The future of banking in the EU: Four trends

Ekmel Çilingir

Banking has advanced so much across the EU in recent years that even customers themselves do not always keep up with the innovations. In this insight, I will look at the most striking innovations of recent years and those that will continue to improve banking.

Environmental influences and security

There is no doubt that the big breakthrough came in 2020 when COVID-19 caught the world by surprise and forced it to step on the accelerator of banking change. As a result, banking entered the digital world much more actively than before.

Digital services have become a necessity for both financial service providers and customers. While many customers used to shy away from digitized services because of security concerns and fear of cyber-attacks, they have changed their minds since they started using digital services. It was clear to see how much work has already been done on security and how important investments in things like anti-money laundering (AML) are in general.

Indeed it is the focus on things like cybersecurity and AML that have been key highlights that have changed banking in recent years and have certainly contributed significantly to changes in the future. If one takes a look at the statistics – regular surveys show that financial institutions tend to allocate at least 10% of their IT investments to cybersecurity each year, and overall, the value of the cybersecurity market in Europe could reach $55 billion by 2026. At the same time, there is a growing focus on AML and AML professionals. Allied Market Research has estimated that the size of the global market for AML software was valued at $879 million in 2017 and could already exceed $2 billion by 2025.

The rapid development of artificial intelligence

Artificial Intelligence (AI) is another one of the most fundamental and perhaps even the most important things that have changed and are still changing banking. AI is an important part of everyday life nowadays and is also used in many other areas. Well, the impact of AI in banking itself should be divided into two parts – the extent to which it has changed and will change everyday life for customers and the extent to which it has influenced, and will continue to influence the financial institutions themselves.

AI and its algorithms are excellent at analyzing data, generating relevant insights and significantly speeding up the process of assessing things like credit risks, credit issuance, etc. This saves a lot of time and benefits both the financial institution and the customer. The employee does not have to deal with the same monotonous, repetitive situations every time, while the customer does not have to wait a long time for a decision to be taken and can receive service at any time of the day. And most importantly, this is just part of the nuances of how we can describe the benefits of AI.

AI banking will continue to play a very important role in the future. This is reflected in surveys that already show that the benefits of AI far exceed expectations. For example, research platform Statista conducted a survey with financial services companies in 2021, in which more than half (60%) of the respondents said that they had benefited from AI to a much greater extent than they had anticipated before they were exposed to this innovation.

Open Banking

2018 was a year when another major step was taken to change banking and its characteristics. At the beginning of 2018, the EU’s second Payment Services Directive (PSD2) came into force and opened up access to payment service users’ data to financial service providers and third parties.

In short, so-called open banking has emerged, where the directive requires a bank to provide another service provider (third party) with information about the customer’s account, as well as access to it to initiate a payment service, with the customer’s consent. Again, this is a step that has made everyday life much easier, for example, by making it much easier for consumers to pay for goods and services in a variety of places: access to account and payment services is now not only available in the bank’s own environment, such as online banking or a mobile app, but also through a variety of other electronic solutions.

Overall, the EU has been a pioneer in open banking and is now well ahead of other regions. The number of people using open banking is expected to grow rapidly in the future. For example, according to Statista, more than 12 million people were using open banking in the EU in 2020, and more than 63 million are expected to use it in 2024. By comparison, in the Far East market, 7.7 million consumers were using open banking in 2020, and 28 million are forecast to use it in 2024.

Banking as a service

Another major development that has changed banking widened the range of possibilities, and made everyday life easier is Banking as a Service (BaaS). This is the possibility for non-banking corporate products to offer digital banking services to their customers, even if they do not have the appropriate license to provide financial services. This opportunity is created when licensed financial service providers integrate their digital banking services.

BaaS will undoubtedly continue to bring changes and benefits in the future. For example, according to the global research company Verified Market Research, the global market value of BaaS in 2020 was $356.26 billion. By 2028, it could grow by as much as five to six times. It is worth noting that according to the research, Europe accounted for around one-third of the BaaS market in 2021.

BaaS is a win-win situation for customers, financial service providers and non-banking companies alike. Customers get very simple solutions with minimal time costs, while non-banking companies can also create and offer financial services with the help of licensed financial service providers. And licensed service providers themselves have additional markets and more opportunities.
Thus, many changes have taken place in the banking sector in recent years, some of the most significant of which have been introduced in the EU. Whereas the European Union used to be dominated by conservative commercial banks, it has now been replaced by fast, innovative digital banks. They are making banking easier for small and medium-sized businesses and innovating the financial industry.

Ekmel Cilingir, Chairman of the Supervisory Board of European Merchant Bank

Ekmel Çilingir | Chairman of the Supervisory Board of European Merchant Bank UAB