In an interview with Paperjam, , vice-head of the Private Banking Group at the Luxembourg Bankers’ Association (ABBL) and member of the management committee at Banque Raiffeisen, discussed key challenges facing Luxembourg’s private banking sector, including regulatory scrutiny, digital transformation and the rising competition from neobanks.

Regulatory scrutiny

De Vuyst acknowledged that private banks are “often classified as high-risk for anti-money laundering (AML), primarily due to the large, sometimes cross-border transactions involved, the occasional use of complex financial structures such as trusts and offshore entities, and the fact that ultra-high-net-worth individuals (UHNWIs) often operate in cash-intensive industries or invest in high-risk financial products.”

However, she noted that identifying risks does not mean they cannot be effectively managed. “Robust Know Your Customer (KYC) procedures, continuous transaction monitoring, regular risk assessments, PEP screenings, and stringent controls on cross-border transactions and offshore accounts all play a crucial role in mitigating these risks,” explained De Vuyst.

As for banking safeguards, Luxembourg’s commitment to combating money laundering has been reaffirmed by the Financial Action Task Force, which, following its 2023 inspection, concluded that the country has a “sound framework for combating money laundering and terrorist financing.”

Digital solutions

While the private banking sector has always been known for its personalised client services, De Vuyst suggested that digitalisation has become an essential tool for enhancing operational efficiency. According to the latest KPMG-ABBL , there has been a growing acceptance of digital solutions within Luxembourg’s private banks.

“Digital transformation in banking is about how customer relationship managers operate and serve their clients,” said De Vuyst. The survey revealed that 66% of respondents viewed digitalisation as a strategic priority, with the goal of improving efficiency, customer satisfaction and regulatory compliance. Most private banks are now investing in digital capabilities such as mobile apps and online banking services to cater to the diverse needs of their clientele. In particular, Luxembourg's private banks are increasingly implementing agile methodologies, cloud computing and data analytics to enhance responsiveness and competitiveness.

Furthermore, De Vuyst pointed out that more than one-third of Luxembourg’s private banks had embraced hyperautomation, showcasing the sector's growing interest in artificial intelligence and robotic process automation to streamline operations and improve client services.

Smaller private banks

De Vuyst also addressed the challenges faced by smaller private banks in Luxembourg, which traditionally operated as small boutique firms. With the increasing need for digital investment and the rising costs of regulatory compliance, smaller banks are often struggling to scale their operations. However, De Vuyst expressed confidence in their ability to thrive by focusing on specialisation.

“Smaller private banks still have a future,” she stated. “Their success lies in specialising--whether by focusing on a specific client segment, geographical area or niche service.” Additionally, she suggested that outsourcing non-core functions to service providers could help these banks streamline their operations and focus on delivering tailored advice to clients.

Neobanks

While traditional private banks face challenges from rising regulatory costs and digital competition, De Vuyst acknowledged the growing influence of neobanks, particularly among digitally native customers. These digital-first institutions have been gaining traction by offering cost-efficient services and real-time transactions.

However, De Vuyst pointed out that neobanks still lack the ability to replicate the personalised wealth management services offered by private banks. “Private banks differentiate themselves through deep client relationships, bespoke wealth management and expert advisory services--elements that require a high degree of trust, personal interaction and expertise that neobanks, at least in their current form, do not fully replicate,” she argued. These qualities remain essential for high-net-worth individuals who value holistic wealth management strategies over mass-market transactional banking services.

Despite this, De Vuyst believes that “private banks must not be complacent.” She recognised that the digital-first mindset of neobanks sets new industry standards in terms of transparency, convenience and accessibility. De Vuyst suggested that private banks should embrace this shift and integrate advanced digital tools, such as artificial intelligence-driven financial insights and digital portfolio management, into their service models. This would enable banks to offer the best of both worlds: cutting-edge technology and deep, personalised client relationships.

Fintech collaboration

De Vuyst pointed out that private banks are increasingly collaborating with fintech firms to accelerate their digital transformation efforts. The KPMG-ABBL survey revealed that 74% of private banks had signed at least one contract with a fintech firm over the past three years, stated De Vuyst. These collaborations are helping private banks meet the evolving demands of tech-savvy clients while also addressing increasingly complex compliance requirements.

“Fintech is viewed as a means to boost efficiency and address the increasingly complex compliance requirements of banks,” she said. De Vuyst also suggested that partnerships between traditional private banks and neobanks could prove mutually beneficial, as they offer the opportunity to share resources, technologies and digital tools.