The financial sector in Europe is undergoing a profound transition. The war in Ukraine, high inflation and the threat of recession have put pressure on the profitability of players. The figures speak for themselves: over 52 percent of the banks and wealth managers surveyed stated that they intend to tackle full-spectrum digitisation projects within the next two years in order to remain competitive. While more than 40 percent are already working on innovative concepts for their customer experience. This is the finding of the recent study “Unlocking opportunity in challenging times: innovation in European Financial Services” commissioned by Objectway - global TOP-100 FinTech provider of as-a-service software and service growth platform to banks, wealth and asset managers - to GlobalData, leading global provider of business intelligence and data analytics. 

A clear majority, almost 70 percent, also believe that ever-increasing regulatory pressure is forcing them to continuously question and adapt their business model. "Investor protection and environmental concerns are increasingly becoming priorities for regulators in Europe," explains Luigi Marciano, founder and CEO of Objectway. In light of the recent financial crisis and the "bank run" on private banks in the U.S., he said the call for stricter international regulation is inevitable. While the extent of the changes is uncertain, they are expected to create a number of additional costs for, say, administration and legal departments. Therefore, a shift to more efficient, digital and technologically advanced business processes will be necessary. Changing customer expectations regarding sustainable investments or new communication channels make technological progress inevitable for the financial sector.

Declining profitability and skeptical customers     
The study shows that the private wealth sector's earnings forecasts for 2023 point to another year of stagnation. In addition, clients are steadily minimising the number of wealth managers they use. While a private client worked with an average of 4.6 wealth managers last year, that number is now down to 4.2. Assets under management, on the other hand, remain stable. According to Marciano, this indicates that clients are reducing their investment options because, for example, their portfolios are not growing or other requirements in the cooperation are not being met. According to the study, the increasing competition is clearly noticeable at around 84 percent of the financial companies surveyed.

Everything rises and falls with customer satisfaction     
To overcome this stalemate, the only way forward is to go digital. The study shows that banks and wealth managers increased their investments in technology by 8.5 percent last year and will probably increase them by a further 9.2 percent by the end of the year. The aim is mainly to improve the customer experience for increasingly demanding digital technologies, optimise processes and business procedures, and further develop the range of products and services. Just under the majority, almost 40 percent of respondents cited customer experience as the most important priority. "Increased competition between players, the challenge of digitalisation and the ability to then guarantee the results of investments are the biggest challenges," comments Marciano. He says a lasting relationship with increasingly demanding customers is the key factor. Artificial intelligence (AI) is the big issue here, with almost 50 percent citing AI and machine learning as the biggest changes in customer experience strategies over the next two years, followed by expanding the number of customer-facing channels (35.6 percent).

ESG offering is a must - not a "nice to have"

However, when it comes to innovation in terms of offering, ESG investments take the absolute lion's share. Across the industry, 84.5 percent plan to add or expand ESG investment options in the next three years - led by Private Wealth at 97.2 percent. "Sustainable investing is on the rise among high-net-worth individuals in Europe and globally, as awareness of positive social and environmental impact combined with improved financial returns grows," Marciano said. In this regard, he said there are several ways to develop or sharpen an ESG-compliant profile. Creating new investment solutions is the natural response to changing investor priorities, according to 73 percent of respondents. Other important means of developing an ESG brand cited in the survey included asking clients about their ESG views (64.7 percent) or providing additional support and resources for financial education (48.5 percent).

The need for strategic partners

Regardless of the company's priorities, successful strategic innovation requires a coordinated approach and shared goals among all stakeholders. "More and more companies are recognising the benefits of having an ecosystem of fintech and wealthtech experts and are outsourcing aspects of their business. In doing so, they are creating new opportunities for growth while reducing the cost and complexity of administration," Marciano explains. Flexibility is the top reason for outsourcing an innovation project, according to the study. This is especially true in large companies (47.6 percent) that have internal resources but do not want to use them exclusively for what could be a critical modernisation. The other key factor, at around 40 percent, is clearly cost, especially for smaller companies. This is because it is usually not cost-effective for so-called boutiques to develop software internally.