Europe’s Retail Banking Model Under Threat
Faced with the challenges of the financial crisis and re-regulation, retail bankers are distracted from the threat of the ‘de-banked consumer’. But banks’ core competitive advantages are being eroded – and they face some tough choices if they are to stay competitive in the digital age.
The emerging challenge for European retail banks
European banks face significant risks in the retail payments market, as emerging fintech players and regulatory reforms pose new challenges. In this report, we explore the main scenarios which are likely to emerge and the strategies banks could follow to respond to market changes.
New financial technology, or “fintech” players have entered the payments market, with the aim of offering a simpler user experience.
In contrast, banks have lagged behind, accounting for just 19 per cent of the $10 billion spent on fintech last year. They now have important questions to answer about how much they should invest in payments innovation, and whether they should enter partnerships with rivals or non-bank challengers.
Through a series of interviews with 24 industry experts, our Payments Disrupted report predicts a radical change in the status quo, with payment systems unlikely to be run by and for banks in the long term.
See below a summary of the report's key findings.
Status quo under threat
In the majority of European countries, payment processors and payment schemes tend to be owned or controlled by banks.
Banks’ traditional control over payment systems has provided them with a valuable stream of revenue. But banks’ dominance in payments is increasingly under threat from a range of directions…
- Around a quarter of European retail banking revenues are likely to stem from the payments market this year, equating to roughly €128 billion
- Fees relating to cards and current accounts are expected to make up 21 per cent of this revenue
- 44 per cent should come from interest and 35 per cent from transaction charges.
Regulation, technological innovations and evolving consumer demands could challenge banks dominance in the payments sector.
Tighter banking regulations have created more favourable conditions for non-bank participants in the payments market, including fintech firms.
New technologies could allow agile challengers to enter the payment initiation market.
Changing consumer preferences
As the use of digital tools grow, people could place more trust in new players, undermining banks.
Half of the experts we interviewed only expect a more open payments market to have a low impact on banking profits; we expect regulatory reform to have long-term consequences.
- Non-bank players could expand into other key banking services such as lending, foreign exchange and money market funds after establishing themselves in the payments sector.
- By displacing cash payments, they could also disrupt the wider banking eco-system, including banks' ability to attract small business customers.
The emerging payments landscape
Banks now have a range of questions to answer in response to the evolving payments landscape.
- Should they invest on their own, or should they collaborate?
- Should they focus on becoming utilities that simply provide the ‘rails’ for payments?
- Should they adopt different strategies for card and non-card payments?
We suggest four future scenarios could now emerge in the payments market.
- The continuation of the status quo
- A new oligopoly
- A utility model
- A parallel payments infrastructure.
Responding to the challenge
By failing to keep up with payment innovations, banks could involuntarily become utilities and face lower margins.
To address rising competition, industry collaboration was identified as the best course of action to pursue by the majority of the payment experts we interviewed.
We encourage banks to team up with non-bank players, such as payment providers, global card networks as well as rival institutions.
We believe small banks should look for selective industry collaborations, and for larger banks it may be useful to partner with or acquire fintech, while making selective in-house investments.