The following article was printed in the international edition of Neue Zürcher Zeitung, a Swiss daily.
The translation was done by Raiffeisen Bank International.

Eastern pioneers of digital banking

It is a small bank in a small country. But it is in a class of its own, even internationally, regarding digital banking. This bank is not domiciled in Switzerland but in Slovakia. Tatra banka was first in Europe to introduce mobile payments via smartphone. It was one of the first banks worldwide to identify its customers in the call center by biometric voice recognition alone. And for some years now, you can also withdraw money from the ATM using your smartphone.

“The development heads in a direction that will let you deal with any of your financial issues via your smartphone,” says Pamela Babuščáková, head of Tatra banka’s research and development department, during a talk in Bratislava. This will allow customers not having to carry around bank cards in their wallets any more. When paying in your café, you can take your phone and hold it next to the reading device, after having selected one of your bank or credit cards digitally stored in an app and maybe having entered a PIN. Or you can enter into your phone the amount you want to withdraw at an ATM. The phone will generate a six-digit code that you will just have to enter into the machine. You can also forward this code to your partner in case he or she has left the wallet at home and needs some cash.

Are these just gimmicks? “Once the customers have tried these new possibilities, they love them,” says Michal Liday, Tatra banka’s CEO. He says that the bank would promote digital innovation as it forms the core of the company strategy. According to Liday, Tatra banka has decided almost ten years ago to position itself as digital pioneer. That was not easy at first. For example, they had the goal that any new customer opening an account would leave the branch with functioning bank cards and an already installed mobile banking app. At the beginning, however, staff members were not confident they could install the apps to the customers’ various smartphone models and make the customers familiar with mobile banking. The change process took a bit more than two years. But today, the digital strategy is firmly embedded in the company, says Liday, and the bank gains a competitive advantage.

One may be surprised to find a forerunner of digital banking in Slovakia, the small transformational country and Austria’s Eastern neighbor. But digitization is generally on the upswing in the former socialist countries of Central and Eastern Europe, albeit coming from a lower level compared to Western Europe. Poland is sometimes mentioned in the same breath with countries such as Australia or Great Britain on international banking conferences. And indeed, there is a high density of innovative companies in Poland: mBank (a subsidiary of German Commerzbank) or Millennium Bank are both considered leaders in digital banking. For instance, customers already broadly employ mobile payment. But according to an industry report of Deloitte consulters, it is Tatra banka that’s first in Central and Eastern Europe.

The people in Eastern Europe are quite open towards technological innovation, that’s one reason for the dynamics. They also often lack strong attachment towards a bank branch for historical reasons. In the case of Tatra banka, also the own founding history plays an important role. After the fall of the Iron Curtain, the local subsidiary of Austrian Raiffeisen Bank International (RBI) was initially founded as bank for corporate customers, the retail business started only later. “By comparison, our customers tend to be wealthier, better educated, younger, more entrepreneurial and of more urban character,“ said CEO Liday. These were good prerequisites for the digital transformation.

Indeed, Tatra banka makes considerations similar to many other banks in Western countries. Business fields and working environments have adapted because of the internet economy. This is evident as one meets in a brand-new start-up center in Bratislava, which might as well be in Vienna, Berlin or Warsaw. Solutions developed here can basically be interesting anywhere.

Tatra-boss Liday sees three big advantages in the digitization strategy. Firstly, it is an instrument for customer retention: “We want to win over digitally savvy people – and promise them that they will constantly receive the most innovative solutions from us”. The biometric voice recognition is one example for this. In Tatra banka’s call centers people can be identified during free talking by comparing their voice with a sample recorded earlier. For the customers, this is a relief compared to the more complicated identification before.

Furthermore, the system is considered extremely secure. There has been no fraud attempt yet. Rather, it may be difficult to identify the customer via voice recognition when he or she e.g. has a cold. In general, security questions don’t seem to pose too big a problem regarding the new digital possibilities. The payment by mobile phone, for instance, can security-wise be compared with the use of bank cards.

Secondly, digitization also offers a cost cutting potential. With the help of biometric voice recognition, the customer identification takes about one minute less than it used to –you save thousands of hours over a year and therefore need less staff. That is also why the bank pays a lot of attention to how customers accept new offers and how their usage can be increased; using two innovative offers per month, for example, leads to a reduction of account management fees by about half.

Thirdly, digitization is a marketing instrument. If one minute at the beginning of a conversation with a call center can be saved, the customer is rather willing to listen to information on a new product at the end of the call. Similarly, Tatra banka uses its digital channels for marketing purposes.

However, the digital world cannot replace everything. The personal contact with the customer remains important, says CEO Liday. Tatra banka does not only invest in digitization, but also and significantly in the modernization of branches. Deposits and withdrawals are hardly carried out there anymore, but there are elegant premises for meetings with customer advisors. If more complicated products such as mortgages are addressed, people still want to discuss them personally, he says. Even in digital times, it seems, not everything can be done via the smartphone.

Fintechs provide for a sharper wind of competition

A new world is coming to the banks in Europe. It carries the cryptic name PSD2. This is what the new EU directive on payment services in the common market, which is to be implemented step by step starting at the beginning of 2018, is called. What sounds technically may well change the banking business. “The directive could turn out to be disruptive,” says Johann Strobl, CEO of the large Austrian bank Raiffeisen Bank International (RBI). The new law obliges the banks make available their customer relationships to third parties.

Up to now, the cost to the bank customers was considerable in case they wanted to transfer their financial business to another bank. In the “old” banking world, the customer account was the core of the business relationship, around which other products such as deposits, credit cards or mortgage loans were grouped. With PSD2 this integrated model could split. Third-party providers such as emerging fintech companies or other institutions are in principle granted the option of accessing account information from bank customers and making their own offers after acquiring a license – primarily for payment services, later possibly also for loans and other products. This could lead to a much more open and sharper competition for financial services. This is also the aim of the EU directive.

The new PSD2 world is a major reason why banks need to deal with digitization. On the one hand, they are obliged to set up technical interfaces for third parties. This partly causes the construction of completely new, open online banking platforms. On the other hand, they have to face a tougher competition from fintechs and work to keep their customers on track with their own offers.

In practice, however, the new PSD2 world still contains many controversial questions. For instance, banks and fintechs are currently struggling about precisely how third-party providers are allowed to access customer data and which aspects of data protection must be taken into account. Furthermore, national solutions will probably also play a role in the specific technical implementation of interfaces in addition to the binding technical standards of the EBA (European Banking Authority). In Slovakia, for example, people are working on an own standard – and in the face of the open questions ask themselves whether a start of the ambitious project at the beginning of 2018 is possible at all.

It would have a considerable disadvantage if it came to many individual national solutions: the competitive effect of the PSD2 would be diminished because fintechs cannot develop technically uniform offers for the entire common market. In any case, the more they move into the traditional banking business, the fintechs will probably lose a substantial advantage. “The banks are now extremely regulated,” says RBI CEO Strobl. Sooner or later regulation would also cover fintechs.

Traditionally, banks such as RBI are currently feeling their way to deal with the new market participants. “The cooperation with fintechs can only do us good,” explains Strobl, “they bring innovative approaches to the industry.” Banks could, in turn, contribute their great strength, such as existing and trusting customer relationships. RBI has recently launched an “Elevator Lab”, looking for cooperation with fintechs from the region. Ideally, RBI will thereby gain access to new products – and the fintechs to the bank’s network with its more than 16 million customers in Central and Eastern Europe.