmaier, Global CEO of BlueSnap
The finance industry is at a tipping point with software firms on the brink of becoming banks. This may seem like a farfetched idea, but now that software platforms come equipped with payment capabilities, their SME customers may want to receive more financial products from these platforms.
This is part of the wider trend of ‘embedded finance’ – when companies which aren’t banks incorporate financial services such as lending, insurance, and payments into their product.
Software firms are particularly leveraging ‘embedded payments’ – where the ability to accept and process payments comes with the software itself. Think of a school consolidating all the payments a parent would make for their children – tuition, books, extracurricular activities – in one software platform. This trend has exploded in popularity because there’s a desire among companies, and their customers, for everything from products to payments to happen under one roof.
With the market value of embedded payments expected to reach £2.08 trillion by 2026 and customers becoming increasingly married to their software, let’s look at how we ended up at this turning point in payments.
How chasing convenience puts money in platforms’ hands

Ralph Dangelmaier
The growth of embedded payments is propelled by the need for ease, trust, and convenience. As platforms are selling payments hand-in-hand with their software, customers don’t need to integrate with additional service providers just to accept payments. And they’re already bought into using the platform for its other functions.
Not only is this kind of back-end reconciliation easy and convenient but it helps software platforms generate revenue too. That’s because software companies that embed payments become Payment Facilitators (a.k.a PayFacs) – allowing them to monetize transactions that happen within their platform.
By selling payments, software firms can see up to a fivefold increase in value per client. Rather than depending on software subscriptions alone, these platforms now receive a cut of every transaction that’s facilitated using their software too. This provides them and the businesses they serve with a mutual incentive – shared profits.
Software platforms are passionate about helping their customers create the most easy-to-use experience to drive a higher volume of transactions. Of course, there are many ways to launch new revenue streams, but why leave money sitting on the table when all you have to do is become convenience-obsessed?
Why finance teams want software and payments in one
As a payment expert who’s worked in a bank’s back office, I know how important a financial software stack can be. In its highest form, it can steer a business’ entire financial strategy.
Often these stacks are well curated, but the biggest drawback is the manual collection of data across platforms. Trying to build a financial picture of a business using your ERP, CRM, human resource and billing system can involve hours of laborious data entry.
For everyday finance teams, this isn’t an efficient use of time. They need to be able to pull data swiftly to advise their executives on financial strategies. CFOs are also under pressure to choose the right software stack to streamline processes and ensure payments ROI.
That’s why payment technology that removes the manual work for finance teams – to get from A to B more quickly – is growing in popularity.
Software firms using embedded payments are saving them hassle and time. Not only that, it helps the key financial decision makers of SMEs stay in a constant state of financial planning, where they can change their strategy whatever the market conditions may be.
The end of traditional banking for SMEs?
Increasingly, SMEs are struggling to get the payments support they need from traditional banks. The ‘higher risk, lower return’ view of the small business market among banks leaves software platforms in a ripe position for a takeover.
There are over 90,000 software companies in the UK alone. With nearly half of software platforms (48%) turning to embedded payments to gain a source of competitive advantage, this figure could represent a threat to corporate banking as we know it.
SMEs don’t have the deep pockets that multinational businesses have. The Amazons and BMWs of the world have long reaped the benefits of a corporate account with a large bank – and the round the clock support this offers.
But SMEs face high conversion fees and often receive minimal support chasing late payments, leaving them between a rock and a hard place. If these businesses can save money by moving from banks to software platforms, then banks are at risk of losing their position over the middle market.
Looming regulation
Until now banks have been able to defend their position because safety and security is key. Once platforms become regulated, then what? It won’t be long before regulators eye up the software industry as their next big focus.
But regulatory bodies like the FCA, PRA and more favour ‘controlled innovation’, so this will take time.
Currently, to process transactions in Europe, businesses must go down the lengthy and costly process of becoming Payment Service Providers (PSPs). That’s why many software platforms are choosing to partner with a licensed payment provider which sells the payment package to them, instead.
In fact, 89% of software platforms choose to work with PSPs rather than become a PayFac themselves. It makes sense when it’s taken more than a year for some platforms to begin processing payments on their own.
Given the sizable financial risk of processing your own payments and the administrative burden this brings, it’s no wonder software firms are looking to fintech for a better way.
After all, it’s not just about processing the payments. A partnership with a payment technology partner comes complete with support in onboarding, underwriting, compliance, risk, payouts and customer support.
In short, software platforms see the benefits of selling payments and are primed to become the next big financial players.
Not only is there revenue for the taking but their customers benefit as well. With software platforms ready to offer SMEs a banking alternative and a superior customer experience, they’re offering a truly win-win solution for all involved. And it’s payment technology partners that can help them make this vision a reality.
Banking
Emerging technology will power long-term sustainability within the UK banking industry
Published
2 days agoon
September 26, 2023By
admin
By Peter-Jan Van De Venn, VP Global Digital Banking at Hexaware Mobiquity.
Sustainability has been a big focus for the banking industry in recent years, with the issue becoming increasingly important for consumers. It’s no wonder that sustainability has become baked into the purposes of almost every bank, from Natwest to HSBC.
However, the economic uncertainty of the last year has led to many banks putting it on the back burner. Challenging market conditions have forced financial institutions to change their priorities to concentrate on protecting the bottom line. Our research found there’s been a significant drop in the number of UK banks saying that sustainability remains a key business strategy. 12 months ago it was a major priority for 100 per cent of banks, but now that number has shrunk to 60 percent.
Whilst it’s understandable that banks are feeling the pressure at the moment, there’s a risk that they will miss out if they hit the pause button. From cost savings brought by innovative digital products and services, to improved brand reputation and increased profitability, there are a lot of longer-term benefits they could be failing to unlock. So how can they keep moving forward?
Losing momentum
Emerging technology holds the key to their success, with the power to disrupt current behaviours and promote a more sustainable culture. Banks are already aware of this, with 76 percent using digital transformation to drive sustainability, but a lack of leadership has made it difficult to build momentum in the last 12 months. Currently just over half (54 percent) of banks have tasked an executive at board level with overseeing sustainability – way down from 83% just 12 months ago.
This lack of board authority means banks are struggling to engage the entire organisation to move ahead with sustainable initiatives. As a result, almost two-thirds of banks are seeing progress slow, admitting they are not actively taking steps to foster more sustainable behaviours throughout the organisation. Those that have taken their foot off the gas need to find a way to move forward again.
No time for standing still
Banks know that technology can drive sustainable behaviour. For instance, many of them are already encouraging their workforce to work remotely, as a way of reducing travel. This has two benefits – not only does it cut the costs of running physical offices at full capacity, but also reduces the bank’s carbon footprint. There has never been a better time to invest in technology to drive more sustainable behaviours.
New digital products and services can also extend the benefits beyond employees to encompass the wider customer base. A fair number of banks are already investing to make this happen. More than a third (35 percent) of banking organisations are using Machine Learning (ML), Artificial Intelligence (AI), cloud and analytics to make digital services more easily accessible. Investment in these technologies will be critical as the number of physical bank branches continues to decrease, with figures from Which? showing this is taking place at a rate of 54 branch closures each month.
Hitting environmental and social responsibility goals
Emerging technologies can also help banks keep pace with tightening ESG rules and regulations. Banks are faced with demands for increasingly granular reporting and transparency on ESG – demanding a new approach. In line, 41% of them are developing data visualisation tools to improve stakeholder engagement and understanding of ESG risks and opportunities, while 37% are using machine learning and artificial intelligence to identify and track ESG risks and opportunities across a wide range of data sources.
More than one in three are also using the blockchain to improve transparency and traceability in supply chains, and implementing digital tools and platforms to collect, analyse, and report ESG data and metrics in a standardised and consistent manner. All these applications of emerging technology will put banks on track to address global environmental challenges and unlock a greener future.
Long-term sustainability
As the economic pressures hopefully start to subside, increasing numbers of banks will start investigating how they can use emerging technologies to provide engaging experiences and value-added services for customers, to drive greater revenue and efficiencies.
Whilst banks are right to focus on their revenue under difficult trading conditions, it’s important they don’t miss out on the long-term benefits that sustainability can bring. To capitalise on this, banks must keep pushing the boundaries and invest in emerging innovations to drive more sustainable banking behaviours, benefiting the planet and driving great digital experiences for customers.
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