The Luxembourg banking sector continues to operate a formidable and dynamic banking ecosystem, marked by consistent growth in assets and evolving business models largely focused on client proximity. Even though the year 2021 saw a slight decrease in the total number of authorised banks, overall banking assets grew by 11.9% to hit EUR 951.7bn from EUR 850.1bn the previous year - a testament to the high performance of the country’s banks.

The sector is also undergoing a structural reshaping, with the ongoing disruption brought about by rapid technological innovation intensifying the need for new business models, operations and processes. Of all the subsectors within this sector, the payment sector perhaps stands as the archetype of how technological innovation can reshape an industry’s approach and create an obligation to change.

The new payments landscape

Digitalisation is radically changing the European banking landscape - especially within payments, which is in a new phase of the so-called payment revolution that started three decades ago. Factors such as the demand for instant payments, the entry of fintech and big tech players, and the AI-enabled integration of financial service offerings within traditionally non-financial platforms have accelerated the digitalisation of payments and effectively limited the use of physical cash in recent years.

The impacts of the payments revolution on the financial services industry and how banks are facing up to the market changes in this emerging landscape is particularly important for Luxembourg, given the country’s significant role in financial services and as a hub for some of the leading technology players driving the evolution of payment methods.

In this report, PwC Luxembourg has identified three main shifts that are underpinning this new payments landscape, instigating the structural growth and transformation of banks and pushing the boundaries of digitalisation towards the strengthening of their value proposition:

• Demand for instant payments disrupts the ecosystem and infrastructure
• Big Tech’s entry presents a new and complex layer of competition within the payments ecosystem
• Innovation of B2B payments represents the new frontier of payments.

The disruption of the payment ecosystem affords a greater opportunity for banks, fintechs, big tech firms, and regulators alike to re-assess their strategy for greater value yield. More importantly, it is allowing banks to transform or upgrade - in every sense of the word - in order to consolidate their position as market innovators and leaders.

In this context, we have identified five strategic considerations that will advance banks' adaptation and set them up for greater value-creation in this new payments segment:

• Differentiate your business/organisation by leveraging opportunities within the B2B landscape
• Partnerships with FinTech will lead to a win-win situation
• Anticipate further changes in the payments landscape
• Drive the development of global payments solutions
• Regulators have a role in levelling the playing field

Roxane Haas, Banking and Capital Markets Leader, PwC Luxembourg, says: “The payments revolution, which began over three decades ago, has taken on renewed vigour in recent years, fostered by technological changes and shifts in market dynamics. Regulation has also been immensely pivotal in the digital transformation of the payments landscape. As a financial centre with immense global focus, Luxembourg has not been exempt from the impacts of this payment revolution. The country has established itself as a major European hub for payments innovation, with enabling factors such as a strong national digitalisation drive, cross-border payment expertise, effective regulation and the presence of required infrastructure attracting many multinational payment service providers.”

Jörg Ackermann, Banking Consulting Partner, PwC Luxembourg, says: “Although banks have already started embarking on their B2B payments innovation journey, there is a need for more proactiveness in this still-developing segment which is awash with significant opportunities for banks -with those that fail to optimise client proximity and value-added services bound to be left behind. By evolving, collaborating, taking initiatives, and with the necessary regulatory support, banks would not only thrive but will be well-positioned to lead the payments sector of the future.”

Philippe Förster, EMI/PI Leader says: “When we look back at what Open Banking brought to the ecosystem, with access to current accounts' data’, it’s exhilarating to consider what the future could be with Open Finance and its access to broader data.”

About Banking Trends & Figures

Every year, Banking Trends and Figures measures the evolution of the Luxembourg banking sector, which with 124 authorised banks at the end of the financial year 2021, means the number of banks decreased by four.

As in previous years, you will also find in this publication an analysis of the financial statements of the largest country segments of banks present in Luxembourg. This review aims at better understanding the dynamics within the different country segments, as well as their relative development against the overall Luxembourg banking market, which recorded a strong performance in 2021 with an increase in net profit by 30.8%. This review aims to shed more light on the dynamics within the different country segments, as well as their developments relative to the overall Luxembourg market. To ensure continuity, we have maintained the composition of the six main country segments: UK/North American, Chinese, French, Swiss, German and Luxembourg banks, which constitute our ‘home’ segment. For each of these segments, we highlight any changes and developments from the previous year and discuss observed trends.

For more full details on the above, download the full report here.