Europe’s Retail Banking Model Under Threat

5 threats – A roadmap for the future of retail banking

Today’s customers expect retailers to anticipate their needs and respond immediately. They are used to direct and immediate engagement across a range of products and services, and expect equal responsiveness from their bank.

The core competitive advantages that banks have previously used to disarm new entrants have been dramatically weakened:

• Oligopolistic access to cheap funding via current accounts is under threat.
• New, technologically-enabled forms of competition and the regulatory agenda limit banks’ privileged access to customers, undermining their ability to cross-subsidise loss-leaders through high-margin cross-sales and back-book pricing.

This report argues that the challenge for European banks is not that any single new entrant or model will emerge to dominate their market. Rather, the risk is that the combination of attackers across the banks’ eco-system will steadily erode their core competitive advantage, resulting in a much smaller banking sector.

Understanding and anticipating these threats is key to retail banking’s long-term profitability.

5 threats - What can be done to address them

Threat 1: Expansion of the securities market

As European banks shrink risk-weighted assets and lending capacity remains constrained, companies will look to raise more money via capital markets.

As more borrowing shifts to capital markets, the wider the pool of these alternative asset classes will grow, and the greater will be investors’ comfort with them. This in turn shrinks bank deposits, a core source of funding on the liability side of the balance sheet.

Threat 2: New entrants, new rules

A new group of businesses are looking to enter traditional banking markets, with the aim of capitalising on an expected cyclical upswing in profitability.

Their hope is for muted competition from banks as they repair their damaged balance sheets and reputations. Start-ups with experienced bank management teams have found it relatively easy to secure investment on this premise.

Threat 3: Independent aggregators

Independent aggregators, like the UK’s MoneySuperMarket.com, have positioned themselves as the go-to place for the cheapest or best products, supported by the provision of ‘best buy’ comparison tables and the network effects of the Internet.

Such aggregators seek to optimise customers’ financial holdings by analysing purchasing patterns across their customer base. This will undercut the competitive advantage banks have historically enjoyed from privileged access to customer data.

Threat 4: Reinventing service elements through technology – the FinTech revolution

Emerging business models such as payment specialists like PayPal and Square, are using new technology to re-invent key elements of financial services.

Another example of such technology-led disruption is the rise of the P2P ‘lenders’ or exchanges, which bring borrowers and investors together in a highly cost-efficient manner.

Threat 5: Tech titans could enter the fray 

There is much talk of the threat posed to banks by other large players outside financial services, especially technology companies.

But the real danger here is not that a Google or Apple will one day support a banking subsidiary with a huge balance sheet. It’s that by innovating around it in support of their own core business, these players could fundamentally undermine the traditional integrated bank business model.

For further reading, see also this article and infographic.