A.T. Kearney is predicting the demise of one in ten European banks over the next five years as more agile digital challengers embrace the changes wrought by Open Banking to increase their market reach.
The ten-year study from the consultancy analyses data from 92 retail banks in 22 markets: 50 in Western Europe and 42 in Eastern Europe. The data is taken from official bank records from January 2007 to December 2018, including annual figures, forecasts, and results from the third quarter of 2018.
The study finds that despite continued strong growth in volumes, income remains weak with a dramatic drop in income per client (-1.1% 2018 vs 2017; -11% 2018 vs 2008).
Simon Kent, partner and global head of financial services at A.T. Kearney comments: “Not all banks will survive the tide of change as customers increasingly favour digital banks and innovative products and services. Branch closures is a short-term fix to steady the books but it is not enough – traditional institutions need to consider strategic transformation to improve cost and top line and also offer more innovative products and services.”
Data from A. T. Kearney’s Retail Banking Radar shows that neobanks’ customer bases across Europe have grown by over 15 million since 2011, compared to a decrease in two million customers for retail banks. Up to 85 million Europeans will be customers of these banking models by 2023 according to the study – which equates to around 20% of the population over 14 years old.
The advent of Open Banking will be a key driver of change. A trend revealed in the study is the transformation of traditional banks into lifestyle platforms, becoming a ‘one stop shop’ for customers’ daily needs – purchasing, travel, entertainment, utilities etc. This is a model that has been embraced by new arrivals on the banking scene, building marketplace platforms for customers to bolt on third party products.
Daniela Chikova, partner at A.T. Kearney says: “The shift towards digital banking, only compounded by the introduction of Open Banking, has caused a transformation in how and where customers want to bank. Open Banking has been a key driver in banking innovation, and we expect this to continue into September as the new Regulatory Technical Standards come in.”
Looking Ahead: Five Predictions for the Next Five Years
Top line. Over the next five years, the top line will move out of stagnation and begin to decline, putting pressure on margins with €2.3 billion in income at risk in the European retail banking revenue pool.
Cost management. Mounting pressure on costs will accelerate the number of mergers and acquisitions. With a quarter of banks struggling to keep costs under control, astute cost management will become a determinant of success. In this environment, one in 10 banks will likely consider selling or merging with a competitor.
Multi-channel. A simple branch network will become a thing of the past with a multichannel network emerging to meet consumers’ needs. In 2023, the Nordics will operate a third of this network, and in Western Europe, a third of all branches will close their doors. Artificial intelligence, analytics, and new technologies will shape consumers’ experience across channels.
New competition. Emerging new competitors will gain momentum. In 2023, 50 to 85 million Europeans will use neobanks as more consumers who are digital natives become bank clients. Traditional banks will come under pressure to partner or reinvent themselves.
Lifestyle platforms. With about half of all Europeans ready to share their personal data, banking will become a lifestyle platform. By 2023, platforms will combine financial services with other aspects of daily life, such as online shopping.
Opportunities for Traditional Retail Banks
Four new business models will emerge:
Behemoths. The industry giants will use their scale to astutely manage costs with a no-frills offering that has simple choices and a high level of standardization, which will appeal to older generations and the late adopters. This model will eventually evolve into the industry’s product factory, providing an off-the-shelf solution for smaller banks and institutions.
Advisory banks. These institutions will pride themselves on strong client relationships and deep insights about their client base. The service model will change with new client segmentation and pricing, based not only on assets under management but also on clients’ needs, the services they want, and the degree of personalization.
Digital banks. New online banks will quickly build up their digital capabilities by acquiring or partnering with neobanks or fintech companies. As the traditional branch network rapidly and dramatically scales down, digital banks will be the experts in transformation and change management, using gamification and rapid innovation to keep their clients engaged.
Lifestyle platforms. Institutions that dare to leap outside of financial services will integrate access to a variety of service providers, including government services, home utilities, and daily purchases. These innovators will integrate social media capabilities and crowd wisdom to become a one-stop solution for consumers’ daily needs—from shopping and entertainment to travel.
Banking 4.0 – „how was the experience for you”
„So many people are coming here to Bucharest, people that I see and interact on linkedin and now I get the change to meet them in person. It was like being to the Football World Cup but this was the World Cup on linkedin in payments and open banking.”
Many more interesting quotes in the video below:
