N° 131 : Digital transformation in the French banking sector

Three major changes define the current digital transformation: firstly, the expectations of customers, whose digitised uses were confirmed during the recent health crisis; secondly, the competitive environment - already significantly affected in the area of payment - with the effective emergence of new players, "Fintechs", and the prospect of an increased presence of "Bigtechs"; and lastly, the development of new technologies, which are renewing prospects as regards the analysis of data and connections with other players, partners or customers. When analysing the risks and opportunities, it is indeed the first development that is at the heart of the considerations of surveyed institutions: the digital transformation of the industry means that they run the risk of losing their relationship with customers whose new uses they would not be able to satisfy; and conversely, it allows them to consider new offers and better quality services. It is therefore a natural consequence that the banks' efforts are most notable in this area -online interaction has become the norm and the tools developed for this purpose have progressed considerably- and that such area sees a concentration of numerous projects for the coming years.This also affects how banks approach future competition with new entrants: determined to maintain customer relationship in their value chain, they must nevertheless anticipate scenarios where it will be necessary to cope with their competitors. The increasing number of acquisitions of innovative players (technical suppliers, Fintechs, etc.) and partnerships testifies to the banks' desire to anticipate changes in the banking market. The increasing number of acquisitions of innovative players (technical suppliers, Fintechs, etc.) and partnerships testifies to the banks' desire to anticipate changes in the banking market. However, it requires significant efforts to integrate these innovative partners into their processes and to operate using an open architecture - whether it be by distributing products designed by others or by making their banking services available on an à la carte basis. These banking-as-a-service or banking-as-a-platform models -which could foreshadow an ever-increasing use of and adaptation to platforms by the banking sector- are, however, not universally adopted by banks, and they are never a core strategic objective.

In terms of the technologies used, the last four years have seen a clear maturation of the banking industry in the development and deployment of artificial intelligence-based tools: prototypes have been followed, in many places, by operational solutions that contribute to improving relations with customers, better identifying risks and supporting the fight against money laundering and terrorist financing. Conversely, the progress of distributed ledger technologies appears to be slower-paced: very few use cases have emerged. It is also proceeding in a more differentiated manner: only a portion of the players seems to be actively exploring the field, expecting that the stabilisation of the regulatory framework and the emergence of secure tokenised assets (central bank digital currency) will allow for the widespread development of products and services related to shared electronic registry systems (DLT - Distributed Ledger Technologies).

In terms of risk management, the digital transformation is also changing the landscape, increasing certain risks and at the same time offering tools to better identify and control them. Cyber risk is a prime example to illustrate this trend. With the increasing surface area of exposure to risk and sophistication of cyber attacks, security is one of the major concerns of the institutions surveyed; this concern is consistently expressed throughout survey responses. In this regard, the use of new technologies and state-of-the-art computing methods can be beneficial for the development of effective security solutions. Artificial intelligence, in particular, is recognised as being more effective in the detection of attacks or in handling suspicious content more quickly. The fight against money laundering shows the same dialectic pattern: on the one hand, the fragmentation of distribution chains, the demand for a totally dematerialised relationship, and the growing use of cryptoassets are factors that increase the risk of money laundering; on the other hand, progress in remote identification technologies, the availability of data, and the ability of artificial intelligence to detect suspicious behaviour open up prospects for the fight against money laundering to be more effective.

As far as governance is concerned, the management bodies of banks are generally presented as being very closely involved in the definition of the strategies implemented: several institutions have set up committees specifically devoted to monitoring the transformations that is underway. However, the financial effects of these transformations, in particular cost reductions or revenue increases in relation to the investments made, seem difficult to measure.

The adaptation of IT systems is naturally a major issue in digital transformation strategies: the rationalisation of systems, the strengthening of their resilience in the face of growing cyber threats and the search for modularity and reactivity - manifested in particular by the increased number of APIs and the rise in the use of the cloud- constitute the guiding principles of such strategies.

However, digital transformation is not just a technical process; it also has a strong impact on human resources management through the major transformations it brings about in the banking business. These transformations involve anticipatory measures during recruitment -with the specific challenge of attracting profiles that are still scarce; they also require change management support for staff that is already employed and the promotion of a culture of innovation within the institution.

Four years after the first ACPR study on the digital revolution, this study on digital transformation makes an observation that justifies such lexical shift: although it is still incomplete, the digital transformation of banks is well underway. Its effects on the landscape, products and innovations of the banking sector are clearly visible. In the financial sector undergoing profound changes characterised by the increasing fragmentation of value chains, banking institutions remain major players today: they have demonstrated real maturity in digital matters and say they are facing the transformation of their business models with confidence.