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Supervisors show their lack of depth in digital

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Last week the European Central Bank issued a report on the state of digital transformation across European banks, and announced that they were not only interested in this space but would be supervising it. Yay! Disappointingly for me, the report and perspectives fell well short of what I think of as truly digital. Here's their announcement with my take on it.

Banks’ digital transformation: where do we stand?

Technological innovation triggers structural change in all areas of the global economy, and banking is no exception.

Well, it took its time. After all retail, travel and even medical supplies have been going through structural change well before banking did.

Digital transformation is not just an option any longer for banks, but a necessity to remain competitive and continue meeting customers’ evolving demands.

Wow, that’s a surprise!

There is no single understanding of what “digital transformation” exactly means.

Maybe not within governments or financial institutions, but most of us working in this domain understand that it is redefining the business model, organisational structure, processes and people in a the institution to have digital at its core, and not an add-on to the old analogue system.

Still, it emerges as a broad concept embracing business models, processes, resources, and the cultural changes that the adoption of technologies enable.

I don’t like the phrase ‘broad concept’. It’s not a concept and it’s not that broad. It’s narrow and basic. It’s changing the system to a digital platform of apps (front office), APIs (middle office) and analytics (back office), with anything physical on top, and not the other way round.

While ECB Banking Supervision will maintain a neutral approach to business models and technology, one of the key supervisory priorities is ensuring that banks properly manage the long-term sustainability of their business model and the risks stemming from digital transformation.

Sounds good to me, but how will you supervise the risks?

As supervisors, we believe that banks can thrive thanks to opportunities opened up by digital transformation if, along the way, they prove capable of properly facing inherent challenges: strategic and execution risks, technology-related and operational risks as well as potential new emerging threats.

Sure, there are huge risks in adapting an organisation to be truly digital. That’s why clever banks turn to people like me and 11FS to help them. Unfortunately far too many turn to the likes of McKinsey as a safe pair of hands when, in reality, many general consultants have as little experience of how to do digital transformation right as the companies that hire them.

Those risks need to be consciously identified, assessed and mitigated via upscaled governance and risk management frameworks as well as investments in capabilities.

The major risk is getting it wrong. Not sure that many identified, assessed and mitigated that. It’s my old saying of Charles Darwin:

The thing I add to Darwin’s quote however is that it’s all well and good being adaptable to change, as long as you know what to change into.

In a first harmonised attempt to build supervisory knowledge at European level, in 2022 ECB Banking Supervision launched two initiatives in this field. First, it engaged with consultants, banks, banking associations and technology companies to gain a general overview of market trends.

You didn’t consult with me.

Second, in the summer it conducted a survey among 105 large banks under direct ECB supervision to assess the status of their digital transformation.

And I bet they all said they’re doing it brilliantly.

The results of the survey vary across banks and further dialogue is needed to fully validate their self-assessment.

We’re doing it brilliantly but our competition aren’t.

Still, the survey itself and the market outreach already reveal some interesting trends worth highlighting and probing further. The results relate to six focus areas (further details are available in the full overview):

  1. Digital strategy and KPI steering: almost all European significant institutions have a digital transformation strategy, although the degree of maturity differs. Main objectives are becoming more customer-centric in how products and services are offered as a lever to increasing revenues and improving operational efficiency by automating processes and modernising IT infrastructures. Most of the banks however still face challenges in developing Key Performance Indicators (KPIs) to monitor digital progress, quantify the impact of digital transformation on their profitability and track effectiveness of implementation.
  2. Digital business: most digitalisation strategies are focussing on improving the customer experience and offering digital services and products 24/7. However, keeping track of digital customers and sales remains a challenge.
  3. Investments and resources: most banks do not yet have a dedicated digital transformation budget, but on average one fifth of the IT budget is spent on digitalisation. Adequate financial investments and talented staff are confirmed as key success factors.
  4. Governance and cooperation: are key enablers of digital transformation. Banks themselves recognise the importance of setting an adequate tone from the top and an effective internal control framework. Having sufficient IT experience both in the board as well as the second and third lines of defence remains an attention point.
  5. Use of innovative technologies: cloud is most commonly used and seen as a foundation for the use of other technologies. Also, application programming interfaces (APIs) and artificial intelligence (AI) are used by most of the banks with increasing business relevance. Distributed ledger technology (DLT) on the other hand, is only used by a very limited number of banks, with crypto-related activities and related exposures being very insignificant so far.
  6. Risks: as banks open up their IT infrastructures and increasingly rely on third party providers, they face heightened risks of third-party dependency, money laundering, fraud and cybersecurity. These risks require further monitoring and must be taken into account in banks’ governance and risk appetite frameworks. These risks are also among the supervisory priorities of ECB Banking Supervision for 2023-2025.

What about leadership and culture? Is the whole business being transformed or is it delegated to some Chief Digital Officer working beneath? Is this a cost-cutting initiative or a customer-enhancing service? There are so many other areas that are more important than those cited above.

In our upcoming supervisory activities, we plan to continue our work on digital transformation by complementing this preliminary analysis with further investigations in specific areas that require further attention.

Leadership, culture, structure, organisation, processes, use of ecosystems, platforms and partnering and more of those please.

These include targeted reviews and on-site inspections, which will be conducted in the course of 2023 and communicated publicly via the supervision newsletter and website.

What can an on-site inspection achieve?

Inspector: “Are you digital?”

Bank: “Yes!”

Inspector: “Show me.”

Bank: “Here’s our app.”

Inspector: “OK.”

The results of those investigations will be part of our supervisory dialogue with banks and pave the way for shaping supervisory guidance and expectations in the coming years.

Can I volunteer to be an inspector?

I know I’m being harsh but come on. Digital is hard, but it’s not hard if you know how. The key is being adaptable to change and, more importantly, knowing what and how to change.

Anyways, here’s their report if you’re interested:

Chris Skinner Author Avatar

Chris M Skinner

Chris Skinner is best known as an independent commentator on the financial markets through his blog,, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal's Financial News. To learn more click here...

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