- with readers working within the Business & Consumer Services industries
The banking sector is undergoing a profound transformation. What was once seen as disruption by FinTech has now evolved into collaboration, with banks embracing innovation and collaboration, to remain relevant and competitive.
To better understand this evolving landscape, EY partnered up with the Malta Bankers' Association to conduct a comprehensive study of Malta's banking sector. The goal: to identify challenges and opportunities that will shape a purpose-led, viable, safe, stable, and progressive industry.
Customer Loyalty in the Digital Age
Traditional customer loyalty is no longer a 'given'. Technology has empowered customers to switch providers with ease, making it imperative for banks to earn trust through superior service and digital convenience. Banks must recognise that loyalty today is earned, not inherited. Digitalisation is key to delivering the seamless experiences customers expect.
Revenue Streams: Rethinking the Balance
The EY report revealed that net interest income accounts for 70% of total income, 15% above the EU average. While this reflects strong liquidity and economic growth, it also signals a lack of diversification.
Interest income has been buoyed by recent rate hikes, but as rates decline – currently at 2% from the European Central Bank – banks must pivot toward fee and commission income. Opportunities lie in areas such as voluntary occupational pension schemes, which the government is actively promoting.
In 2022, Malta's banking sector posted a modest 4% return on equity, below the EU average of 8%. Today, core banks are reporting returns of 19-20%, a significant turnaround that underscores the sector's resilience and adaptability.
Digital Transformation and AI Integration
Digitalisation remains a top priority. At Bank of Valletta, we are launching a new mobile banking platform next year with five times the functionality of the current system, and we are aware that other members are also continuously refining their digital platforms and other related functionalities.
The real game-changer is artificial intelligence (AI). We've moved from mobile-first to AI-first. AI is enhancing productivity, streamlining operations, and improving customer experience – such as enabling same-day personal loan approvals through smart lending apps.
AI is rapidly emerging as a transformative force within the banking sector, offering new avenues to strengthen business models and enhance operational efficiency. By leveraging AI-powered analytics and automation, banks can streamline internal processes, reduce costs, and allocate resources more effectively. Moreover, AI enables the delivery of highly personalised and intuitive customer experiences, from tailored product recommendations to responsive digital support, thereby deepening customer engagement and trust. As banks continue to innovate, integrating AI will be essential to maintaining a competitive edge and meeting the evolving expectations of both customers and regulators.
AI also helps reduce the cost-to-income ratio by eliminating value-destroying work, allowing banks to focus on what matters most.
Another important development will be the digital Euro. The introduction of the digital Euro is poised to further accelerate the transformation of the banking sector. As a central bank digital currency (CBDC) backed by the European Central Bank, the digital Euro aims to complement physical cash and existing electronic payments, offering greater convenience and security. For Maltese banks, this development presents both opportunities and challenges: it encourages innovation in payment systems and customer engagement, while also requiring significant investment in technology and compliance to ensure seamless integration and safeguard financial stability.
As digital banking grows, so do cyber threats. Banks are investing heavily in cybersecurity, not just in technology but also in customer education. This is a war that will never be won; we will just need to prepare ourselves for the various security battles that will change over time. We are today dealing with sophisticated criminals using AI-driven social engineering. Collaboration across sectors and customer awareness are our best defences.
Despite the digital shift, customer preferences vary. Banks must offer a multi-channel experience: digital platforms; over-the-counter services; hybrid models; and assisted digital channels.
Call centres will eventually be replaced by chatbots, which already handle 70% of queries. But the personal touch remains essential for certain customer segments. This is especially relevant for that cohort of society which is not tech-savvy or who has always struggled to adopt new technologies.
Regulatory Innovation: The Central Data Repository
A major initiative underway by the Malta Business Registry is the Central Data Repository. This will streamline onboarding for corporates and reduce duplication of due diligence across banks, regulators, and service providers.
Imagine if ID card data were automatically accessible to banks.
This would significantly enhance efficiency and strengthen links
between government, industry, and the banking sector.
Sustainability and Green Finance
Banks are increasingly factoring climate risk into lending decisions. Incentives – such as lower interest rates for green projects – are proving effective.
We jokingly say 'greed before green,' but incentives work. There's scope for regulatory reform, such as capital relief for banks financing green assets. A green building carries lower risk, yet current regulations treat it the same as a brown one.
The shift is already visible in sectors like hospitality, where sustainability is becoming a competitive advantage. However, sustainability requires greater support to the banking sector in terms of capital relief to enable banks to tailor much more attractive financing solutions.
Ultimately, the future of banking will depend on how effectively institutions respond to shifting customer preferences, regulatory innovation, and the growing importance of sustainability. By embracing multi-channel experiences, streamlining collaboration between key stakeholders, and supporting green finance through targeted incentives and reforms, banks can deliver more efficient, customer-centric, and responsible solutions. Striking the right balance between technological advancement and the personal touch will ensure the sector remains resilient and relevant in an evolving landscape. The future is challenging but bright by way of the opportunities for banks to create value for the Maltese economy, their customers and the broader community.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
