Banking is, in essence, about processing information and making predictions – about the future liquidity needs of depositors, the ability of borrowers to repay loans, the quality of collateral. Some of the necessary information is measurable, while some is rather “soft” and comes from repeated interaction with customers.
Traditionally, banks have had a key competitive advantage over other financial institutions: by providing different financial services under one roof, they obtain valuable information to make predictions.
Digital innovation may thus change banks’ competitive advantages – it can hinder or boost their business models.
New technologies, in particular artificial intelligence (AI), improve the processing of information. Banks use AI to upgrade their services, better manage risks and operate more efficiently. More than 80% of banks supervised by the ECB identify process automation as an important way of reducing costs.
But digital innovation also accelerates structural change in the financial sector as new competitors enter the scene and provide services along the banking value chain. Banks under ECB supervision indeed see the potential loss of customers as one of the risks associated with the digital transformation.