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InsideNow

Banking—Mutualization trends

While collaborations between FinTechs and banks are a hot topic—FinTechs being seen as the future of finance, compelling banks to work alongside them—banks have also been collaborating with each other for several years now.

Authors

Authors

Kasper Peters - [Sponsoring] Partner - Strategy - Monitor Deloitte, Belgium

Alexandre Havard - Director - Consulting Banking - Deloitte Luxembourg

Yannick Putzeys - Manager - Strategy - Monitor Deloitte, Belgium

Corina Darii - Analyst - Consulting Banking - Deloitte Luxembourg

Published on 11 March 2021

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Interbanking initiatives in Europe are growing, with banks aiming to make significant savings while meeting regulatory deadlines and client requirements. However, not all of these collaborations work the same way, and certain ecosystems are more successful than others.

So, which partnerships are currently doing better? And, are there any breeding grounds for a successful interbank ecosystem? To answer these questions, Monitor Deloitte commissioned the “Interbank ecosystems in Europe” study, that analyzed 205 active interbank ecosystems in Europe, the results of which were published in February 2021.

Banks have a long tradition of collaboration, but interbank ecosystems have only started growing

The last five years have seen a surge in interbank ecosystems since 2014, the number of ecosystems has almost doubled to more than 205 initiatives across 30 European countries. Banks are facing digitalization pressure, especially from BigTech companies that pose a significant threat due to their size and direct access to customers. Banks risk losing direct client relationships by becoming simple back office suppliers to Google, Apple, Facebook and Amazon (GAFA).

On the other hand, regulatory pressure is increasing, especially in domains where banks are increasingly expected to take on a monitoring role, such as fraud detection, client monitoring and compliance.

Banks see interbanking collaborations as an answer to these challenges, which explains the overall rise of these partnerships in the past few years.

While covering various domains, interbank ecosystems are driven by three main goals

The domains covered by interbank ecosystems range from IT services to compliance, open-banking, and mobile payments. Collaborations in these different domains have evolved in multiple waves from the 1960s to today1, driven by the following three goals:

While covering various domains, interbank ecosystems are driven by three main goals

The domains covered by interbank ecosystems range from IT services to compliance, open-banking, and mobile payments. Collaborations in these different domains have evolved in multiple waves from the 1960s to today1, driven by the following three goals:

Achieving economies of scale

Achieving economies of scale remains banks’ priorities when mutualizing activities. This involves several banks combining an activity to increase scale, thereby reducing costs. For example, several Dutch and Belgian banks have chosen to share their ATM management costs through Geldmaat2 and Batopin3 respectively.

Generating new revenue streams

Generating new revenue streams allows banks to stay competitive and maintain the trust of their customer base. In Luxembourg, five banks in collaboration with other institutions have created LuxTrust4, a digital identity service for professionals and private individuals.

Countering regulatory pressure

Banks can counter the cost pressure of compliance through collaboration. i-Hub, a Luxembourgish mutualized know-your-customer (KYC) solution for the management and digital storage of clients’ data, has led to increased operational efficiency for participating banks5.

Four countries are leading in terms of interbanking initiatives

Italy, Poland, Portugal, and Belgium are leaders in terms of the number of interbanking initiatives combined, they hold 30% of all European Union (EU) collaborations. Our analysis of the evolution of European interbanking shows there is a significant gap between western and eastern European countries6.

The number and type of interbank ecosystems differ across Europe, with most collaborations staying local. While European regulatory bodies are now trying to promote European-wide initiatives, only a few are able to scale up to a European level, mainly because of local legislation or local interpretations of European legislation. We have identified three types of platforms based on their integration into local or European rules.

Four countries are leading in terms of interbanking initiatives

Italy, Poland, Portugal, and Belgium are leaders in terms of the number of interbanking initiatives combined, they hold 30% of all European Union (EU) collaborations. Our analysis of the evolution of European interbanking shows there is a significant gap between western and eastern European countries6.

The number and type of interbank ecosystems differ across Europe, with most collaborations staying local. While European regulatory bodies are now trying to promote European-wide initiatives, only a few are able to scale up to a European level, mainly because of local legislation or local interpretations of European legislation. We have identified three types of platforms based on their integration into local or European rules.

Local platforms— local rules

Most banking initiatives that start on a local level remain within national borders, with most banks adhering to local legislation, therefore limiting their opportunity to scale. The Monitor Deloitte study identified 157 initiatives across all domains, such as itsme in Belgium7, a local leader for mobile identity and digital privacy.

Local platforms—European rules

Although less commonplace at only 36 initiatives, ecosystems that both follow European rules and have activities implemented locally are growing. The driving force behind them is the European Commission, which is actively encouraging an increase in EU-wide initiatives. LUXHUB, an open-banking platform founded in Luxembourg, was created following the release of the revised Payment Services Directive (PSD2) and provides services to 35 banks in 10 EU countries8.

European platform—European rules

Only 12 interbank ecosystems have been able to scale to a European level (or beyond) since 1960, and are mostly active in payments and cash, financial markets, securities and open banking. The frontrunners in this category are Euroclear and SWIFT, two Belgian initiatives that started early and have now reached a global scale. More recently, the European Payment Initiative (EPI), a collaboration between 16 banks and the European Central Bank, has started working towards a unified European mobile payments scheme

Many attempts to create interbank ecosystems fail; successful ecosystems have common traits

One of the main challenges faced by banks is managing the complex stakeholder structure of multiple banking parents. Therefore, a central facilitator should take on the responsibility of connecting the shareholding members to create trust early on.

A clear business case is the main driver for success, if agreed between all participants. Once the business case is defined, all participating parties should be aligned with a common strategy and agree on clear objectives and scope for the interbank ecosystem. It is worth mentioning that this alignment is easier to achieve when collaborations do not impact existing client relationships. Communicating to the market should happen sooner rather than later, committing all participants to the project’s success. Finally, having C-level support from shareholders when starting the initiative is paramount.

Many attempts to create interbank ecosystems fail; successful ecosystems have common traits

One of the main challenges faced by banks is managing the complex stakeholder structure of multiple banking parents. Therefore, a central facilitator should take on the responsibility of connecting the shareholding members to create trust early on.

A clear business case is the main driver for success, if agreed between all participants. Once the business case is defined, all participating parties should be aligned with a common strategy and agree on clear objectives and scope for the interbank ecosystem. It is worth mentioning that this alignment is easier to achieve when collaborations do not impact existing client relationships. Communicating to the market should happen sooner rather than later, committing all participants to the project’s success. Finally, having C-level support from shareholders when starting the initiative is paramount.

Banking associations and public authorities contribute to the success of interbank ecosystems

Banking associations have always had banks’ best interests in mind, representing the financial sector on both national and international levels. Interestingly enough, their initial goal was to lobby governments and regulators on behalf of their participants.

Public authorities have shaped banks’ developments through regulations and government support. For example, the EU has issued several important directives aimed at banks that have further forged interbank ecosystems.

Banking associations and public authorities contribute to the success of interbank ecosystems

Banking associations have always had banks’ best interests in mind, representing the financial sector on both national and international levels. Interestingly enough, their initial goal was to lobby governments and regulators on behalf of their participants.

Public authorities have shaped banks’ developments through regulations and government support. For example, the EU has issued several important directives aimed at banks that have further forged interbank ecosystems.

Evolution and role of banking associations in Europe

Sixty-nine banking associations are active across Europe today, both at national and European levels, with the first association founded in 1905.

Number of banking associations

1900 - 2020, Europe

Banking associations have three main roles regarding interbank ecosystems:

  • Initiate: proactively stimulate interbanking collaborations by driving and coordinating shared member initiatives. One example is Febelfin, which coordinated a study regarding ATM optimization in Belgium, leading to the two initiatives Batopin and JoFiCo.
  • Contribute: actively support initiatives taken by member banks. One example is the Luxembourg Bankers’ Association (ABBL), which conducted surveys of its members on the potential mutualization of functions such as open banking and PSD2, paving the way for LUXHUB.
  • Promote: facilitate interactions between banks and other players to foster consensus. Most banking associations play an important role in the positioning and representation of their members in negotiations with third parties

Public authorities are playing an increasingly important role in the interbank landscape

Governments play a prominent role in the interbank landscape through direct support and backing about one-third of all analyzed initiatives received direct or indirect support from governments.

When publishing new regulations or adapting existing ones, governments can influence certain interbank ecosystems, playing an indirect role in their evolution as a result. They can take an active and direct role through government bodies. They can also provide business incentives, such as a commitment to implement a new solution for government services or the provision of subsidies to build and roll out a solution. Examples can be found in the areas of identity services; starting an enterprise; payments; or credits.

The interbank outlook is bright

Over the past 60 years, the driving forces behind the creation of interbank ecosystems have shifted significantly, from economies of scale, to regulatory pressure, to revenue generation. Looking ahead, BigTech, regulatory constraints, digital transformation and cost control seem to be the four main drivers for interbanking collaboration.

Therefore, interbanking ecosystems have many drivers encouraging their growth, with five areas expected to become particularly prominent:

The interbank outlook is bright

Over the past 60 years, the driving forces behind the creation of interbank ecosystems have shifted significantly, from economies of scale, to regulatory pressure, to revenue generation. Looking ahead, BigTech, regulatory constraints, digital transformation and cost control seem to be the four main drivers for interbanking collaboration.

Therefore, interbanking ecosystems have many drivers encouraging their growth, with five areas expected to become particularly prominent:

Financial crime

Financial and digital inclusion

Data hubs

Sustainability

Beyond banking services

Three transversal elements will further shape future interbank ecosystems:

Rise of multipurpose vehicles

Consolidation is likely to happen in the future, by clustering or through mergers and acquisitions. Existing interbank ecosystems will start operating in multiple domains, requiring them to house several distinct initiatives under one consolidated roof.

European scaling

Ecosystems have rarely been able to go beyond the local level. However, we have noticed a more active attitude from European institutions, which are encouraging banking collaborations for geostrategic reasons.

Acceleration of mixed ecosystems

Over the last few years, players from different industries have started joining banks to form different kinds of ecosystems, blurring the lines between industries as a result.

Footnotes

1 Monitor Deloitte study – Interbank ecosystems in Europe, February 2021. 2 https://www.geldmaat.nl/information-english 3 https://batopin.be/en 4 https://www.luxtrust.lu/fr/page/105 5 https://www.i-hub.com/en/about 6 Monitor Deloitte study – Interbank ecosystems in Europe, February 2021. 7 Monitor Deloitte study – Interbank ecosystems in Europe, February 2021. 8 https://www.luxhub.com/our-solutions/products/xs2a-psd2-compliance-api

Conclusion

Interbank ecosystems have experienced significant success in the past, and their time is far from over. The EU and the new requirements brought by the pandemic are expected to be the main catalysts for these ecosystems to flourish in the near future. However, a culture of collaboration and trust must be further entrenched among European banks, and banking associations have a crucial role to play in this respect.

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