The digital transformation divide in Europe’s banking industry
Bank of America’s recent European fund manager survey points to a hopeful economic picture of growth for the continent.
Fintech is empowering better financial choices and modernising day-to-day banking for Europeans
According to the survey, fund managers have rediscovered their optimism, and gloomy predictions of recession seem to have been narrowly avoided.
Against this backdrop, European fintech is finding its footing once more. Thanks to an exemplary combination of resilient financial hubs and the brightest minds of tech in the region, the continent has fostered an ecosystem that is truly world leading. Fintech is empowering better financial choices and modernising day-to-day banking for Europeans.
As the birthplace of the neobank, Europeans have taken fintech in their stride. Neobanks are now even outpacing legacy banks in app adoption in the region. But while these indicators all appear positive, there are European nations that are yet to fully grasp the digital banking opportunity.
Europe’s digital growth story has regional differences. From Britain to the Balkans, there is a growing digital divide in a continent that is brimming with opportunity – but there is no one-size-fits-all when it comes to the European market.
Challenger banks are using innovative technology to provide country-specific banking tools to suit the specifications of their consumers. And it’s not only neobanks that are ahead of the curve – incumbents are also seizing the opportunity to bridge the financial exclusion gap.
Where does the digital divide lie?
Each nation has distinct nuances to take into account – specific regulatory environments, infrastructure, talent pools, and not forgetting socioeconomic and cultural factors.
Europe’s digital divide is a product of typical characteristics: internet connectivity, digital literacy, the availability of smartphones and digital devices. Disparities in broadband access in urban and rural communities remain stubbornly persistent. According to Eurostat, around 21% of rural households in the European Union do not have access to broadband internet, compared to only 2% of urban households.
In Romania, which ranked lowest on the EU’s Digital Economy and Society Index in 2022, the market is dominated by incumbent banks. Only 69.1% of adults hold a bank account, pointing to low levels of financial literacy and inclusion – underpinned by a preference for a cash economy.
In contrast, the UK has a rate of over 60% fintech adoption growth according to data from Tipalti, and Lithuania has established itself as an impressive fintech ecosystem backed by the nation’s central bank. However, it is too simplistic to reduce the digital divide to regional disparities, as the starker differences lie between countries themselves.
Regulatory environments and regional disparities
Navigating the regulatory architecture in each market is critical – regulators have shown they are not afraid to put pressure on those that seek to evade their parameters.
Supranational regulatory frameworks, such as the European Union’s Payment Services Directive (PSD2), aim to promote competition and innovation in the fintech sector while ensuring consumers’ data is protected. In the UK, the advent of the Kalifa Review in 2021 helped sharpen the focus on creating the regulatory conditions to enable growth in the sector.
There are a handful of national regulators in Europe that do not look too kindly on neobanks. Plus, there is a wariness around automated compliance and risk procedures, and a general nervousness around digital-only business models of neobanks. European nations that have been behind the curve are now playing catch up.
The case for financial inclusion
Some European citizens are facing disproportionate levels of financial illiteracy, and the urgent need for financial education in the region can be met by the neo and challenger banks.
Neobanks are known for their innovative tools that help in educating the public about financial services. Monzo, Revolut, Starling and Zing keep consumers notified of spending at each transaction – and provide prompts to consider budgeting options, spending habits and savings.
The advent of virtual cards allow for seamless e-commerce transactions and ease the management of expenses for individuals. Digitally enabled payments are serving a much greater purpose than meets than eye, by leveraging technology that facilitates financial inclusion.
Country-specific challengers stand a strong chance of directly addressing the pain points of consumers and focusing on financial education. Salt Bank, owned by incumbent Banca Transilvania, has launched as Romania’s first all-digital bank this year. With the backing of one of Romania’s largest banks, it has its sights set on onboarding the country’s unbanked and better serving the digitally savvy.
Similarly, in Greece, Piraeus Bank, a well-established institution in the country, announced in 2022 the impending launch of a digital independent bank in Greece. Snappi is still awaiting its European banking licence, but it promises to bring a digital-first experience to Greek consumers for the first time in the nation’s history. Locally focused challengers backed by traditional institutions benefit from historical trust with consumers and will likely stand the best chance of sustained success.
Europe’s financially excluded have a strong correlation with nations that have not yet experienced the full benefits of digital transformation in banking – or digital transformation more broadly. European governments, businesses and industry organisations all have a role. Digital and financial inclusion efforts must move faster for Europe to harness the full potential of the digital revolution for the continent’s unbanked in order to create a more inclusive society and prosperous economies.
