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Retail customers have adopted digital banking services en masse during the Covid-19 pandemic, as high street branches remained closed and cash transactions have plummeted. Many banks are re-thinking their digital strategy as a result, reports Rob Langston.

This article is part of The Banker’s Special Report, A new era in retail digital sales for CEE banks, in association with Backbase.

The stay-at-home orders enforced around the world to prevent the spread of the coronavirus has driven retail customers online in a way that few could have imagined before the onset of the pandemic. Covid-19 has acted as a catalyst for longer-term trends already in motion before the virus reached Europe.

One trend that has accelerated over the past year is customers’ adoption of digital banking, as branches have remained closed and many aspects of spending and saving have moved online. “During the pandemic, the worldwide digitalisation of businesses made a leap forward, which would have taken five years in non-crisis times,” says Pierre-Yves Guegan, head of retail banking for central and eastern Europe (CEE) at UniCredit.

“Before 2020, the pace of digitalisation of banking services was not the same in every country. The pandemic has greatly accelerated the digitalisation of our products and services that was already underway [across the region],” he adds.

The shift to digital banking had been building for many years before the outbreak of Covid-19, and is something that those in the CEE have embraced much more readily than their peers in western Europe. Mr Guegan reports that UniCredit CEE has seen adoption of digital banking by retail customers growing at a good pace across the region, particularly in countries such as the Czech Republic, Hungary and Romania.

“Our customers have rapidly and increasingly embraced digital solutions, and active digital users continue to increase alongside digital sales,” he says. “We also see an acceleration in the service model as customers are visiting our branches less, paving the way for the future evolution of our omnichannel service model.”

Embracing change

Mastercard’s Evolution of Banking 2020 study found that users in eastern Europe were much more positive about digital banking platforms compared with their western peers. Exactly half of eastern European respondents said they frequently conduct financial transactions online or via an app, compared with just over one-third (39%) of western Europeans.

Pawel Rychliński, president of the CEE division at Mastercard Europe, says while Covid-19 has “undoubtedly” had a significant impact on the digital transformation of everyday life, there are some historical and cultural reasons why eastern Europeans have embraced digital banking with greater enthusiasm.

“In CEE, the development of mobile banking applications has progressed further in terms of their innovation, functions and consumer adoption,” says Mr Rychliński. “The reasons for this can be debated, but certainly one of the most important factors is the fact that banking in CEE, after the political and economic changes in the early 1990s, started almost from scratch when we talk about legacy technology.”

Therefore, it was easier for banks and their clients to move directly into new solutions backed by innovative technologies, rather than to upgrade those built in a completely different technological era.

“That is why in CEE countries, contactless technology, or the usage of online and mobile banking, was so quickly and seamlessly adopted by consumers,” says Mr Rychliński.

Indeed, consultancy McKinsey noted in a report on digitisation in the region that financial transactions based on payment cards had “entirely bypassed” the use of cheques more commonplace in other developed markets.

Fintech blossoms

A healthy environment for fintech start-ups and neobanks has also emerged in recent years, with strong digital infrastructure and talent to be found in the region. According to Raiffeisen Bank International’s CEE Fintech Atlas 2019, that year represented a new peak in investment in many CEE markets. It highlighted Belarus, Poland, the Czech Republic, Slovakia and Slovenia as leading digital banking markets.

The fintech expansion has been bolstered by initiatives such as open banking, which has increased market competition by allowing both traditional banks and neobanks to offer new products and services to retail customers.

“Eastern Europeans embrace innovative digital banking services offered by well established, traditional banks, mostly because these institutions already offer very innovative solutions,” says Mr Rychliński. “However, this does not stop consumers enjoying what many fintechs in our region have to offer in both the payments and personal finance areas.”

As well as becoming significant players in the CEE market, Mr Guegan says fintechs have made a major contribution to the transformation of the region’s banking sector. “Banks have a number of significant strengths compared to fintech start-ups: capital, customers, safety and trust,” he explains. “[Incumbents] are leveraging fintech companies as a source of inspiration to transform and improve customer offerings and services, using digital platforms and analytics.”

UniCredit is “strongly committed” to developing innovative and efficient products and services, and has been partnering with fintechs to accelerate its digital transformation for several years already, he says.

The role of the regulators in the adoption of digital banking must not also be overlooked, says Alistair Stuart, managing director of European Depositary Bank Digital Banking, which is part of the Apex Group, given the often “complicated” relationship they have in trying to promote innovation while safeguarding customers. “It’s a real challenge to regulate a complex, multi-dimensional market like Europe,” he says. “It’s somewhere between the devil and the deep blue sea where you sit as a regulator.”

Branko Popovic, director of strategy and transformation for southern and eastern Europe at consultancy PwC Serbia, argues that regulators in the region have helped to promote digital banking and allowed new entrants into markets. “Regulators are promoting competition — this may be by simplifying the various procedures to allow new entrants, like some of the neobanks, [to flourish],” he explains.

Beyond the pandemic

It is difficult to discount the impact of the pandemic on the long-term adoption of digital banking. For many banks, it has been an opportunity to enhance their existing offerings and build out the range of digitally available products and services to increase sales.

“In the first quarter of 2020, we made more progress in our digital transformation than in the past three years,” says Mr Guegan. “All this was possible thanks to our previous work and investments in digital transformation. We are now leveraging our previous investments in mobile banking, internet banking, contact centres and paperless branches.”

For example, in the past year UniCredit boosted its digital penetration by delivering a common customer experience in its mobile banking channel in seven CEE countries. “This resulted in a 54% increase in active mobile users and a more than 200% increase in mobile transactions,” he says.

It also led to the development of new services, including more than 200 Covid-19-related initiatives in CEE markets, Mr Guegan adds, allowing customers to continue receiving best-in-class banking services during the lockdown periods. “For example, in a few months we developed a full end-to-end online current account opening in Hungary and new digital and automated processes for moratoria applications in Slovenia,” he says.

While digital banking is likely to remain a feature of post-pandemic life, Mr Rychliński argues that does not mean banks can afford to be complacent. They will need to prioritise investment in innovations, personalise the customer experience and focus on security and data privacy, he notes.

“The outlook for digital banking growth and usage in CEE in the coming years is very promising,” says Mr Rychliński. “The openness of consumers to digital solutions will go hand-in-hand with their increasing availability and advancement, also as a result of the pandemic.

“On the other hand,” he adds, “if financial institutions want to win consumers’ loyalty in the future, they will have to address today’s risks and consumers’ expectations.”

Indeed, conventional banks that stand still are unlikely to prosper after the pandemic with more digital-savvy retail customers shopping around, adds Mr Popovic. Banks will need to consider what they require to be able to compete in what is already becoming a more competitive environment.

“They have to adapt. They have to prioritise digital initiatives and really figure out what is important,” Mr Popovic says. “I’m not even talking about [spending] money: some of these markets are struggling with the availability of [talent] able to design and implement these digital solutions that enable the banks to successfully compete in a digital marketplace.”

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