By Mark Leyden.
We are still struggling with the aftermath of the massive 2008 global financial crisis. Many European banks are still in state ownership, lending has plummeted, banks are seizing assets from customers, cost to income ratios are out of whack and many of the largest banks are still struggling to make profits. In an effort to clean up their balance sheets, banks are paying less in deposit interest, charging more for lending, and effectively providing no new lending. In addition, in order to improve their cost-to-income ratios, Banks are reducing headcount and performing large scale branch closures.
As discussed in a previous article, Banks are also struggling with technology adoption. Lacking the necessary skillsets internally, after years of outsourcing, Banks are now left to play an enormous catch up game with Fintech companies looking to take the low hanging fruit.
Retail Banks earn approximately ¼ of their income through payment processing and fees, while the remaining ¾ of income is generated through interest charges. In typical ‘disruptive technology’ fashion the technology startups, or FinTechs, are targeting the incumbent Banks payments and fees initially. The Banks would be foolish to allow any startups get a foothold in the payment space, as they will very quickly move into the more lucrative interest charging product space...
Into this environment, the European Commission is introducing some radical legislation. The Payment Services Directive (PSD2), an EU mandated directive from Nov 2015, must be implemented into Member state legislation by the end of 2017. This is a total game changer for the financial industry across the EU. The UK looks set to adopt this legislation, and indeed many UK Banks implementations are ahead of their EU peers already, irrespective of the recent Brexit vote. Also, by the end of 2017, we will have SCT Inst - SEPA Instant Credit Transfers. Similar to the UK Faster Payments, SCT Inst will provide customers with the ability to transfer funds anywhere in the SEPA area in real time.
PSD2 introduces new types of Institutions providing payment services, cashless money and account information aggregation. All of these services are enabled via existing institutions having to provide Application Programming Interfaces (APIs) to their core banking systems.
So what are we going to see? Less branches, split between ‘full service’ and ‘customer acquisition’ branches. A move to providing more and more services via web and mobile channels. The days of your Bank manager knowing you personally are long gone.
A good example of such a Bank is mBank in Poland. They decided to move to where the customers are and set up ‘customer acquisition’ branches in Shopping Centres. These branches have ‘products’ on shelves for customers to select, interactive digital signage and customer monitoring which is used to drive signage content. These branches are the equivalent of the mobile phone operators shops. For every four ‘customer acquisition’ branches, they have one ‘full service’ branch located in a cheaper, out of town, industrial estate.
Tesco is a potential example as to where things may go. A highly regarded retail brand, Tesco have been providing banking services, in conjunction with RBS, since 1997. In 2008 Tesco bought out the joint venture. Of course, a trusted brand alone does not guarantee banking success, and Tesco will struggle to recover from the recent hacking scandal.
Regulators, chastened somewhat by recent widespread Bank failures, would prefer to regulate a small number of Banks with large, low risk balance sheets. It appears inevitable that retail Banking, certainly in Europe, will be transformed into a utility service - a low cost, high volume, low profit industry providing wholesale services to companies with trusted brands.
Why would trusted, world wide recognised brands such as Facebook, Google and Apple not get into Banking?