In a year characterized by seismic and unexpected changes in the geo-political landscape, European retail banking was not left unscathed: declining revenues were not offset as the industry struggled to sustainably reduce costs and persistent issues in terms of risk provisions remained. According to the new A.T. Kearney Retail Banking Radar, European banks could have a promising future, but an open mind and willing stance on disruption and change will be vital, especially to face the rise of digital giants and to address the challenge of fintech innovation.
In 2016, the European economy continued its recovery, with a broad yet limited rise in GDP across all countries. Steady improvement in the job market, low oil prices, and rising disposable income created a perfect mix for domestic demand-led growth.
Retail banks experienced solid increases in deposits and loans, consolidating the upward trend of recent years, but this slightly positive scenario has not led to an improvement of the overall of European retail banks’ performance, which recorded a decrease in revenues by 4% compared to 2015.
The European Central Bank’s (ECB) ongoing Quantitative easing policy and new regulation, such as on interchange fees, all impacted European retail banking profitability, with many finding it hard to respond and adapt their business models to the new digital challenges that affect the industry’s commercial dynamics. Moreover, issues in terms of risk provision have significantly hampered retail banks profitability costs in Southern and Eastern Europe countries.
However, a few banks managed to revamp their approach and emerge as champions, proving it remains possible to outperform the norm, should the leaders of European retail banks find ways to embrace a constantly changing environment.
Retail banking Performance
For an understanding of retail banking today, as in previous editions of the Retail Banking Radar, A.T. Kearney focused on six indicators that highlight crucial topics for the industry.
For European retail banks, 2016 stands out with five out of six A.T. Kearney Retail Banking Radar indicators registering a decline compared to 2015:
· Income per customer
· Cost-to-income ratio
· Profit per customer
· Risk provision costs relative to total income
· Net interest income relative to total income
Cost-to-income ratios rose by 1%, reaching an average of 64%, indicating banks were struggling to significantly reduce costs, despite austerity measures. Only income per employee had a significant increase, reflecting banks’ execution of restructuring plans.
Country differences within the European retail banking industry remain sizable
In terms of income per customer, most European retail banks saw a sizable decrease in income per customer with Spain and Italy showing the greatest decline in this indicator, at 8.6 and 6.6 percent respectively.
Turkey, Switzerland and Poland are exceptions to the negative trend.
In terms of Income per employee, United Kingdom and Benelux banks made the largest leap in productivity this past year, up 10 and 12 percent respectively, despite a slight reduction in income.
As for the cost-to-income ratio, there is a large gap between the average and best-in-class ratios, with Spain, the Nordics, and Turkey below 55 percent. The European countries with the highest cost-to-income ratio are Austria, Germany, and France.
What about the future?
The 2017 Retail Banking Radar this year is supplemented by a new industry scenario exercise describing three visions of disruptive change in European retail banking:
1. Open banking. New third parties enter the payment and banking ecosystem and manage to disintermediate a significant volume of retail banking customers.
2. Global shocks. The political upheaval from Brexit and recent US elections extends into a contraction of investment and confidence.
3. Rise of the giants. One of the digital giants harnesses its potential by materially disrupting
the financial services market
The fintech story has also grown rapidly over the past three years: chatbots driven by AI are becoming a popular way to improve the customer experience and distributed ledger technology could be a catalyst of a new wave of technologies and financial services propositions.
A.T. Kearney expects use cases and proof-of-concepts in banking to gain more attention in the coming year.
A.T. Kearney’s financial services team envisage three types of fintech evolving:
· Challenger fintech start-up banks such as N26 gain more attention and some markets could face a wave of new competition. For example, Monzo, a UK start-up bank has grown to almost 200,000 users in 18 months
· As partners to incumbents, some fintech players could augment or accelerate established bank’s digital transformation
· Other fintech offers will compete in the transaction banking space, such as Klarna, Transferwise and Revolut. Their opportunity space could be a move into full-fledged banking
How should banks respond?
Banks cannot continue as they are, and need to learn lessons from those who have been successful, if they are to address present and future challenges: income could be challenged by new open-banking entrants, economic uncertainty will continue, digital giants could stride across the landscape, and economic realignments could pressure costs as incumbents struggle to compete. An open mind and a willing stance will be crucial for banks to protect themselves from these threats and take advantage of the opportunities they bring.
Do not hesitate to contact us, should you need further details regarding Romania or request an interview to dig deeper into the current state of European retail banks.
About A.T. Kearney
A.T. Kearney is a leading global management consulting firm with offices in more than 40 countries. Since 1926, we have been trusted advisors to the world's foremost organizations. A.T. Kearney is a partner-owned firm, committed to helping clients achieve immediate impact and growing advantage on their most mission-critical issues. For more information, visit
www.atkearney.com.
About the A.T. Kearney Retail Banking Radar
The A.T. Kearney European Retail Banking Radar is the leading industry study giving banking leaders deep strategic insights into the most critical performance indicators and trends. The survey, which has been run since 2010, analyses six core dimensions of banking performance in retail banking.