The recent joint White Paper by Temenos, in conjunction with IBSI, Modernizing Banks in Europe Technology Trends and Challenges for Small and Mid-sized Banks pointed out that the European banking industry has been going through a difficult phase over the last couple of years. Declining profit margins driven by lower interest rates and an increase in credit losses were already emerging as major problems. The COVID-19 pandemic has further exacerbated the situation with the European Central Bank (ECB) warning that the prolonged impact of the crisis could impact the minimum regulatory capital levels of banks.
With revenue slowing down, the emphasis is now, more than ever, on cost efficiency, better risk management, and building a resource-light digital platform for servicing customers, claims the report. This has, in turn, accelerated the need to scale up technology investments within the banks.
European banking segments that are in greater need of modernizing their technology infrastructure are small to mid-sized banks. These banks are also facing significant pressure from new competitors. These come in the form of digital native challenger banks, FinTech startups, and big tech companies that have the advantage of a broad customer base, technological sophistication and can provide a personalized customer experience. However, technology modernization is always easier said than done, especially when these banks have to work within limited budgets, lack of skill sets, outdated infrastructure, and a traditional banking mindset.
They are also a threat because they better understand the value of the skillful combination of data plus technology, and use this information to improve the customer experience directly.
Incumbents need to find a solution – the ‘do nothing’ option means they will fade away.
Mid-size incumbents are probably in the worse position: they face a lack of resources and more budget constraints. How can they manage to cope with the situation and modernize?
New Trends Could Bring the Solutions Banks Need
For many small and mid-sized banks, technology modernization does not have to be a straight-up upgrade or replacement of core and digital banking systems. Some key market developments and trends are influencing their modernization approach:
Rise of BaaS Platforms: The European and the UK markets have witnessed an increase in Banking-as-a-Service (BaaS) platforms in recent years driven by Open Banking and the growing FinTech ecosystem. Amongst other contributions, this model also allows small and mid-sized banks to offload some of their banking products – accounts, debit and credit cards, credits, mortgages, which are generally standard products. Offloading these essential services to a common BaaS platform can be an approach to bring down costs for the banks and allowing them to stay competitive and freeing up funds to invest in proper customer front ends.
Open Banking and FinTech Collaborations: The Open Banking revolution ushered in with the enforcement of PSD2 regulations, was expected to pave the way for FinTech and bank collaborations in Europe. As a first mover, Europe is relatively more mature as an Open Banking regime than other markets. Banks are warming to the idea that Open Banking is more than just a compliance requirement. Once small and mid-sized banks leverage Open Banking, they can enter the same playing field as large banks and disruptive FinTechs, offering their customers products and services beyond their portfolio.
However, many small and mid-sized banks are still working on developing Open Banking APIs and have either just reached the compliance stage or are in the process of getting there. While the road to compliance is a milestone in itself, banks that aim for more than compliance are set to benefit from the opportunities that Open Banking presents.
Banks should look carefully at which assets are essential and monetize the rest. The monetization of banking licenses can be key to this process. Banks can provide the service and Fintechs can offer banking products to users without having to wait for their banking licenses. This has the benefit of leaving more budget to invest in the transformation process. Banks can offer their services in aggregator portals (i.e. Raisin for deposits) leaving more budget to invest in the transformation process.
Another source of income is Platformication. Banks can offer their clients new services by integrating with third parties (via APIs) and embedding these services in their online banking. The fees they get equal more budget to invest in a bank’s transformation.
The amount of amazing technology flowing from the Fintech sector means that the only limitation for banks to solve their problems are their imaginations and the quality of the partners they choose!