Banking Trends & Figures 2022

The Payment Revolution An opportunity to enhance Banks’ Digital Transformation

An onslaught of rapid and dramatic changes - regulations, shifting market dynamics, and consumer demands - has incited the rapid establishment of the payments landscape as the archetype of how technological innovation can reshape an industry’s approach and create an obligation to change. This has inevitably affected the digital transformation of banks and necessitated a long-overdue drive towards innovation in payments.

As a sector that has historically proven to be resilient amid market disruptions and various evolutions, the payment revolution has opened up new and uncharted territory for banking. The entrance of fintech and big tech competitors profiting from quicker adaptation to new technologies and less stringent regulation, the advent of new business models requiring long internal and structural overhauls, and a slew of regulations meant to effectively balance this new terrain, are but a few of the radical changes that banks must navigate in their attempts to reinvent and expand their value-add. 

As a financial centre with immense global focus, Luxembourg has not been exempt from the impacts of this payment revolution. The country has established itself as a major European hub for payments innovation, with enabling factors such as a strong national digitalisation drive, cross-border payment expertise, effective regulation and the presence of required infrastructure attracting many multinational payment service providers.

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Banking Trends & Figures 2022

Key Takeaways

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Banking Trends & Figures 2022

Key considerations

Three main shifts that are underpinning the new payments landscape

Demand for instant payments disrupts the ecosystem and infrastructure

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Big tech’s entry presents a new and complex layer of competition within the payments ecosystem

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Innovation of B2B payments represents the new frontier of payments

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What are the unique barriers to banks’ payments transformation?

Tighter regulation has created an uneven playing field for banks
 

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Banks face a plethora of ambiguities in the attempt to upgrade legacy systems

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Changes in market dynamics por retention powerse a risk to banks' custome

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Five strategic considerations for banks' adaptation and better value-creation

Differentiate your business/organisation by leveraging opportunities within the B2B landscape

Given the relative nascency of innovative advancements within the B2B payments sphere, banks have an opportunity to reinvent themselves in alignment with core and unique strengths such as long-term business relationships with corporates. They could strategically focus on providing ancillary services, improving cross-border payments procedures, extending cyber-security expertise, and adopting a fee-based revenue model. By assessing what differentiation is needed to compete in this technologically-advanced environment and finding improved ways to present their existing services, banks are in a prime position to enhance their value-add potential exponentially, compared to their peers in the payments segment who are more limited in this context.

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Partnerships with fintech will lead to a win-win situation

In the emerging payments landscape, banks would have to foster greater engagement with fintech and big tech firms in order to upgrade their infrastructure and accelerate the materialisation of their innovation initiatives. Collaboration also holds potential for new product development and outsourcing benefits and could help to enhance operational efficiency without massive cost increases, which is especially true for smaller banks for whom the financial commitment of upgrading infrastructure could be too high. Although these partnerships will require both banks and tech players to adjust and adapt their risk approach and strategic objectives, increasing collaboration to further payments innovation holds benefits for both parties. 

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Anticipate further changes in the payments landscape

To consolidate their position as proactive players, banks need to anticipate potential disruptions within the payment landscape and be at the forefront of driving future innovations. With significant changes such as embedded finance, the ‘uberisation’ of payments, and open banking APIs being employable tools that will allow banks to increase their value-add and create additional offerings, it is clear that effectively surveying the current landscape and looking beyond the future will serve as a vital thriving mechanism. 

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Drive the development of global payments solutions

As highly-regulated institutions with an extensive network and immense influence, banks are well-positioned to facilitate common or standardised agreements in order to reduce the ambiguity surrounding the implementation of existing payment systems and regulations like the PSD2. With the threat of further fragmentation within the payments system, the respectability and credibility of traditional banks remain valuable assets that could enable them to drive the development of safer and more inclusive payments solutions. 

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Regulators have a role to play in levelling the playing field

 To ensure homogeneity in the regulatory landscape and urge equal access to payment innovation opportunities for both banks and their fintech counterparts, regulators would have to double down on efforts to enforce industry-wide compliance by all players. They also need to ensure that regulation is dynamic enough to encourage further technological innovation and that consumers are safeguarded regardless of who has their data.

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Evolution vs Revolution: The new payments landscape

The payments landscape as we know it today has undergone a long evolution with banks traditionally at the epicentre. From an era of mail orders, telephone orders, and long authorisation processes, the arrival of the internet advanced the evolution of payments with the popularisation of e-commerce - which opened up access to trade and finance to a broader client base (Exhibit 2). Today, the rise of electronic verification systems is also propelling the use of e-wallets, a form of digital cash, in the aftermath of the adoption of digital and mobile payment channels such as Apple Pay and Google Pay. At the same time, we are observing the disruptive potential of cryptocurrencies within traditional infrastructures for payments processing, clearing, and settlements.

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The Payments Revolution challenges banks’ role

The ‘speed to innovation’ in the B2B payments landscape has opened up a new wave of unique and fast-changing customer demands requiring adaptability and responsiveness from their PSPs. And while most service providers are doubling down on their efforts to adapt to these demands, banks find themselves particularly less prone to move at the same pace as their more digitally-attuned peers in this respect. 

In this section, we identify unique barriers to banks such as tighter regulation and the drawbacks of legacy infrastructure and systems. We highlight how these are restricting banks' ability to rapidly provide the more agile and custom-tailored solutions that are typical of Baas/PaaS solutions offered by fintech and big tech. They are also leading to an imbalance in the competitive landscape as banks' more digitally native and less restricted PI counterparts leverage these gaps to attract more customers - challenging their monopoly within the payments system and bringing their current and future customer retention potential into question.

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Banks can thrive by rethinking their solutions and models

As the B2B activities of banks evolve, driven by the payments revolution, it becomes evident that banks need to carefully consider and define what their role would be in the coming years within this landscape. Having demonstrated strong resilience and characteristic ability to manoeuvre various challenges in previous times, there is no doubt that banks have the potential to successfully navigate this emerging payments ecosystem. Thus in this section, we propose certain strategic actions for banks’ consideration that would accelerate the pace of their next adaptation phase and consolidate their position in this emerging payments landscape.

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Luxembourg's Banking Sector Evolution

Number of banks
Number of banks

With 124 authorised banks at the end of the financial year 2021, the number of banks decreased by four.

Countries of origin of banks established in Luxembourg

In terms of geographical representation in the Luxembourg financial centre, German banks still make up the largest group at 16.1%, followed by Chinese banks with 12.1%, French banks with 11.3% and Swiss banks with 9.7%

Countries of origin of banks established in Luxembourg
Balance sheet total (in EUR million)
Balance sheet total (in EUR million)

In 2021, the balance sheet total increased by EUR 101.6 billion (+11.9%), confirming an upward trend observed since 2017. In 2021, it has its origin once again from the increase in deposits from customers. However, against the backdrop of COVID-19, the increase in deposits comes not only from investment funds but also from corporates and households.

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