Technology is banks’ new battleground
European institutions are playing catch up with their U.S. rivals in tech spending
European banks are spending vast sums on technology—but it may not be enough to defend against the incursions of bigger, richer American rivals.
U.S. lenders already dominate investment banking in Europe. The big risk for the continent’s banks is that slicker tech could give their American rivals a platform to make gains in lending to companies—the Europeans’ traditional stronghold.
This year, Europe’s banks plan to make technology investments worth in aggregate $77 billion (U.S.), according to consulting firm Celent. That compares with $105 billion for their U.S. rivals. Faster, more seamless trading systems have long been a priority, but tech spending has shifted across business lines and from back office to front office. It can cover everything from maintaining decades-old systems to cuttingedge artificial intelligence. Unfortunately, European lenders are more focused on patching old systems. Less than a quarter of their budgets will be spent on new tech this year. U.S. rivals were at that level five years ago and now spend a third on innovation. J.P. Morgan, an early starter, will spend half of its annual $11 billion technology budget on innovation this year.
J.P. Morgan, Goldman Sachs and other American rivals cleaned up their balance sheets more quickly after the financial crisis, which gave them a head start on competitors in Europe. Their initial tech investments focused on modernizing legacy systems, building platforms to comply with new regulations and automating routine tasks. Over time, more complex tasks have also been automated using artificial intelligence and machine learning. Since 2017, J.P. Morgan has used a software program to review commercial loans, which the company estimates saved 360,000 hours a year of lawyer and loan officer time.
European banks are behind in this process. Hampered by lower interest rates and profits, they have had less cash to spend. They have also contended with additional regulation— most recently the new European Union data privacy rules and open banking regulation.
The Americans’ early lead has in turn given them lower transaction costs and more flexible systems, adding to the challenge Europe’s banks face as they enter another round of slowing growth and falling interest rates.
The digitization of financial services has brought banks everywhere face to face with new competitors. Amazon, Google and Apple are offering selected financial services to their customers, such as credit cards, payment services and inventory loans to Amazon marketplace sellers. But the tech giants are unlikely to want to become full-scale banks and risk an avalanche of regulation.
Small fintech companies are also developing new products, often without the regulatory burden that traditional lenders face. Banks on both sides of the Atlantic are using accelerator programs and other types of partnership to incorporate new fintech products into their offerings. While they may hit on a great new product, any competitive advantage is likely to be short-lived as customers will expect their bank to add that service soon—and won’t necessarily be prepared to pay for it. In many cases, European banks may be better off eschewing this arms race, focusing their investment on core capabilities and only offering new products or services once they have proven popular with customers. That would make the most of their limited firepower, even if they linger behind their American rivals.
Still, Europe’s banks need to defend their core turf of corporate lending to protect vital customer relationships. Ominously, the top five U.S. banks gained three percentage points of commercial-lending market share in Europe, Middle East and Africa between 2015 and 2017, according to consulting firm Bain & Co.
European banks may already spend more than they would like on technology, but investors shouldn’t be surprised if they have to open their wallets even wider.