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A year of transition
2020 may have marked the ‘rock-bottom’ year for retail banking, and 2021 has provided some light on the horizon, namely in terms of volume growth, advances on cost transformation, and a growing hope that interest will come back. In fact, banks have been bold in addressing negative interest rates already in the past year, through deposit pricing to customers and use of the ECBs support mechanisms, namely allowances free of negative interest for the banks and the long-term financing facilities (TLTRO).
Business has, in principle, developed nicely in 2021. Consumers continued to deposit more with their bank (+5-7% across 34 banks and banking groups across the 10 largest European retail banking markets, similar to the previous year). Likewise, they took out more loans (4-6% YOY, similar to the previous year), largely fueled by a further increase in real estate prices. The share of net interest income has come down slightly, from 66 to 64% of total income, which might be due in part to fees on negative interest that are typically counted as fees, not interest. Overall, the top line has grown by approximately 3-4% on a per customer basis (and similarly in absolute terms).
The issue continues to be the cost side. Costs have grown rather than come down, despite all the efforts through tactical cost measures or fundamental bank transformation programs. Large players are consolidating platforms and franchises, have disposed of smaller country franchises, and are – across the board – cutting into branch networks and staff. Whilst these programs admittedly take time to bring costs down to a new run-rate, we had expected some progress on the cost side to become visible in 2021. This was not the case: Operating costs per customer increased by 1-2%. As a result of the topline growth, the weighted average of cost-to-income ratios amongst European retail banks improved marginally from ~64% to ~63%.
Four key drivers in European Retail Banking
Fundamental change agenda ahead
Strategically, retail banks have embarked on a journey of transformation which will make them more resilient and leaner. However, if we dissect current transformation programs, we mainly see cuts to the current sales networks, platform consolidation, agile transformations, and digitization programs. We believe that in creating the 2030 retail bank, a more strategic transformation agenda is required:
- Reinventing sales: Banks are currently cutting branch networks and adding mobile and digital inbound capabilities. Online players are adding face-to-face components to their outbound-oriented models. Retail banks should turn the (branch-based) inbound sales model into a people-supported outbound sales model.
- Reinventing products: Simple mobile investment propositions have taken new investors by storm; buy-now-pay-later propositions are replacing traditional installment loans; and open banking is starting to become visible in product propositions, including lending and accounts. In order to stay relevant, banks need to overhaul their underlying capabilities and provide simple solutions to currently complex problems.
- Purposeful repositioning: Consumers and regulators alike expect banks to foster digital enablement and economic growth, whilst not leaving anyone behind. ESG is becoming relevant in retail banking too. Whilst less obvious than in some other industries, retail banks can contribute to digital inclusion, affordable housing, adequate pensions, and financial wellbeing in general.
- Repositioning for embedded finance: A lot has been said about big tech and fintech eating banks. Probably the biggest change in this decade is yet to come, from another angle: Embedded Finance. Consumers are starting to consume financial services as part of their media or communications subscription, via their car, or through their preferred online or offline travel operator or retailer, to name just a few. Embedded finance could account for up to 15% of 2030 retail banking revenues, and banks need to start positioning for this shift sooner rather than later.
This is the first article of our Retail Banking Monitor 2022 blogpost series. Also check out the other blogposts on Reinventing Sales, Reinventing Products, Purposeful Repositioning, Repositioning for Embedded Finance, and Performance Review.
Dominik Berner also contributed to this report.
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