UK: 5 Threats To The Traditional European Banking Model – And A Roadmap For The Future

Last Updated: 2 July 2014
Article by Deloitte Financial Services Group

Most Read Contributor in UK, August 2017

Faced with the challenges of the financial crisis and re-regulation, retail bankers are distracted from the threat of the 'de-banked consumer'. But, as we argue in our new report, banks' core competitive advantages are being eroded – and they face some tough choices if they are to stay competitive in the digital age.

Read the full report: Banking disrupted

European retail banks may take comfort from their success in fending off the first internet-based challengers to their market. But today's non-bank challengers are notably stronger than those of Web 1.0, and customer expectations have changed.

Today's customers are used to engaging directly and immediately with retailers, and expect their needs to be anticipated across a range of products and services. They expect similar responsiveness from their bank.

Yet 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 and their ability to cross-subsidise loss-leaders through high-margin cross-sales and back-book pricing.

As we argue in this report, 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 therefore key to retail banking's long-term profitability. So what are they and 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.

The more that 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 that competition from banks will be muted 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, 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 are looking 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, e.g. 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, such a player could fundamentally undermine the traditional integrated bank business model.

A roadmap for the future

What, then, is to be done? To avoid being caught out as market sentiment shifts to favour business models better-suited to this new order, Deloitte believes banks must begin a more radical transformation now. Banks need to:

  • Focus on developing distinctive capabilities in those markets where they can maintain sustainable competitive advantage across the cycle.
  • Resist building excess fixed costs at the top of the credit cycle for products like broker mortgages and commercial real estate, where profitability will ebb and flow.
  • Use analytics to exploit their treasure trove of customer data and match the responsive customer experience provided by other industries.

The view from Deloitte

"Deloitte believes that banks need to expand their strategies from cyclically-driven balance sheet optimisation to a longer-term vision suited to a world where the way in which people bank, invest and borrow, will be very different from the past."
Zahir Bokhari, UK Banking Leader, Deloitte

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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