22 November 2021

SSM's Hakkarainen: Digitalisation in European banking: no time like the present

I will argue that the impact of these changes will generally be positive for banks’ customers, who will benefit from better and more convenient services, and for the economy at large.

One of the mantras of banking supervisors across the world is technological neutrality. In other words, supervisors should not be influencing banks’ decision-making when it comes to technological strategy. Such decisions are best made in the private market, by those who will ultimately deal with the consequences.

The ECB subscribes to this approach. Nevertheless, while we are neutral, we are still paying close attention. In my remarks today, I will explain what I personally see when I look across today’s technological banking landscape in Europe.

I will note that there is a certain inevitability about the continued – and likely ever accelerating – technological change in the banking sector. And I will argue that the impact of these changes will generally be positive for banks’ customers, who will benefit from better and more convenient services, and for the economy at large.

However, for banks, the trends associated with technological transformation will not all be benign. For business models to remain sustainable, banks cannot afford to stand still when it comes to technology. Customer demand for convenience will inevitably increase, so banks should feel a sense of urgency to push their work on digitalization forwards as fast as possible.

The inevitable drivers of modern customer demand – convenience and choice

Customer behaviour has been moving towards more digitally oriented consumption of banking services for some decades now.^[1] It was already clear before the coronavirus (COVID-19) pandemic that the move away from branch-based banking towards online banking was well under way.

The pandemic has accelerated this existing trend.^[2] Some of the innovations that were already available to banks’ customers – in particular contactless forms of banking and payments – suddenly became very attractive when social distancing was the norm.

In this context, the European banking sector has seen the number of digital users increase by 23% since the start of the pandemic.^[3] This reinforces the banking sector’s position as the industry where customers are most willing to connect with their service providers via online channels.

In some ways this is a testament to how well banks have managed to build and retain customers’ confidence that online services can be delivered conveniently and effectively. Recent surveys on digitalisation confirm that bank customers broadly approve of innovative banking solutions. Respondents report a high level of satisfaction with banks’ online services, which they see as easy to use, fast, and delivered via attractive websites or apps. For these reasons, it is perhaps not surprising that of those who switched to online banking during the pandemic, 87% plan to continue using banking apps after the risks associated with the virus recede.^[4]

It is similarly unsurprising that use of online banking is higher among young people. Even my generation quickly understood the advantages of digital banking, especially in terms of convenience. However, it took time to change our old habits and beliefs, and this slowed down our shift to the most modern applications. For the digitally native younger generations, online is the default option. They expect financial services – like other online services – to be available without any extra effort.

So, by this point, it is clear that European customers have for some time been on an inevitable path away from traditional physical branch-based banking and towards online and mobile alternatives. It is also clear that this will mean that online service applications must become more and more convenient.

Implications for market structure

One of the implications of this online shift relates to the structure of the banking market. As customers have become more willing to consume all kinds of products online, they have also become more open to buying financial services bundled with services provided by non-bank entities. Often these other service providers have more information about their customers than banks.

SSM

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