Leonard couldn’t lull himself into dreamland. His bedside clock kept reminding him of the unforgiving passage of time—it was now 5am—and he was getting more and more jittery. You see, later that day, his team would receive training on Artificial Intelligence (AI) and how to use it in their department.
He had read about AI, but he just couldn’t wrap his head around it. He felt like he was lagging behind, especially when his colleagues would use terms that, for him, were too “technical”. It was as if they were speaking another language. Now, he was considering calling in sick to skip the training.
Leonard was probably not feeling ready yet for the changes AI—and even further, Generative AI (GenAI)—might bring to his job. Perhaps he was afraid he wouldn’t be able to use it well, which would mean he would be behind in technology—and possibly, out of work. But maybe all he needed was to set up a plan to learn and develop the right skills. Maybe the training would be a first step.
Have you ever experienced this type of situation? We suspect we all did at some point in our life. But no one likes to be that person, who isn’t keeping up with or grasping a new development. It’s only human to feel anxious, fearful and even want to bypass such situations—like Leonard.
However, sometimes you just have to take a leap of faith because life doesn’t wait for you. Either you evolve with time, or you stay behind.
We could make a similar case for the banking sector in Luxembourg. The country’s position within the ever-evolving European banking landscape remains strong. Because of its reputation for openness and stability, it’s becoming a significant hub for e-commerce, private banking, asset servicing, e-payment institutions, and FinTechs directly linked to financial services.
But this calls for banks to transform their traditional systems and use technology to maintain or expand market share. They also need to meet security and compliance requirements, optimise cost efficiencies and attract talent to stay competitive and relevant.
Banking Trends & Figures 2023: Is technology an enabler or a threat?
It’s not like banks in the Grand Duchy are avoiding change. They are already using new technologies such as data analytics, deep learning, and AI in their services. However, they still need to make more progress.
Banks know they need to catch up—and then keep up—with the continuous expansion of technology. PwC Luxembourg’s 2023 CEO Survey underscores this, with 69% of financial services’ CEOs said deploying technology was their primary investment focus in the next 12 months.
On this basis, the 2023 Banking Trends and Figures report examines the convergence of banking and technology in Luxembourg, and how it’s reshaping the delivery and consumption of banking services.
In this blog, we share the main findings of the report. More precisely, we outline important technological advancements that are driving transformation in the industry, their benefits, as well as potential risks that may arise. Lastly, we provide four considerations that can facilitate banks’ transformation journey in the future.
Six emerging technological trends within banking in Luxembourg
The 2023 PwC Banking Trends and Figures highlights six trends that are driving greater innovation in Luxembourg’s banking industry. Undoubtedly, technology offers numerous benefits and may likely shape varying aspects of the industry’s future.
Customer centricity still sits at the heart of the digitalisation drive. Clients’ increasing need for convenience, speed, and tailored solutions is propelling banks to work more closely with FinTech companies, create immersive customer experiences in a connected ecosystem, and foster the emergence of specialised roles.
However, banks need to strike the right balance to succeed in their transformation journey—adapting too quickly may alienate customers and employees, while adapting too slowly may lead to losing them.
1. Cloud Computing is sparking industry-wide technological transformationCloud computing is becoming increasingly popular in the banking industry, especially because it combines and streamlines data algorithms and software platforms, making high volume operations such as payments and data reconciliations more efficient. It also allows for the implementation of tailored products and services.
Robust cloud solutions paired with the increasing availability of synthetic datasets are outpacing traditional ones, offering banks collaboration opportunities with emerging cloud service providers. New Ways of Working (NWOW) platforms such as Microsoft 365 and Google Suite are increasingly helping banks move to the cloud, notably after COVID-19.
Luxembourg’s banking sector, which traditionally has been lagging, is now beginning to speed up its cloud adoption journey. This is due to greater ease in supervisory approvals and a clearer framework for cloud solutions.
To successfully transition to the cloud, it’s essential for all business functions to collaborate effectively. This includes upskilling and hiring skilled talent, and fostering collaboration between the business and IT departments.
In the banking industry, AI-based technologies are enabling process automation, improving operations, and enhancing compliance and risk management processes. They also strengthen customer relationships by building trust and freeing up time from repetitive tasks.
Banks are also using AI to improve real-time transaction monitoring. It allows them to swiftly detect and flag suspicious activities through user data and transaction pattern analysis. Voice biometrics and facial recognition technology enable customer authentication in various scenarios, including account opening and transaction verification.
As for GenAI, banks are applying primarily for its automated data discovery and unstructured data ingestion properties, but its evolution will undoubtedly open up new possibilities, such as market sentiment analysis, algorithmic trading, and robo-advisors, just to name a few examples. The number of AI use cases, however, is expected to increase rapidly in the coming years.
The upcoming EU AI Act will bring clarity as to what banks can and can’t do with AI, which is a prerequisite for relevant investments into the technology. Nonetheless, given the ever growing number of opportunities in this field, banks need to define their focus for the use of AI and where to invest in. Or else, they risk getting lost on their journey.
Banks are increasingly embracing FinTechs, initially seen as disrupting traditional banking models, in a bid to stay competitive and enhance profits through digital transformation. This collaboration in Luxembourg’s thriving FinTech environment strengthens the country’s position as a key player in the financial industry.
By partnering with FinTech companies, local and international banks gain access to talent, technology, and new customer segments. In turn, they improve offerings such as digital wallets and electronic payment processors.
Seeking viable FinTech partnerships allows banks to complement their capabilities and potentially increase profitability in this evolving landscape.
To meet the changing needs and expectations of customers, the banking sector is increasingly using technology to provide them with personalised experiences. To do so, they use interactive tools such as video and augmented reality.
Banks can use the extensive client data available to understand customer preferences, financial situations, goals, and provide more personalised products and services. This approach builds loyalty, increases customer lifetime value, and helps banks attract new clients and gain market share.
In payments, solutions such as digital payments and mobile wallets meet the demand for fast and electronic transactions, giving customers affordable and simple options. Additionally, digital IDs improve security in verifying identity, reducing fraud and identity theft, and simplifying a traditionally complex process, particularly in cross-border transactions.
Emerging technologies, mostly AI enabled, and a surge in digital solutions in recent years will lead to an increase in operational efficiency for banks, if properly applied. Distributed Ledger Technology (DLT), for example, is expected to further simplify cross-border trades, reduce costs and create a further customer-focused financial system, which bears potential to generate new revenue streams for banks. It achieves this by providing transparency, efficiency, and accountability.
New entrants and non-banking organisations are driving, in part, the shift to embedded finance. Branchless neo-banks and digital insurers are also challenging traditional financial services in Luxembourg’s fast-growing real-time payments sector led by companies such as Mangopay, Payconiq, Koosmik, and COMO Global. Disruption is a risk, though.
The European Union (EU) Information and communication technology (ICT) regulatory landscape provides crucial guidelines and frameworks for the financial services industry, setting standards to embrace technology and mitigate potential risks associated with it and data-driven models. This fosters healthy competition among banks, FinTech firms, and other providers.
EU regulations in the financial sector are constantly evolving to shape the future of banking. The Digital Operational Resilience Act (DORA), Blockchain III Law in Luxembourg, and the Market in CryptoAssets regulation (MiCA) are some of the important regulations for the emerging technologies mentioned earlier. The EU AI Act, as the world’s first comprehensive AI legislation, is particularly significant.
Collectively, these regulations will influence how banks adopt technology to their advantage and clients’ benefit. Impressively, for the first time, regulations seem to be driving the modernisation and digitalisation of IT systems within banks, in addition to new technology becoming available.
Five challenges in banks’ technology adoption journey
Banks’ technological transformation isn’t linear. Integrating technology brings many benefits, but there are also challenges. For example, the abundance of data has led to heightened customer data processing and digital storage in banking operations. This scenario is beneficial, but it also creates numerous entry points for potential cyber-attacks, posing risks of data loss or theft.
In addition, banks face important challenges when adopting technology, including deciding on technology, selecting vendors or third-party service providers, and responsibly implementing AI. Below, we outline five.
1. Increased reliance on third-party providers could stifle business continuityBanks increasingly rely on third-party providers such as cloud service providers, software vendors, and FinTechs to enhance their operations and provide new, innovative services as part of their digital transformation.
While beneficial, this reliance heightens banks’ dependence on the availability and reliability of IT services. Disruptions or performance issues can lead to service interruptions, dissatisfied customers and reputational damage.
To mitigate these risks, Luxembourg’s banking sector should consider having alternative vendors and backup systems to ensure business continuity. Additionally, continuous monitoring and performance evaluation of third-party services is crucial for ensuring compliance with standards and addressing issues promptly.
The growing trend of banks in Luxembourg collaborating with third party providers will also heighten cyber threats due to sharing access to their systems and networks with them. The increased use of web banking and digitised services introduces similar security challenges.
Robust due diligence and compliance measures’ enforcement are crucial in these collaborations. Moreover, digital operational resilience (DORA) will need to be embedded in the various IT transformation technologies.
Lastly, the AI revolution prompts discussions on data quality, with General Data Protection Regulation (GDPR) obligations emphasising the need for clear strategies in managing EU residents’ personal data, urging Luxembourg banks to bridge the knowledge gap regarding the European AI Act. They also need to employ AI safely and responsibly by ensuring that the governance of any AI project is robust enough.
In the evolving banking industry, ensuring customer adoption is crucial for the new technologies’ successful integration. Banks need to keep up with or better lead competition on customer experience and convenience.
At the same time, banks have also to master their communication on the benefits of new channels and functionalities not to lose traditional clients while succeeding with the tech-savvy generation.
This involves active engagement through communication and educational campaigns, ensuring a gradual expansion of technological offerings at a pace customers can reasonably adapt to.
Factors like ease of navigation and efficient response times are crucial, requiring product revisions based on feedback. Involving clients in the transformation strategy and addressing concerns, fosters increased adoption and engagement.
Additionally, banks should implement gradual onboarding strategies for employees to mitigate potential alienation and skill gaps resulting from swift technological changes. Continued transformation also requires internal change management.
As emerging technologies become widespread in banking, intense competition for market share arises from both established banks and digitally-native entrants. Former key differentiators such as operational efficiency, product development, and customer convenience are now standard industry expectations.
Short-term success requires financial institutions to adopt and apply emerging technologies effectively for innovation and operational excellence. Long-term sustainable differentiation hinges on core capabilities, including a skilled employee base, relationship management, expanding value chain coverage, and developing new products and services.
A significant challenge in banking digitalisation is the lack of relevant talent. Banks need to continuously enhance their knowledge and talent pool through industry best practices and nurturing individuals with expertise in finance and information technology. Despite potential job role invalidation due to AI and automation, this strategic approach ensures employee skill alignment and workforce optimisation.
As certain roles become obsolete, the focus should shift to vital new roles in areas such as cybersecurity, programming, and blockchain architecture, prompting banks in Luxembourg to attract top talent with a core human resources strategy. While currently challenging, banks prioritising and achieving this skill match can secure long-term advantages as well-trained personnel contribute lasting value to their employers.
Four key considerations to move forward
The ongoing technological transformation in the banking sector is expected to go on, with AI playing a central role in managing cross-enterprise processes at scale. As AI continues to evolve, organisations will need positions overseeing its responsible use.
Organisations will increasingly rely on service providers for IT testing, financial reporting, and managing processes. Luxembourg banks navigating these trends and challenges can maximise benefits by implementing four key considerations for the future of banking in the rapidly evolving technological space.
1. Use AI and data analytics to improve customer experience and service costsBanks are increasingly using AI and data analytics to transform the customer experience. Advanced algorithms and machine learning models provide deeper insights into customer behaviour, preferences, and needs, enabling personalised services and tailored financial solutions, thereby improving customer satisfaction.
The rise of GenAI, AI-based chatbots, and virtual assistants will facilitate real-time access to information for customers. Banks benefit from reduced operational costs, improved risk management, and enhanced service quality.
By using AI to streamline processes and anticipate customer demands, banks can foster greater loyalty, driving long-term profitability and competitiveness. The synergy between banks and AI-driven analytics promises a win-win scenario with enhanced value and convenience for customers and operational excellence for banks.
Banks can gain a competitive advantage and build trust by adopting a unified strategy for managing cyber threats and protecting customer and sensitive data. To do so, they should invest in data protection, implement strong cybersecurity measures, and actively address cyber threats.
It’s important for banks to establish clear responsibilities with external partners for cybersecurity. By making cybersecurity a priority, banks can protect their reputation, build trust with customers, and stay competitive.
As banks align with their technological goals, addressing skill gaps is crucial to avoid difficulties in innovation and productivity. Adopting advanced technologies requires upskilling employees to effectively use these tools, unlocking their potential for better decision-making and business growth.
In Luxembourg, banks can attract top talent by investing in the creation of digital talent and innovation hubs, fostering an environment that nurtures and retains skilled professionals.
To develop an agile culture, banks should promote innovation, adopt agile methodologies, make data-driven decisions, encourage cross-functional collaboration, and stay updated on industry trends.
Banks should also make organisational adjustments to eliminate traditional silo-based models within value chains. By integrating these strategies alongside technological tools like DLT, Cloud, AI, and data analytics, banks can navigate the tech landscape, adapt to market demands, and provide improved financial services that meet evolving customer needs.
Conclusion
As we have seen in this blog, banks in Luxembourg are already integrating innovative technologies, including AI and cloud-based solutions, to enhance efficiency and replace traditional infrastructure.
These advancements hold great potential for improved operational efficiency, innovative products, and personalised customer experiences. The trends discussed—cloud computing, AI, FinTech collaborations—and the evolving regulatory landscape can positively revolutionise the industry. Despite the benefits, banks also need to be aware of threats related to data security risks, privacy concerns, and the need for upskilling to adapt to rapid technological changes.
Ultimately, for banks to succeed in their digital transformation, they need to balance using technology for progress and proactively managing the associated risks effectively. They also need to align technology with strategic goals, avoiding a mismatch that could undermine progress. In addition, they shouldn’t overlook the need for a human-led change management process to ensure end users—be it clients or employees—effectively adopt the new technology.
Forward-thinking, prioritising cybersecurity and regulatory compliance, and fostering customer trust are key for banks to thrive in a customer-centric technological future. Read the full 2023 Banking Trends and Figures report to get detailed information.
Back to Leonard
Did you think we had forgotten about Leonard? Since he couldn’t get any sleep, he decided to get out of bed and search for information about digital transformation in the banking industry. That’s how he discovered this blog. When he got to the end of it, he felt somewhat relieved because he realised he wasn’t alone in his struggle to understand the technological changes his work faced.
He understood that, similarly to him, banks need to address the slow adoption challenge not to fall behind, especially as technology becomes all the more crucial in the sector—and our lives.
Leonard felt inspired even. What he before considered as insurmountable challenges, were now key opportunities to grow. He also recognised the immense potential of blending banking and technology to transform how banking services are delivered and experienced in Luxembourg. And he believed he could be part of it.
As sleepiness approached him, he thought about the title of the report: Is technology an enabler or a threat? He finally knew the answer.
What we think
The integration of new technologies in Luxembourg’s banking sector can bring many benefits, such as boosting competitiveness, but banks also need to address data security and privacy concerns, and the need for upskilling. Strategic planning is key to strike the right balance between business drivers, technology needs, and market dynamics.
Julie Batsch, Banking and Capital Markets Leader at PwC Luxembourg
Our 2023 Banking Trends & Figures report shows that moving from on-premise to Cloud is a great use case for banks to boost efficiency, to operate and process data, and to enable innovation with a much lower time to market. On top of that, AI can become a game changer for banks if applied with the right focus and on a proper data foundation.
Jörg Ackermann, Banking Advisory Leader at PwC Luxembourg
