Banking disruptedHow technologyis threateningthe traditionalEuropean retailbanking model

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B A N K

1European banks’ ability to earn

returns above the cost ofcapital in the long term willdepend on whether they canpass on the cost of holding

higher regulatory capital.

METROBANK

GOOGLE

 APPLE

PAYPAL

European banks may be taking comfort from the factthat they saw off similar threats in the past, notablythe challenge of Internet banks in the late 1990s, andthe encroachment of securities markets that radicallychanged the structure of US financial services.

This largelycomes down

to the degreeof competition

in the marketand, specifically,

the threat posedby new entrantsand substitutes.

Banks’ ability toraise margins will also

depend on the regulatoryenvironment. The UK,

which is home toEurope’s largest financial

centre, has placedcustomer outcomes 

at the heart of itsregulatory agenda.

It is also pursuingcompetition as a way of

achieving its objectives.And the UK’s Financial

Conduct Authority isusing behavioural

economics to ensurethat banks do not rely on

behavioural biases togain financially at

customers’ expense.

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However, the first phase of Internet bankingcompetition was supplier driven. Customers

are now used to engaging directly andimmediately with retailers, and to their 

needs being anticipated across a range ofproducts and services. They expect similar

responsiveness from their bank.

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The two core competitive advantages that banks deployed in the past to fend

off previous attacks from new entrantsand the capital markets have been

dramatically weakened. By contrast, non-bank challengers are notably

stronger than those of Web 1.0.

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This will shrink the revenue pool available

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Oligopolistic access to cheap fundingis under threat. New, technologically-enabledforms of competition and the regulatory agendalimit banks’ privileged access to customers and, therefore, their ability to cross-subsidise loss-leaders through high-margin cross-salesand back-book pricing.

Consolidation would be the natural response,but regulatory conditions may preclude thisapproach. Banks are, therefore, likely to endup having to re-engineer their ownbusiness models and customervalue propositions.

Deloitte fears that banks risk beingcaught out as market sentiment

shifts to favour business modelsbetter-suited to this new order.Banks must, therefore, begin a

more radical transformation oftheir cost base now.

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Banks should alsouse analytics to

exploit theirtreasure trove ofcustomer data and match the

experienceprovided in other

industries.

In short, Deloitte believes that banks need toexpand their strategies from cyclically-drivenbalance sheet optimisation to a longer-term

vision suited to a world where the way inwhich people bank, invest and borrow, will be

very different from the past.

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www.deloitte.co.uk/bankingdisrupted