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.
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.
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.
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.
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.
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.
With 124 authorised banks at the end of the financial year 2021, the number of banks decreased by four.
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%
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.
Partner, Luxembourg Banking & Capital Markets Leader, PwC Luxembourg
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Partner, Markets and Strategy Financial Services Leader, PwC Luxembourg
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Partner, Regulatory Advisory Services, PwC Luxembourg
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Partner and EMI/PI Leader, PwC Luxembourg
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