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The future belongs to the courageous
After more than a decade of a challenging low-interest environment for retail banks in Europe, three forces are coming together: Interest rate hikes (and margin expansion), the fruits of cost transformation programs, and the adoption of digital service models. 2022 has been another good year overall for European retail banks, with topline increasing by an impressive 8%, while costs lagged behind and increased slightly by 2%. The branch network transformation is progressing, with an average network reduction of ~15% in Europe in the last two years, albeit with considerable differences in progress between individual countries.
A tale of two lands emerges as we dive deeper into the success trajectory of recent years. Banks have embarked on a journey to transform their business and operating models. Fueled by the first fruits of this journey, around four in five of banking players in our sample have moved to the land of improving profits. Meanwhile the remaining fifth stayed in (or moved to) a smaller land with shrinking profits, looking at their performance over the last five years. Those who have been courageous in the past will need to remain bold to stay ahead in the future. Two priorities are emerging as key differentiators in the near term:
- Reinventing Sales
- Reinventing Products
Beyond these immediate priorities, our scenarios for retail banking in 2025 remain relevant, with areas and players to watch out for – embedded finance keeps eating into banks’ revenue pools, and big tech/fintech players continue to drive innovation, price competition, and the quest for customer interaction.
2022 has been another good year for European retail banks
The 2022 financial results paint a positive picture in Europe, with positive development of underlying business – both loans and deposits, with topline results and returns boosted as interest rates rose again. With operating costs remaining relatively flat, banks reaped the benefits of interest hikes and margin expansion, and a notable positive gap between revenue and cost has developed.
A tale of two lands
Within an overall good macroeconomic environment, a tale of two lands emerges as we dive deeper into the success trajectory of retail banks in recent years.
Around four out of five retail banks in our sample have – to varying degrees – managed to successfully push their agendas towards higher profitability and more competitive positioning. Pricing courage on fees and commissions, along with interest rate hikes, fueled their topline development, and the initial successes of cost transformation programs have become visible.
Conversely, a smaller share of banks – just over one in five of the retail banks in our sample – ended up in a worse position than six years ago. They have not been able to contain their cost development yet or have lost competitive edge in their markets in recent years.
Strategic priorities
Retail banks have embarked on their journey to transform key elements of their business and operating models. Beyond ongoing efforts to further transform costs and drive digitization, retail banks need to focus on two immediate strategic priorities.
Reinventing sales
Customer behavior has undergone stark changes in recent years. Amplified by the pandemic, we have seen a fundamental shift – a considerable increase in mobile-first customers vs. cash/branch-based usage. Banks have so far failed to respond easily to this more scattered pattern, with multichannel silos built around traditional branch channels. This has not only been a challenge for traditional bricks-and-mortar banks, but equally for direct banks, faced with a need to incorporate partner channels.
A new model is emerging in the market – moving from a branch-centric, multichannel, inbound model to a digital sales, omnichannel, outbound model. The first banks have embarked on this journey already, mainly by building remote advisory capabilities and shifting the bulk of their retail (and SME) customers into this new coverage model. As this sales model will evolve further, five key building blocks are essential for success:
- 1Customer experience
- 2Channel approach and integration
- 3Organizational structure and process design
- 4Data analysis and technology infrastructure
- 5Management systems and compliance
Reinventing products
Retail banking products, and especially how they can be consumed, have started to evolve significantly in recent years. Innovation from the tech and fintech sectors has fueled a radical transformation in key products. While the core functionalities of products like current accounts, deposits, savings, investments, and loans have remained more or less unchanged, they are undergoing a journey towards better, simpler, faster, and more accessible products. As part of this transformation, consumer behavior and expectations change alike.
In many areas this development is fairly mature already, whereas in other areas it is only at the beginning. The reinvention of retail banking products is one of the key strategic priorities that banks need to pursue in order to stay relevant for consumers and to maintain and improve their competitive positioning. Banks need to provide equally simple, convenient, and digital solutions for their customers. Reinventing products is two-fold for retail banks: Customer frontends need to be simple and convenient an backends need to support and enable an ‘upgraded’ product experience. In order to succeed in attracting customers with a reinvented product experience, banks need to:
- 1Upgrade the user experience
- 2Ensure instant decisions and approvals
- 3Lower entry barriers
- 4Conceive ‘supporting’ processes as a key enabler
- 5Consider partnering
Outlook
Retail banks need to act in a targeted and sequenced way:
In the short term (1-2 years), retail banks need to leverage the tailwind of margin expansions and the initial fruits of cost transformation to make their sales model future-fit and reinvent their product landscape with a view to radically simple solutions.
In the mid-term (2025+), our scenarios for retail banking in 2025 will approach fast – with embedded finance eating into banks’ revenue pools and big tech and fintech continuing to drive innovation, price competition, and the quest for customer interaction.
Andreas Pratz, Lisa Schöler, Johannes Gärtner, Dominik Berner, Miles Puttergill and Rhys Dalkin analyzed the European Retail Banking landscape and co-authored this report.
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