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Investing: Establishing a New Business Line for Banks

by internationalbanker

By Tamara Kostova, CEO, Velexa





European banks’ profitability was hit hard1 during the pandemic. Although the recovery has been faster than expected, with the aggregate return on equity hitting 7 percent in the first half of 2021, the downturn reminded European banks that they must resolve long-standing issues2 that often put their profitability at a disadvantage compared to their US counterparts.

The recovery was driven partly by increased fees, a risky undertaking considering that hungry challenger banks are always eager to take business away from incumbent banks by offering, among other things, reduced fees.

One major income source that has kept European banks afloat during the pandemic is investment banking, second only to interest income, which has accounted for 60 percent of aggregate banking profits.

But with stock markets bearish3 overall and recession fears looming, European banks must either brace themselves for further reduced profits or take fast action to diversify their income streams, adding revenue sources that do not come from traditional market-influenced elements.

How European banks recovered

That eurozone banks have “recovered” is not necessarily a given. Although profit balances have returned to pre-pandemic levels, it is too early to understand the full impact of the pandemic on bank profits. Other indicators of financial stability, such as return on equity versus cost of equity, remain4 suboptimal for 75 percent of European banks.

As government support measures come to an end, banks must be vigilant about increases in nonperforming loans (NPLs) and insolvencies, all of which would negatively affect their bottom lines.

However, one positive factor did emerge that sheds light on the potential way forward for European banks: Customers have become far more receptive to digital services.

The COVID-19 pandemic accelerated digital transformation across all sectors; customers are now more willing than ever to access services using mobile apps or their web browsers rather than visiting their local branches.

This opens the door to an entirely untapped income stream: fees and spreads from embedded-finance tools.

Leveraging embedded finance as a new income stream

A letter5 to shareholders written by JPMorgan Chase’s chief executive officer, Jamie Dimon, stated baldly that banks must start catching up to their neobank challengers that have “hundreds of millions of customers” while the US banking market cap has declined.

The “EY 2021 NextWave Global Consumer Banking Survey” revealed6, however, that incumbent banks still lead the way in consumer trust in Europe. The opposite is true in the United States, where public trust has fallen steeply.

Now is the time for European banks to partner up with fintechs (financial-technology firms) while consumer trust is high.

Many banks have recognised7 the value of embedded finance and started working with fintechs to provide a wider range of digital services to customers—and reap the income these services inevitably bring. By partnering with erstwhile competitors, banks can start offering their customers white-label versions of what their competitors are providing.

Implementing an embedded-finance investment platform not only opens up an immediate new income stream but also brings value to the table, which helps banks retain their customers for longer.

Making embedded finance work for incumbent banks

On the technical side, embedded-finance services are usually offered via an API8 (application programming interface) or as a full-scale white-label platform that banks can integrate into their websites and mobile apps.

On the business side, a rebranding of the bank might be required. Although trust in European banks remains high, neobanks are catching up. A rebranding might be necessary to cement that trust and engender the idea in customers that the incumbent bank is “forward-thinking”.

Users want banking “super-apps”.

The same EY 2021 survey showed9 a strong consumer preference for financial “super-apps”—apps that combine several financial services (such as banking accounts, payment services and investment features) into one.

In Europe, almost two-thirds of survey respondents expressed interest in these financial super-apps. Interest was especially high in the United Kingdom among users who used between three and five different financial-services providers.

If incumbent banks could offer such apps themselves, leveraging both open-banking technology and fintech investment-platform APIs, they would have a shoo-in for immediate revenue generation by charging small fees to customers or partners who want to be included in the super-app.

Incumbent banks could further monetize such a super-app by sprinkling it with offers and services specific tothe bank itself. Users would be welcome to connect to other financial institutions and trading platforms, but there should always be an option—and an incentive—to do it through the bank itself. This would give users the freedom to choose while also keeping the door open for them to stay with the banking brands they love and trust.

Long-term customers add further services

The longer customers maintain their relationships with their banks, the more10 services and products they will add. By providing a super-app, or even simply an embedded investment platform11 within their primary banking application, incumbent banks would increase customer retention and thus the lifetime value of those customers.

The same EY survey further discovered that consumers had diversified their financial-services relationships. Users of incumbent banks have an average of two and a half relationships, while those engaging with neobanks have an average of three. This indicates consumers’ dissatisfaction with no single financial service offering them everything they need.

This is a further opportunity for incumbent banks to capture market segments by offering turnkey financial solutions. The easiest way to do this is to team up with a provider offering fintech solutions for banks.



 1 European Central Bank/Banking Supervision: “Banks back to pre-pandemic profitability, but will it last?” November 16, 2021.

2 Bloomberg: “ECB’s Enria Says Pandemic Marked a Turning Point for Banks,” Nicolas Comfort, November 9, 2021.

3 CNBC: “European Markets Open to Close Stocks Data as ECB Meets in Sintra,” June 29, 2022.

4 European Central Bank/Banking Supervision: “Banks back to pre-pandemic profitability, but will it last?” November 16, 2021.

5 JPMorgan Chase & Co.: “Annual Report 2021: Chairman & CEO Letter to Shareholders,” Jamie Dimon.

6 EY: “How can banks transform for a new generation of customers?” Jan Bellens, Nikhil Lele, Rob Mannamkery, October 7, 2021.

7 McKinsey & Company: “What the embedded-finance and banking-as-a-service trends mean for financial services,” Zac Townsend, March 1, 2021.

8 Velexa: “The Investing Platform as a Service.”

9 EY: “How traditional banks can make the most of consumer trust,” Nigel Moden, Cat Haines, Peter Neufeld, November 24, 2021.

10 EY: “How can banks transform for a new generation of customers?” Jan Bellens and Nikhil Lele, October 7, 2021.

11 Velexa: “The Investing Platform as a Service.”



Tamara Kostova is the CEO of Velexa. She has spent more than 20 years driving strategy in top tier financial-technology companies and banks, including DXC Technology, Deutsche Bank, UBS and Thomson Reuters. She believes in personalised services with clients’ needs at the forefront and relentlessly fights to close the gender wealth gap.


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