# What banks can learn from Silicon Valley
Author:  Pal Sinha, Barnali 
Author URL: https://financedigest.com/author/pal-sinha-barnali
Published: 2019-08-17
Category: BANKING
Category URL: https://financedigest.com/category/banking
Meta Title: How Europe's Most Digitalised Banks Outperform Peers
Meta Description: Discover why digital pioneers in Europe's banking sector outperform their peers with a consistent customer focus, flexible product portfolio, innovative
URL: https://financedigest.com/what-banks-can-learn-from-silicon-valleyhtml

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**Five success factors which explain why Europe’s most digitalisedfffff banks outperform their peers**

By **Bertrand Lavayssiere**, Managing Partner at International Financial Management Consultancy, Zeb

![Bertrand Lavayssiere](https://prod.superblogcdn.com/site_cuid_cm5qst7v3003gwirgwqtxn8i8/images/bertrand-450x300-1736839001042-compressed.jpg)

Bertrand Lavayssiere

More than a decade after the global financial crash, most of [Europe’s banks](https://www.financedigest.com/europes-banks-brace-for-russia-fallout-while-u-s-banks-see-limited-pain.html "Europe’s banks brace for Russia fallout while U.S. banks see limited pain") are profitable. It is therefore tempting to assume that the region’s [banking sector](https://www.financedigest.com/is-automation-key-to-esg-success-in-the-banking-and-finance-sector.html "Is automation key to ESG success in the banking and finance sector?") has almost fully recovered from the 2007-08 meltdown, but this is to miss a crucial point. Overall, [Europe’s top](https://www.financedigest.com/malta-retains-top-spot-for-rainbow-europe-rights-say-activists.html "Malta retains top spot for ‘Rainbow Europe’ rights, say activists") 50 banks earnings are insufficient to cover their cost of capital, meaning that their core banking services might lead to long-term stagnation and decline.

There is, however, a promising escape route from this grim fate for banks with sufficient foresight, as revealed in zeb’s latest [annual European Banking Study](https://www.zeb.eu/europeanbankingstudy). Digitalisation—the hottest topic [across](https://www.financedigest.com/white-bullets-piracy-demonetising-programmes-drastically-reduce-ad-revenues-to-piracy-websites-across-europe-analysis-finds.html "White Bullet’s piracy demonetising programmes drastically reduce ad revenues to piracy websites across Europe, analysis finds") the whole industry—could be the “silver bullet” that delivers long-term profits. [Research by zeb reveals that banks which are digitalisation pioneers outperform less digitalised peers across all significant banking and capital market](https://www.financedigest.com/fucoidan-extract-market-research-report-2022-global-forecast-till-2028.html "Fucoidan Extract Market Research Report 2022 – Global Forecast till 2028") KPIs.

Further analysis shows that these [pioneers](https://www.financedigest.com/european-banking-study-2019-profitability-remains-key-issue-for-european-banks-systematic-digitalization-as-a-success-factor-within-growing-competition.html) have absorbed the example set by Big Tech giants such as Google and Amazon and focused on five key [success factors that are equally applicable to the banking industry:](https://www.financedigest.com/enabling-decision-making-success-in-the-banking-industry-3-considerations.html "Enabling decision-making success in the banking industry – 3 considerations") a consistent customer focus, a simple, flexible product portfolio, an innovation-led operating model, an expandable infrastructure and omnipresence in their customers’ daily lives.

Look at the earnings profile of many [European banks](https://www.financedigest.com/european-banks-cash-in-on-rising-rates-as-clouds-gather.html "European banks cash in on rising rates as clouds gather") and one can see immediately why it is no longer an option to rely on traditional, pre-digital solutions to restore long-term profitability. Based on data compiled by zeb, average post-tax return on equity (RoE) among Europe’s [top 50 banks](https://www.financedigest.com/metro-bank-former-top-bosses-fined-over-reporting-error.html "Metro Bank, former top bosses fined over reporting error") reached 7.2% in 2018, 0.6 percentage points higher than in 2017. On paper, the region’s leading banks look like they are moving closer to delivering the [returns expected](https://www.financedigest.com/lufthansa-expects-further-significant-improvement-after-return-to-profit.html "Lufthansa expects further ‘significant improvement’ after return to profit") by investors, with a current cost of equity of around 8.0%. However, appearances are deceptive.

When we drilled deeper into these numbers, we found that the incremental increase in the top 50’s RoE over the last five [years was solely due](https://www.financedigest.com/mechanical-and-electronic-fuzes-market-one-the-most-booming-industry-in-upcoming-years-due-to-global-demand-in-industry-by-2027.html "Mechanical And Electronic Fuzes Market| One the Most Booming Industry in Upcoming Years Due to Global Demand in Industry by 2027") to non-operational factors: principally, reduced loan loss provisions, lower litigation costs and lower taxes. In stark terms, [Europe’s largest](https://www.financedigest.com/portugal-set-to-start-up-europes-largest-floating-solar-park.html "Portugal set to start up Europe’s largest floating solar park") banks are making less money from their core banking services than five years ago.

How, then, can Europe’s leading banks boost their earnings in a stagnant market with a host of new competitors, from digital start-ups and personal finance portals to [online brokerages](https://www.financedigest.com/online-brokerage-robinhood-jumps-29-to-surge-past-offer-price.html "Online brokerage Robinhood jumps 29% to surge past offer price")? In this difficult market, we believe banks have four strategic options. They can consolidate and gain economies of scale through M&A; specialise by focusing on certain products, customers and sales channels; break up the [value chain](https://www.financedigest.com/mussel-extract-market-overview-and-exhaustive-analysis-on-market-segments-supply-demand-value-chain-2022-2029.html "Mussel Extract Market Overview and exhaustive analysis on Market Segments, Supply & Demand Value Chain 2022-2029") by outsourcing and concentrating on core banking products and services; or go “beyond banking” by building or joining ecosystems. For all four options, digitalisation is the key enabler.

The next question is how far Europe’s top 50 banks have pursued digitalisation and it is not easy to answer this in the absence of external benchmarks. In our study, we measured the degree of digitalisation across all banks using a proprietary zeb algorithm which determined how often these financial institutions referred to digitalisation in their [annual reports](https://www.financedigest.com/hmrc-annual-report-and-accounts-2020-21-debt-at-an-all-time-high.html "HMRC Annual Report and Accounts 2020/21 – Debt at an All-time High"), not an exact measure but something which revealed very stark results.This enabled us to cluster [banks](https://www.financedigest.com/uk-watchdog-contacts-banks-following-huge-withdrawal-of-mortgage-deals-ft.html "UK watchdog contacts banks following huge withdrawal of mortgage deals -FT") into three groups: 13 digitalisation [“pioneers”,](https://www.financedigest.com/european-banking-study-2019-profitability-remains-key-issue-for-european-banks-systematic-digitalization-as-a-success-factor-within-growing-competition.html) which emphasised [digitalisation](https://www.financedigest.com/eight-in-10-businesses-recruit-for-digital-transformation.html) very early and continue to stress it strongly; 14 digitalisation “challengers”, which took longer to start communicating on the subject and still do not emphasise it greatly; and lastly, 23 banks that we classified as digitalisation “followers”. Of course, the bias is the potential discrepancy between the intensity of the communication and the reality on the ground.

Meanwhile, the difference between the performances of these three groups in recent [years is striking](https://www.financedigest.com/uk-nurses-begin-biggest-strike-ballot-in-more-than-100-years.html "UK nurses begin biggest strike ballot in more than 100 years"). On average, [digitalisation](https://www.financedigest.com/eight-in-10-businesses-recruit-for-digital-transformation.html) pioneers outperformed [challengers and followers according to every significant banking](https://www.financedigest.com/big-bank-ceos-to-sell-lawmakers-on-relief-diversity-efforts-amid-economic-regulatory-challenges.html "Big bank CEOs to sell lawmakers on relief, diversity efforts amid economic, regulatory challenges") KPI: for example, pioneers registered an average post-tax RoE of 8.7% between 2013 and 2018, compared with 6.0% for challengers and just 2.1% for followers. In the same period, pioneers increased their average operating profit by 5.1%, while the average returns of challengers and followers shrank by 10.1% and 9.6 % respectively. [Digital pioneers were also clearly ahead](https://www.financedigest.com/the-future-of-fintech-forging-ahead-with-digital-transformation.html "The future of fintech: Forging ahead with digital transformation") of the other two groups when comparing efficiency ratios and especially the cost-income ratio. Given this performance gap, it is hardly surprising that digital pioneers generally performed better on capital [markets than challengers and followers](https://www.financedigest.com/market-turmoil-a-boon-for-trend-following-hedge-funds.html "Market turmoil a boon for trend-following hedge funds"). Indeed, pioneers were the only group that achieved a price-to-book ratio of more than 1.0x(while BigTechs are largely above 10).

It is not enough, however, for [banks simply to entrench digitalisation across all operations](https://www.financedigest.com/stellantis-reshuffles-european-financing-operations-through-new-jvs-with-banks.html "Stellantis reshuffles European financing operations through new JVs with banks") for profits to follow. Digitalisation will only work for [banks which understand its implications for their businesses](https://www.financedigest.com/prime-bank-and-agam-spark-lending-revolution-for-individuals-and-business.html "Prime Bank and AGAM spark lending revolution for individuals and business"). In this regard, there is no better role model for Europe’s profit-starved [banks than US technology](https://www.financedigest.com/banks-deploy-ai-3-major-technological-advances.html "Banks Deploy AI – 3 Major Technological Advances            ") giants like Google, Amazon and Apple, the original digitalisation pioneers. To complete our study, we looked in depth at these tech giants’ [business models and identified the five key](https://www.financedigest.com/foot-orthotic-insoles-market-to-generate-us-5-billion-by-2026-growth-key-business-strategies.html "Foot Orthotic Insoles Market to Generate US$ 5 Billion by 2026 | Growth & Key Business Strategies") success factors, based on digitalisation, which banks need to adopt.

Arguably the most important [lesson for banks to learn](https://www.financedigest.com/aml-and-identity-checks-lessons-learned-from-the-natwest-case.html "AML and identity checks: Lessons learned from the NatWest case .") from the tech giants is that digitalisation is not an end in itself. A banking [app](https://www.financedigest.com/why-you-should-use-a-mobile-banking-app-and-how-to-make-the-most-of-it.html "Why You Should Use a Mobile Banking App – and How to Make the Most of It") on a smart phone is not automatically a profit generator any more than the latest back office banking software. Instead, [banks need](https://www.financedigest.com/what-banks-need-to-prepare-for-eba-pillar3-disclosure-of-esg-risks.html "What Banks Need to Prepare for EBA Pillar3 Disclosure of ESG Risks") to see digitalisation as a means to achieving sharper, value-adding customer focus and engagement, combined with efficient, scalable delivery of offerings.

Our research indicates that even Europe’s digitalisation pioneer [banks have yet](https://www.financedigest.com/the-power-of-digital-why-theres-still-life-in-the-traditional-retail-banks-yet.html "The power of digital: Why there’s still life in the traditional retail banks yet") to absorb this lesson fully. For instance, [pioneers](https://www.financedigest.com/european-banking-study-2019-profitability-remains-key-issue-for-european-banks-systematic-digitalization-as-a-success-factor-within-growing-competition.html) have to become faster and more dynamic in expanding their offering and in using customer data to tailor products and services to [individual needs](https://www.financedigest.com/insurance-that-every-individual-needs.html "Insurance that every individual needs…"), without increased complexity. Meanwhile, followers and challengers are in a catch-up race where they must still address such basic issues as [developing authentically customer-centric businesses and automating](https://www.financedigest.com/covid-19-makes-the-case-for-technology-and-automation-for-business-development-in-professional-services.html "Covid-19 Makes the Case for Technology and Automation for Business Development in Professional Services") back office systems.

The hopeful conclusion from our study therefore comes with a cautionary note. [Digitalisation](https://www.financedigest.com/eight-in-10-businesses-recruit-for-digital-transformation.html) can indeed be the “silver bullet” that enables [Europe’s banks to return](https://www.financedigest.com/vodafone-posts-rise-in-q1-revenue-as-europe-returns-to-growth.html "Vodafone posts rise in Q1 revenue as Europe returns to growth") to stable profits. As with any bullet, though, one must aim accurately and pull the trigger at the right time, because [banks need to apply digitalisation in line with their own digital](https://www.financedigest.com/key-considerations-for-building-an-inclusive-digital-banking-experience-fit-for-the-future.html "Key considerations for building an inclusive Digital Banking Experience fit for the Future") maturity. Above all, they must make sure not to mistake the means for the end.


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