In small markets, such as those in central and eastern Europe (CEE), digitization presents a unique challenge. Technology costs money, but it is hard to justify spending much of it in countries with populations of less than 10 million (much less, in many cases) and relatively low banking penetration.
Big regional banks say this is where scale comes in. The tiny markets of the Baltics boast astonishingly sophisticated banking technology for the simple reason that their financial sectors are dominated by Scandinavian groups such as Swedbank and SEB. Banks with extensive regional networks can leverage their presence in multiple markets to justify heavy investment in technology.
Franchises
Erste, for example, might have struggled to make its state-of-the-art digital platform, George, pay its way in Austria alone. But add in the group’s substantial retail franchises in the Czech Republic, Slovakia, Hungary and Romania – all of which are due to get George in the near future – and the project looks much more viable.
Arguing the contrary view, some local banks in the region insist that, when it comes to technology, smaller is better. Independent institutions can be faster and more flexible in responding to market needs. Unencumbered by the need to integrate with group-wide platforms, or wait for approvals from head office, such banks can knock up quick-and-dirty digital solutions using off-the-shelf technology – and ditch them at small cost if they do not work out.
Which side is right? Well, both of them to some extent.
Big regional banks do have the advantage of scale but also have the challenge of upgrading existing IT – a task that tech specialists say increases in difficulty in proportion to the square of the size and age of the systems. Having a multi-country network expands the potential user base for a new platform but adds massively to the complexity of implementing it, particularly when some of those markets are in fragmented and developing regions such as the Balkans.
Networks
Big groups have to invest heavily in technology precisely to defend themselves against smaller, more nimble players. Fintechs have shown that cheap technology can be deployed to great effect in banking. Regional banks with far-flung networks also need to know what is going on in them – which already means spending much more on back office systems.
Smaller players, by contrast, are indeed free to bodge together whatever digital solution will attract customers and boost profits. If they get the back office wrong, it may catch up with them at some point – but that will not necessarily be a systemic disaster.