Digitalization is forcing banks to change tack

Many fail to recognize that transformation is more than technology. Key findings our European Banking Study 2019:

  • The 50 largest European banks are lacking the necessary profitability

  • In the future, further massive burdens are to be expected

  • Digital banks perform better in all relevant ratios

The calm before the storm

More than a decade after the global financial crash, most of Europe’s banks are profitable in the sense of earning positive returns. It is therefore tempting to assume that the region’s banking sector has almost fully recovered from the 2007-08 meltdown, but this is to miss a crucial point. Overall, Europe’s top 50 banks are not earning enough from their core banking services to avoid long-term stagnation and decline. 


Only 14 out of the 50 largest European banks achieved a sufficient CET1 ratio and a return on equity above their cost of equity in 2018...

Lack of profitability remains the core problem of European banks.

There is, however, a promising escape route from this grim fate for banks with sufficient foresight, as revealed in our European Banking Study 2019. Digitalization—the hottest topic across the whole industry—could be the “silver bullet” that delivers long-term profits.

Our study reveals that banks which are digitalization pioneers outperform less digitalized peers across all significant banking and capital market KPIs.
In our European Banking Study 2019, we measured the degree of digitalization across all banks using a proprietary zeb algorithm which determined how often these financial institutions referred to digitalization in their annual reports. This enabled us to cluster banks into three groups: 13 digitalization “pioneers”, which emphasized digitalization very early and continue to stress it strongly; 14 digitalization “challengers”, which took longer to start communicating on the subject and still do not emphasize it greatly; and lastly, 23 banks that we classified as digitalization “followers”.

The difference in performances among these three groups in recent years is striking. On average, digitalization pioneers outperformed challengers and followers according to every significant banking 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 of the other two groups when comparing efficiency ratios and especially the cost-income ratio. 

“The digital pioneers have adapted BigTech's success factors and prove that Europe's banks can survive in the future.”

Dr. Dirk Holländer, Senior Partner

Learning from role models is the key to success

Further analyses of the European Banking Study 2019 showed that the successful digital pioneers have adopted the tech giants’ business models and focused on five key success factors: consistent customer orientation, a simple, flexible product portfolio, an innovation-oriented operating model, an expandable infrastructure and omnipresence in the everyday lives of their customers.

The most important lesson? Digitalization is not an end in itself.
A banking app on a smartphone does not automatically generate profits, nor does the latest back-office banking software. Instead, banks need to see digitalization as an instrument to achieve stronger, value-added customer orientation and retention combined with an efficient, scalable delivery of offerings.


Success factors of Amazon, Google & Co

Digitalization as a magic formula? Only under certain conditions...

Digitalization can indeed be the “magic formula” that enables European banks to regain stable profits. However, care must be taken to ensure that the dosage and timing are correct, as banks must implement digitalization in line with their digital maturity. Above all, however, they must ensure that they do not confuse the means with the end.