As financial institutions in Europe navigate an increasingly digital and regulated landscape, Chief Technology Officers (CTOs) are facing critical challenges that will define their strategic priorities for the next two years. From modernizing core banking infrastructure to integrating artificial intelligence and securing digital assets, the role of the CTO is more complex and impactful than ever. Here are the top three challenges CTOs in European banks and financial institutions must address in 2025 and 2026.
1. Core System Modernization & Cloud Adoption
The Shift from Legacy Systems to Cloud-First Banking
Many European banks still rely on legacy core banking systems built decades ago, making them costly to maintain and challenging to integrate with modern financial technologies. The urgency to move to cloud-native, API-driven architectures is growing as banks seek to improve scalability, security, and customer experience.
Challenges & Considerations:
- Hybrid & Multi-Cloud Complexity: The European Banking Authority’s DORA (Digital Operational Resilience Act) mandates strong cloud governance, making cloud adoption a compliance-heavy process.
- Data Sovereignty & Compliance: EU regulations require banks to ensure that customer data remains within national or regional jurisdictions, limiting cloud provider flexibility.
- Open Finance & API Standardization: With the upcoming PSD3 (Revised Payment Services Directive), banks must build robust APIs to support open banking and fintech collaborations.
The Road Ahead:
CTOs must strike a balance between innovation and regulatory compliance, ensuring cloud migration aligns with security, cost efficiency, and resilience strategies.
2. AI, Automation & Cybersecurity Risks
Managing AI-Driven Innovation and Security Concerns
Artificial intelligence is revolutionizing financial services, from AI-powered fraud detection to algorithmic trading. However, with the rapid rise of AI, CTOs must also navigate complex regulatory and security challenges.
Key Challenges:
- AI Governance & Transparency: The EU AI Act requires banks to ensure AI models used in lending, credit risk, and fraud detection are explainable and non-discriminatory.
- Cybersecurity & Quantum Threats: With the increasing sophistication of cyberattacks, banks need to strengthen encryption, adopt zero-trust security models, and prepare for quantum-resistant cryptography.
- RegTech & Compliance Automation: AI-driven RegTech solutions will be critical for automating compliance with MiFID III, Basel IV, and AMLD6, reducing manual oversight costs.
Strategic Focus Areas:
CTOs must ensure responsible AI implementation while prioritizing cybersecurity resilience, particularly in the face of emerging quantum computing risks.
3. Digital Assets, Tokenization & Payment Innovation
The Rise of Digital Assets in Traditional Banking
With the implementation of the MiCA (Markets in Crypto-Assets) Regulation, European banks are now entering the world of digital assets, tokenization, and instant payments. CTOs must develop the technology infrastructure to support new financial instruments while ensuring compliance with evolving regulatory frameworks.
Key Developments:
- Tokenized Securities & Digital Asset Custody: Institutional interest in tokenized bonds, equities, and real-world assets (RWAs) is growing, requiring new custody and settlement solutions.
- Central Bank Digital Currencies (CBDCs): The anticipated rollout of the Digital Euro will require banks to integrate with new real-time payment rails and develop CBDC-compatible wallets.
- Embedded Finance & Banking-as-a-Service (BaaS): Traditional banks are expanding into embedded finance, offering financial products through third-party platforms, increasing the need for scalable, API-driven banking solutions.
Future Strategy:
Banks that successfully integrate digital asset solutions and real-time payment systems will gain a competitive advantage in a rapidly evolving financial ecosystem.
Conclusion
The next two years will be pivotal for CTOs in European banking as they drive core system modernization, AI-driven automation, cybersecurity resilience, and digital asset integration. Navigating these challenges requires a strategic balance between innovation, regulatory compliance, and operational efficiency. Those who succeed will position their institutions at the forefront of digital finance in Europe.
Would you like to discuss how your institution can navigate these challenges? Let’s connect!