As Luxembourg’s private banking sector adjusts to a future of declining interest rates, the industry must find innovative ways to sustain profitability and remain competitive, according to Giovanna Giardina, partner in the forensic and financial crime division at KPMG Luxembourg. Giardina provided insights into how private banks should navigate a shifting landscape, focusing on technological investment, business model evaluations and increasing reliance on outsourcing and third-party services to maintain growth, during an interview with Paperjam.

Bank profitability

“Absolutely, the positive performance of Luxembourg’s private banks in 2023 was largely due to favourable interest rates,” agreed Giardina. However, as interest rates continue to decline, Giardina stated that private banks must explore alternative avenues for profitability, with a focus on managing rising operational costs. “Private banks need to critically evaluate their core and non-core activities, assessing their profitability and determining the operating model they wish to adopt,” she explained. By doing so, institutions can identify profitable areas for growth in a less favourable environment.

Giardina pointed out that to enhance profitability, banks must re-evaluate their product and service offerings and potentially move away from a uniform approach in servicing clients. “A thorough analysis of the advantages and disadvantages, as well as the potential commissions and costs associated with each option, is key to identifying the most effective strategy.” Furthermore, Giardina emphasised the importance of investing in technology, particularly automation, to reduce costs, streamline processes and improve service delivery. She noted that adopting digital transformation and automation could allow banks to cut processing times, enhancing both client and employee satisfaction. But “to secure a sustainable and profitable future, Luxembourg’s private banks must not only adapt but also innovate.”

Bank consolidation

The number of private banks in Luxembourg has decreased from 66 in 2015 to 45 in 2024. Giardina identified several factors contributing to this decline, including regulatory pressures, changing client expectations and the rapid pace of technological advancements. “The increased regulatory requirements, especially in compliance, risk management, and capital adequacy, have imposed significant burdens on smaller banks. Many have struggled to meet these standards, leading to exits or mergers with larger entities.”

Moreover, “Clients now seek comprehensive services and innovative solutions that larger banks can provide more effectively. This shift has pressured smaller banks to either enhance their offerings or consider consolidation to remain competitive,” noted Giardina.

Thant’s not all. “Smaller banks may lack the resources to invest in the latest technologies, making it difficult for them to compete with larger banks that can leverage technology for efficiency and improved client service.”

Looking ahead to 2025, “we expect further consolidation in the Luxembourg banking sector,” said Giardina. “Larger banks may acquire smaller institutions to expand their market share and service offerings, further driving consolidation in the industry.”

Cost management

Given the rising personnel costs, Giardina highlighted the growing reliance on technology and third-party services as an essential strategy for managing expenses. Automation and the adoption of artificial intelligence are expected to play a significant role in reducing manual processes and improving operational efficiency. Giardina argued that by automating routine tasks such as data entry, compliance checks and reporting, banks can reduce the impact of rising personnel costs while improving service quality. Additionally, “the integration of AI technologies will become more prevalent in areas such as risk assessment, customer service and personalised financial advice”, which will ultimately enhance decision-making and client interactions.

Giardina also pointed out the increasing trend of outsourcing non-core functions, including IT support and back-office operations, to specialised third-party providers. “This would allow banks to focus on their core competencies while benefiting from the expertise of external partners.”

Strategic partnerships

Partnerships with fintech companies are expected to become more common as banks seek to innovate and enhance their service offerings. These partnerships can provide access to cutting-edge technologies that help improve operational efficiency and client service. Giardina also emphasised the importance of data analytics, noting that as banks collect more data, there would be a greater emphasis on using these insights to make informed business decisions. Moreover, “Leveraging data insights can help banks identify trends, understand client needs and optimise their product offerings, ultimately leading to improved profitability.”

Furthermore, with increasing regulatory pressures, Giardina anticipates that banks will adopt regulatory technology (regtech) solutions to streamline compliance processes and reduce personnel costs. These solutions can automate reporting, monitor transactions and ensure adherence to regulatory requirements, reducing the burden on banks’ staff.

Giardina aptly summarised, “As personnel costs rise, private banks will increasingly turn to technology and third-party services to enhance efficiency, reduce operational costs and improve service delivery. The developments in automation, AI, outsourcing and partnerships with fintech companies will play a crucial role in shaping the future of the banking industry.”