Banks in Europe are not making enough money. Since the financial crisis, they have failed to earn profits above their cost of equity and analysts don't expect this to change any time soon. To address this, Deloitte thinks retail banking in Europe is due huge structural change that will transform its future.
The industry's fate is being compared to what newspapers have experienced in the past decade or so. The newspaper industry was ripped open by technology. Social media, smart phones and search engines transformed how we consume information. Today, technology is making similar waves in banking, and we expect this trend to accelerate.
Banks may take comfort from the fact that they overcame threats from new technology in the past. The rise of Internet banks in the late 1990s quickly lost momentum. And telephone banking did not spell the end of bank branches, as some had predicted. But the tagline that has been attached to the state of banking since the financial crisis, 'this time it's different', rings true yet again.
Firstly, the first phase of Internet banking competition was supplier-driven. Excellent customer service from the likes of Amazon and John Lewis means that we are now used to engaging directly and immediately with retailers. We expect banks to be able to match this.
Moreover, the competitive advantages that banks have used in the past to fend off attacks from new entrants are withering away. Banks' privileged access to cheap funding and to customers is being eroded by technology and regulation.
This is not the only element of regulation affecting banks. The Financial Conduct Authority in the UK is scrutinising like never before how banks earn their profits. And the natural response to aforementioned challenges – banks merging – is out of the question as regulators try to increase levels of competition in the industry.
These are enormous challenges facing banks – possibly greater than those faced by newspapers in the past. We should expect change on a similar scale. But how banks fare during this transformation depends on how they respond. How they should do this is discussed in more detail in Deloitte's latest thought leadership report on retail banking: Banking Disrupted – How technology is threatening the traditional European retail banking model.
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