Demand for instant payments, an area in which certain corners of Europe have lagged other parts of the globe, is, according to PwC, disrupting Luxembourg’s payments ecosystem, as well as putting strain on the existing infrastructure. At the same time, innovation in B2B payments the new frontier of payments.
These changes in payments and others are taking place against the hugely increased profitability of the Luxembourg banking market, which collectively recorded a 2021 net profit of 30.8 percent.
The report noted a slight drop in the number of authorised banks. However, overall banking assets grew 11.9 percent to hit 951.7 billion euros, up from 850.1 billion euro the year previous. “A testament to the high performance of the country’s banks,” according to a PwC press release.
“The Luxembourg banking sector continues to operate a formidable and dynamic banking ecosystem, marked by consistent growth in assets and evolving business models largely focused on client proximity,” said the release, which accompanies a report on the banking sector that highlights the payments revolution, entitled “Banking Trends and Figures 2022: The Payment Revolution - an opportunity to enhance Banks’ Digital Transformation”
Structural reshaping
The banking sector is undergoing a structural reshaping due to the ongoing disruption caused by rapid technological innovation, which intensifies the need for new business models, operations and processes, PwC argues. Of all the banking sub-sectors, payments stands as the archetype of how innovation can force an industry to change, it said.
According to PwC, factors including the demand for instant payments, the entry of fintech and big tech players, and the AI-enabled integration of financial service offerings within traditionally non-financial platforms have all accelerated the digitalisation of payments and effectively limited the use of physical cash in recent years, especially during the Covid pandemic.
The payments revolution, which got under way over 30 years ago, has become very active in recent years, helped by technological chances and shifting market dynamics, explained Roxane Haas, banking and capital markets leader at PwC Luxembourg (see photo). Regulation has also had a big impact in the digital transformation of the payments landscape, she added. “As a financial centre with immense global focus, Luxembourg has not been exempt from the impacts of this payment revolution,” said Haas.
Important for Luxembourg
According to the report, the impacts of the payments revolution on the financial services industry and how banks are facing up to the market changes in this emerging landscape is particularly important for Luxembourg, given the country’s significant role in financial services and as a hub for some of the leading technology players driving the evolution of payment methods.
Luxembourg has positioned itself as a major European hub for payment innovation through its strong national digitalisation drive, cross-border payment expertise, effective regulation and the provision of required infrastructure, which have all attracted many multinational payment service providers, said PwC.
When it comes to B2B payments, while banks have already launched operations in this area, PwC’s Jörg Ackermann explained “there is a need for more proactiveness in this still-developing segment which is awash with significant opportunities for banks -with those that fail to optimise client proximity and value-added services bound to be left behind.”
Payments of the future
Ackermann said that banks need to evolve, collaborate, take initiatives, but with the right regulatory support “banks would not only thrive but will be well-positioned to lead the payments sector of the future.”
PwC has identified five strategic considerations that it said will help banks prosper in the new payments segment: Differentiate your business, make partnerships with FinTechs, anticipate further changes, drive the development of global solutions, and remember that regulators have a role in levelling the playing field.
As it has every year so far, the PwC report includes an analysis of the financial statements of the six largest country segments of banks in Luxembourg: UK/North American, Chinese, French, Swiss, German and Luxembourg.