Recently Deloitte published Banking Disrupted: How technology is threatening the traditional European retail banking model. The report highlights the major challenges the industry will face in the coming years and focuses on what the future has in store for Europe's retail banks. We think that five major threats will play a big part in shaping the industry.

  1. Securities markets are expanding – in the past, banks have enjoyed unrivalled access to cheap funding via customer deposits. But as European banks shrink their risk-weighted assets and their lending capacity remains constrained, companies will raise more money via capital markets, much as they already do in the US. And households are redeploying savings to market-based investments.

    In the US, the proportion of household's financial assets held in currency and deposits fell by over a quarter between 1990 and 2012. This change will drive up funding costs for banks at a time when they are desperately trying to make efficiency savings.
  2. New entrants are creating new rules – new entrants to retail banking are enjoying strong growth. In 2010, Metro Bank had 9,000 current accounts registered. By 2014, it had 318,000. Foreign players are also making inroads: Handelsbanken almost tripled the number of its UK branches between 2009 and 2013.
  3. Online comparison sites are ending banks' privileged access to customers – online aggregators are making it easier for customers to find the best value banking. Websites like MoneySuperMarket have already transformed insurance markets. Similar shifts are expected in personal banking. In the past three years, independent aggregators have gone from non-participation to 10 per cent of deposit flows. These aggregators are becoming sophisticated users of data, which allows them to design their own loyalty and reward structures.

    Aggregators' principal attraction is their ability to offer "best buy" comparison tables. Such comparisons are much more easily made than in pre internet days. Their strength in doing this has been strengthened by the network effects of the internet.
  4. Technology is reinventing services offered to customers – mobile banking is growing rapidly. And by 2020, the value of alternate payments will equal that of cards in Europe.  Our research suggests that many customers do not see any value in mobile banking. However, surveys also show that customers who use it are more loyal.
  5. Google Bank PLC? – technology titans could enter the fray. However, we believe that this threat is misunderstood.  If a technology firm launched a bank, it would be subjected to intense scrutiny from investors and regulators. We think it is therefore more likely that these firms would innovate around the universal banking model in support of their own core business – this could fundamentally undermine the traditional integrated bank business model.

These threats will inevitably erode banks revenues. As this happens, the excess costs of legacy IT infrastructure and an outdated distribution model will become unsustainable. Banks with low cost-income ratios will be better placed to respond to competition. For others, the conventional response – consolidation and wholesale cost-cutting – is likely to be challenged by regulators keen to avoid "too big to fail" problems and sceptical about banks' ability to put customers' interests at the heart of their strategies.

Banks will, therefore, need to re-invent themselves, with a new vision of how they can best serve the financial needs of retail and business customers, and an operating model and cost base designed around that vision.

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