The digital transformation of retail banking

The digital transformation of retail banking

New entrants, tighter regulation, and evolving customer expectations: retail banking must rethink its operating model to adapt to a rapidly changing market and preserve its growth potential. Digital transformation lies at the heart of this challenge. However, banks are not without assets, and Hugues Delcourt, CEO/Managing Director of the BIL Group, explains how Luxembourg’s oldest bank has chosen to look toward the future rather than dwell on the past.

Gérard Hoffmann, Chairman & Managing Director of Proximus NXT Luxembourg, told us in his interview for U&US magazine that the financial sector is expected to undergo an industrial revolution comparable to that experienced by the manufacturing sector, with digital transformation playing a role similar to that once played by the steam engine. In your view, is digital a trigger for revolution or rather a driver of natural evolution?

Rather than a revolution, I see the emergence of digital as an evolution that fits into a long-established trend, marked by technological contributions that have already transformed the banking sector—such as the telex, telephone, and fax. However, unlike these earlier advances, digital technology is dramatically accelerating this evolution, and we are witnessing massive adoption by our customers of digital devices, applications, and technologies in general. While past innovations gradually changed how we communicate and carry out transactions, the speed at which digital is taking hold is exponential. We closely monitor the evolution of our digital channels, and every month we see a real explosion in figures!

We must therefore adapt our distribution models accordingly, especially in retail banking, which until now has relied on a geographical network of branches. Digital undeniably influences the format of these physical points of contact with customers. However, while digital complements traditional distribution, it does not replace it. The real revolution is probably to be found in customer experience: simplifying the banking relationship is at the core of customer expectations. Today, the mere juxtaposition of multiple channels—the multichannel model—is no longer sufficient. Recently, an “omnichannel” approach has emerged, pushing us to redesign and personalize the customer experience. We must not only take into account the different channels and the communication they enable, but also ensure they do not operate in silos; instead, they must be interconnected to make the customer journey as seamless as possible. We are only at the beginning of this transformation, but it promises to be as exciting as it is revolutionary.

I fully agree with this analysis, and the first initiative BIL has undertaken—and continues to undertake, as this is an ongoing process—is precisely the adaptation of its branch network.

In Luxembourg as elsewhere, retail banking remains a proximity-based business. It is therefore important that customers can “see and touch” their bank. However, with the rise of digital and the evolution of interactions between banks and customers, the role of branches is changing. Today, “cashless” branches—where security is more discreet—are becoming places for meeting and dialogue rather than transaction processing, which can now be carried out conveniently via computer, mobile devices, or machines installed at branch entrances.

Inspired by the airline industry, we have introduced “flow managers” who welcome customers and direct them to the most appropriate contact point—relationship managers, tellers, or self-service machines. We have also created “training corners” to help customers learn how to use new digital banking services.

The digitization of banking processes, particularly onboarding, is another major aspect of this transformation. Onboarding is the first interaction between a bank and its customer, yet it is often the most poorly managed process. It is more often a hurdle than a smooth experience, which negatively impacts the future relationship.

I think many bankers are afraid of FinTechs. To some extent, this is understandable, as many of these companies aim to “disintermediate” banks, taking away their role as intermediaries for certain financial transactions. It may therefore seem logical for banks to protect themselves against this trend. However, I believe this is the wrong attitude toward an inevitable phenomenon. Instead, we should try to understand FinTechs and view positively what they can bring to the banking sector. Only by adopting this mindset can we benefit from what these new players offer.

I see three ways to cooperate with FinTechs.

The first is to see them as business opportunities: successful FinTechs will need banking services just like any other company.

The second is to collaborate with them to integrate part of their value proposition. A good example is the Luxembourg startup DigiCash, used by many players in the market. Another example is Simple, a personal finance management company acquired by BBVA, which allowed the bank to strengthen its customer offering by integrating capabilities it lacked.

Finally, FinTechs can improve banking efficiency. International payments, for example, are slow, expensive, and error-prone. Companies like Ripple Labs propose a real revolution in this area. At BIL, we are closely monitoring such initiatives. We have chosen to look toward the future rather than regret the past—it is a matter of survival.

I am also impressed by the massive investments in the sector, sometimes up to $240 million in a single week. This is exciting but also concerning, as it may create a bubble. Not all FinTech startups will survive, especially in a regulated industry where compliance takes time and money.

Ultimately, I do not believe banks should invest directly in FinTech capital. The best way for a bank to support a FinTech is to become its client. Banks can provide FinTechs with a platform to demonstrate their solutions, and dialogue between both sides is essential.

While digital is often associated with retail banking, its impact is much broader.

In private banking, for example, innovations such as robo-investing are shaping the future. While many processes will be automated, human interaction remains essential, particularly in wealth structuring and understanding clients’ long-term goals. These deeply personal discussions cannot be fully digitized.

In corporate banking, we also see major changes, such as peer-to-peer lending and automated credit systems like those developed by companies such as Kabbage in the US, where credit decisions are fully automated.

Digital transformation therefore affects all banking activities and processes, not just front-office operations.

Luxembourg’s strengths—such as dialogue between stakeholders (regulators, government, lawmakers), and its strong ecosystem of banks, consultants, and lawyers—remain highly effective.

What is particularly interesting is Luxembourg’s willingness to embrace innovation rather than reject it. For example, virtual currencies were quickly given a regulatory framework. Unlike some financial centers that take a laissez-faire approach, Luxembourg tends to analyze, accept, and then regulate.

This regulatory mindset is a strength, not a weakness. The acquisition of Coinbase by the New York Stock Exchange to create a regulated Bitcoin exchange shows that such an approach is valid.

Luxembourg also benefits from the EU “passporting” system, allowing financial services licensed in one member state to operate across the EU. FinTechs are attracted to Luxembourg as a regulated launch platform to expand across Europe.

While Luxembourg may not compete with London or Hong Kong in terms of capital raising, it offers a valuable niche: helping FinTechs scale within a regulated European environment. Exciting developments are expected in the coming years.