European Retail Banking

The report is a summary of the economics of the European retail banking markets, and the issues facing bank retail management teams. In the context of the many pressures on the European banking sector as a whole, the economics of retail banking are proving reasonably strong today – as a mix of repricing and resource discipline have helped the business.

We’re set for a pretty dynamic period in retail banking. There are certainly things to be worried about: regulatory pressures on capital and liquidity, growing interventions on conduct and consumer protection, the macroeconomic situation and challenges for NPL management, the growth of new types of competitors. But there are also reasons to be positive. Retail banks now have the chance to deliver powerful improvements in the performance of their own business models – using digital channels more broadly, reshaping branch networks, adjusting customer propositions in SME/affluent segments, and making businesses fundamentally more customer centric.

Certainly they are. And there are many forms of new competition. In many markets, there are new entrants in what have been pretty stable supply-sides – and some entrants from outside financial services such as supermarkets and telecom giants. The payments space is a natural area where banking and non-banking competitors meet – and an area of massive change in technological capabilities and consumer behavior. Non-banking competitors bring powerful and different competitive advantages to the table – new and often better brands, different ways of thinking about customers, synergies with non-bank businesses, fresh technology – so they should be taken as a serious threat.

Retail banking remains a business with natural cyclical dependencies. If and when the European economy starts to genuinely recovery this should be positive for retail banks. Interest rate rises tend to naturally benefit bank P&Ls. And underlying improvements in customer credit quality benefit the business on many dimensions. But the timing and extent of this naturally remains uncertain.

Banks have got work to do – we suggest the following management agenda in the report: respond proactively to regulatory pressures, particularly around consumer protection and conduct. Embrace changes in the structure, size and role of the branch network. More broadly than the branch network, take on the cost base. Commit to digital change across sales, servicing, and infrastructure. Prepare today for interest rate rises tomorrow. Manage the NPL challenge. Question foreign market participation and the home-market regional mix. Finally, sharpen customer segmentation and proposition delivery.