How COVID-19 is making the Luxembourg banking sector value the new scenery

How much do we dislike starting another blog with the word COVID in a prominent position? We don’t want our readers’ eyes to glaze over, or for the headline to mistakenly suggest negativity. Because we find this week’s topic – appreciating what is new and innovative in Luxembourg’s banking sector – rather inspiring. 

The problem is, even though the banking sector already was going through a period of change, it is COVID-19 that has acted as a catalyst, ramping it up to a sea-change, by definition, a profound or notable transformation. And transformation, both digital and in a more holistic sense, is what we will be talking about today. 

So from bad (COVID-19), came some good (banking innovation), or at the very least a strong push in that direction. As a quick aside, in preparing this blog we came across an interesting article on the  BBC’s website where they talk about how COVID-19 is creating an entire new language. The example they use is, “From ‘covidiots’ to ‘quarantine and chill’, the pandemic has led to many terms that help people laugh and commiserate.” So we thought we would try our hand at adding to this lexicon. Could we call innovations pushed by COVID-19 “covidations”? Or would it be clearer to say that these innovations were pushed by the “covid-atalyst”? Food for thought.

We digress of course. We like to play with writing. But part of our reason for doing so is to make you aware that for a while, and while it is still affecting us, we cannot ignore that COVID-19 came, that in many ways it conquered, and that it has left change in its wake. 

And that means it is as impossible for us to avoid talking about it as it is for the banking sector. We all woke up one day and looked out the window to realise that the world, which already seemed to be spinning too fast in front of our eyes, had changed. 

Now, at this moment in time, many banks are asking themselves “where do we go from here?”. While we see light at the end of the COVID tunnel we also know that our behaviour has changed significantly in the last 18 months and this is what we refer to as the new “scenery”.  There has been an unprecedented shift to online commerce, massive adaptation of video conferencing and other tools to support working from home, and a renewed focus on our shared responsibility towards the environment. None of us would ever have wished for the pandemic to happen. Of course. But it has forced us to rethink, to refocus and to realign our priorities. 

COVID-19 is compelling  the Luxembourg banking sector to do the same. But are banks fit to the challenges of the new scenery? Read through, let’s find the answer! 


 Six milestones for banking transformation

In the Chinese language, the word “crisis” is composed of two characters, one representing danger and the other, opportunity. And this is absolutely on the mark when thinking of COVID. While it brings many challenges, there are also many opportunities ahead. And this is not the first crisis for banks. The financial crisis, which started in 2007 striking at the very heart of capitalism, and spreading throughout the world in 2008 causing a global recession, resulted in massive structural repercussions and transformations. The banking sector learned then to adapt or die. 

Already, banks, and more importantly, their customers, have embraced digital technology, meaning that they will now be better at anticipating trends and developing tools to provide the services customers demand in a responsible and secure manner. And this is a good thing. 

To give you additional context, every year PwC Luxembourg produces the much in demand “Banking in Luxembourg” report. For the year 2020, which is analysed in the 2021 report, the title “An ever changing Banking landscape” could really not be more fitting. And to catch up with all the unprecedented changes that have happened since March 2020, our banking team decided to do something a little different and take you for a metaphorical walk through this new scenery. 

In this way readers are made aware of the different changes in the Luxembourg landscape that our banking experts think had the bigger impact on the way the Banking sector operates. Of course, many of these changes have been either discussed or initiated for a number of years, with technological disruption, the growing awareness of climate change and the way to address it, and new ways of working. But it all accelerated with the COVID-19 crisis (which you can read in detail if you download the report). The reality is that change is now universally accepted as a constant, and this mind set has to be encoded in a bank’s DNA for it to survive. 

Where the banking team sees the new milestones on this map to the future are, we have placed into six categories:

  1. The new transformation
  2. Seeing the potential of new innovative approaches
  3. ESG and greener possibilities of investment
  4. Securing your data castle in the cyber age
  5. (AML) Protecting your funds against criminal minds
  6. The outsourcing opportunity.

And for the sake of this article we will do a deeper dive into the new transformation, because in truth, the word transformation in some ways encompasses all the other five, although in the classic sense it refers to digital transformation. Also, each category deserves more time and thoughtfulness than we have space for here.

First glance takeaways post COVID

On the virtual walk through Luxembourg, at first glance much seems the same. With its unparalleled range of services, financial infrastructure and expertise, Luxembourg remains a successful financial global hub.

From the beginning of the crisis, banks in Luxembourg had solid business continuity plans in place. This was critically important for maintaining trust. Around 70% to 80% of all workers at financial institutions were able to continue to work from home using their laptops and tablets and the banks were fully functional, as was the Commission de Surveillance du Secteur Financier (CSSF). This stability is a hallmark of the country, and a core element of the financial centre’s success. An after effect of the crisis is that, following this rapid shift to remote working, although there is currently some debate as to the exact shape of the remote working future, particularly with the issue of cross-border workers and the tax implications that brings, it is unlikely it will look exactly like the “same old routine five days a week” in the future. This is where the all important agility of Luxembourg comes into play.

Agility is one of the unique selling points of Luxembourg. And now will be the period that is put to the test, because innovation is going to play an increasingly important role in this new environment. Change cannot just be created by external forces. To be effective, innovative thinking and an entire new mind set is required. Banks in Luxembourg should aim to strike the same balance as the country itself, offering the stability that breeds trust, with the agility and flexibility that is the key to survival in an ever-changing world. 

What the COVID-19 pandemic did was accelerate certain trends that already existed, pushing ESG and digital transformation in particular to the top of the priority list and introducing new ways of working that are here to stay. This is resulting in even more pressure on banks, often in the face of ever-more complex regulations and new expectations from employees, investors and other stakeholders. 

For the report, the starting point was to ask CEOs what they think, because who else better to act as guides on the journey and explain the new scenery? In PwC’s 24th Annual Global CEO Survey – Luxembourg Findings released in April 2021, a very clear narrative became apparent from the polled Luxembourg CEOs, 70% of whom work in the financial sector: post COVID-19 and looking ahead, CEOs are optimistic about the recovery, but show concerns surrounding overregulation. The COVID-19 pandemic has enhanced the need to address cybersecurity, but greatly heightened the desire for, and adaptation of ESG, turning (once again) the challenge into an opportunity. Digitalisation is a necessity to survive. And with all the technological advances and innovations necessary to maintain competitiveness, companies are increasingly considering integrating upskilling into the core of any workforce strategy, while banks are looking more and more to outsourcing in order to embrace new technologies and to achieve economies of scale in the ongoing low interest rate environment.

The new transformation

The key message is that it is definitely time for banks to start carving out a new path. Transformation is all around us. There are three external changes whose impact is very evident in bank’s strategies: consumers’ changing attitudes and behaviours; the tech (r)evolution; and of course, regulation. Given this, banks have begun to undertake their transformation, both on the outside and on the inside, but they will want to step up the pace. In addition, these changes also introduce new threats and challenges. Among them, a steep increase of cyber-risk concerns, to a record high of 79% in the banking and financial sector. 

The all-important question is, how can banks make these initiatives successful in a challenging environment? In this current low-interest and home-based working period, the financial industry has to both ensure the continuity of its services towards its clients, while also providing the appropriate environment for employees and providers in order to continue to operate in a contactless world. Trust has never been more critical. 

We now see clear evidence that what many financial institutions learned from the first year of the pandemic was to reconsider their working habits and practices to ensure their sustainability, both operationally and financially. As our CEO survey released in April 2021 revealed, operational efficiencies will remain a strong driver of the upcoming investments in the financial sector. More than 60% of surveyed CEOs will make it a priority. It’s seen as a prerequisite to drive growth and to be able to launch new products and services. Two thirds of financial institutions will be looking into this. 

Banking & digital transformation

Digitising is not an objective per se, it should be done with an eye to bringing value to the user and the best experience possible. To win in the post-COVID-19 world, leaders must re-imagine not just how their company works, but also what they do to create value in the digital era. To go back to our analogy, think of walking through Luxembourg and it suddenly looking entirely different. How would you adjust? What would you do differently? 

For a bank, this means:

  1. Reimagining its place in the world, instead of focusing on digitising what you already do; 
  2. Creating value through ecosystems, rather than trying to do it all alone; and
  3. Re-imagining its organisation to enable a new model of value creation, rather than asking people to work in new ways within the confines of the old organisational model.

In order to achieve this, the user experience approach has proved to be invaluable for its ability to federate the different dimensions of the analysis while ensuring the delivery of value that matters to the users. 

Digital transformation has clear implications on the outside, but also involves how a company needs to reorganise itself. 

  • On the outside, banks need to be perceived as modern and client-centric organisations. They need to cover experience basics to stay in the game, while exceeding customer experience expectations. 
  • On the inside, they need to provide new tools and resources to streamline operations. Employee experience is key, as engaged employees proactively and passionately add value while aligning with the company vision.
Source: PwC’s Banking in Luxembourg 2021
How to be successful in banking transformation

It is essential to define and set-up the foundations of your end-to-end transformation. Banks should be asking themselves some very important questions:

  1. Align and create a vision. “What do we want to do and what is our ambition?”
  2. Define the transformation governance, the new ways of working and the masterplan “How do we do it?”
  3. Start the transformation journey with pilots first: start small and impactful, deliver results via co-creating and designing pilots with a holistic approach, infusing change within the bank “Let’s do it!” 
  4. Deliver and accelerate the transformation: execute the four plans and achieve defined results “Let’s deliver!”

Banking organisations are absolutely at the threshold of digital transformation and this is paramount, but the change they need to affect is even more profound. Their goal should be to become organisations that are rooted in their origins of trust and security, but are culturally prepared with the right people and the right mind-set to continuously deliver what the changing world and their clients want. 

For example, considered for quite a long time as only a trend, ESG and Sustainable Finance are now fully blossoming. Banks not only need to adapt their product portfolio to this new, growing demand if they want to keep their customers or even better grow their customer base, but it has become mandatory for them to also keep up with the increasing regulatory pressure if they want to be sustainable in the long run.

In the current global financial environment the banking and finance industry faces increasing pressure to engage in broad cost reduction programs, preserve capital and boost profitability. In addition, regulatory compliance pressures are increasing making competitiveness a significant challenge, while new players on the market such as FinTech firms offer increased agility and are playing a significant disruptive role in classical banking business and operational models. 

The banking sector in Luxembourg is unique in that it has an exceptionally international outlook and a strong positioning on the global stage. But this also means that it is affected by what happens around the world. Key to continuing its success will be its agility and capacity to adapt and transform in a changing environment.  The pace of change is unprecedented and no one expects it to slow down. This will mean accepting change and transforming inside an organisation to be able to adapt to these external forces.

What we think
Roxane Haas, Partner & Banking Leader at PwC Luxembourg

 “The past 18-months have yet again proven the resilience of Luxembourg as a global financial centre. But now the time has come to embrace the many new challenges in order to transform them into business opportunities. Our Banking in Luxembourg 2021 report looks at these opportunities in detail and aims to provide some much-needed guidance and analysis for the long way ahead. At PwC, as always, we look forward to walking you through these exciting and challenging opportunities.”

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