Based on an analysis of Deloitte’s database of interbank ecosystems in Europe, Luxembourg sits in the lowest 25% of European countries in terms of number of interbanking initiatives realized (in Luxembourg’s case, five initiatives), below the United Kingdom (11 initiatives, placing it in the ‘median plus 25%’ category) and the top 25% of countries, Italy, Poland, Portugal and Belgium with 19, 15, 14 and 14 respectively.

“Greater fiscal incentives would help banks [in Luxembourg] collaborate better,” Yves Maas, CEO of the Luxembourg Bankers Association (ABBL), commented at a presentation of the Deloitte analysis on Wednesday.

Economies of scale and new technologies

Interbanking collaboration is a way for banks to achieve vast economies of scale. For example, the consolidation of ATM networks in response to reduced cash use.

According to the Deloitte analysis, the number of interbank ecosystems in Europe have almost doubled since 2014 to around 205 in response to evolving technologies, regulation and changing client needs.

“Payments and cash are the biggest areas for collaboration so far, but there’s a growing wave in training platforms and incubators,” said Kasper Peters, a partner at Deloitte Belgium.

As well as economies of scale, collaboration allows for increased market adoption of products, greater competitive advantage over Big Tech, new revenue streams, reduced risk and improved financial inclusion, the report said.

However, Luxembourg is not fully embracing this kind of collaboration.

“Collaboration is a strategic and important investment, but the larger the product the larger the investment,” said Maas. “Revenues in banking have been on the stable side for some time and there’s a limit to how much costs can be driven down.”  

Maas suggested a fiscal incentive would help banks in Luxembourg make the investments necessary for collaboration. “Either fiscal relief [for banks] or jointly sponsored projects like the Luxtrust public-private initiative,” he said, referring to the certification authority that issues and monitors secure electronic certificates. “These would help banks to overcome some of the other obstacles to collaboration, for example, at the moment banks are not feeling the pressure from each other or the regulators, governance is an obstacle, as is the loss of control [inherent in collaborating with one another],” he added.

Collaboration little and large

Another challenge for interbank collaboration in Luxembourg is the market fragmentation, with around 120 banks in the country, many of them small.

“The trend in Belgium is a divide between large bank collaboration and small bank collaboration, because their business cases are so different,” said Peters. “We need to accept that in various areas of interbank collaboration there will be coalitions of variable geometry.”

Maas argued that critical mass was important to collaboration. “If you want to develop a joint solution you need a certain critical mass, potentially one or two larger players taking the initiative complemented by many smaller ones.”

As the retail banking sector in Luxembourg is comparatively smaller than that of its neighbours, it is crucial that banks find the right topics on which to collaborate. The Payment Services Directive, governing the sharing of customer payments data, and cybersecurity are areas the Deloitte participants pointed to as having the same requirements.

“Every country must select the right topics. Interbanking is not an end in itself,” said Peters.

Four traits for success

The successful interbank ecosystems all share four drivers, according to the Deloitte report. A strong business case that can set out a near-term benefit, aligned strategy of participants, support at the executive level and an ability to operate independently of its banking parents.

“We believe in interbank collaboration we will see a rise of multipurpose vehicles, consolidation by clustering or by mergers and acquisition, and better European scaling,” said Peters. However, scaling at a European level is still lagging, with only 12 such initiatives noted since 1960, according to the Deloitte study.

For European scaling to have greater effect, a European mindset is needed in product design from the get go. “We need to call on national authorities to think from a European mindset at the very start [of their cooperation], said Peters.