The banking industry’s evolving landscape

Marking a decade since our first Retail Banking Radar, this year presents a good opportunity to reflect on how the industry has changed and look ahead to what the future is likely to hold.

Post-financial crisis scenario. Banks have come out of the financial crisis stronger, more resilient, and better regulated, thanks in part to the European Central Bank’s non-standard monetary policy measures.

Risk reduction. The industry has rigorously cleaned up and reduced the risks in loan portfolios. Many banks have hit an all-time low in risk provisions, which has been a key driver for the all-time high in profitability. Given that low-risk provisions leave banks vulnerable to changes in the economic climate, the anticipated economic slowdown across many European countries will swing the pendulum of risk provisions in the opposite direction.

Performance. However, overall performance has not recovered. The top line has stagnated, and there have been no tangible improvements in operating costs and efficiency. And although reducing the number of branches is still essential, it is not a sustainable way to improve costs.

Looking ahead: five predictions for the next five years

Top line. Over the next five years, the top line will move out of stagnation and begin to decline, putting pressure on margins with €2.3 billion in income at risk in the European retail banking revenue pool.

Cost management. Mounting pressure on costs will accelerate the number of mergers and acquisitions. With a quarter of banks struggling to keep costs under control, astute cost management will become a determinant of success. In this environment, one in 10 banks will likely consider selling or merging with a competitor.

Multi-channel. A simple branch network will become a thing of the past with a multichannel network emerging to meet consumers’ needs. In 2023, the Nordics will operate a third of this network, and in Western Europe, a third of all branches will close their doors. Artificial intelligence, analytics, and new technologies will shape consumers’ experience across channels.

New competition. Emerging new competitors will gain momentum. In 2023, 50 to 85 million Europeans will use neobanks as more consumers who are digital natives become bank clients. Traditional banks will come under pressure to partner or reinvent themselves.

Lifestyle platforms. With about half of all Europeans ready to share their personal data, banking will become a lifestyle platform. By 2023, platforms will combine financial services with other aspects of daily life, such as online shopping.

Opportunities for traditional retail banks

Four new business models will emerge:

Behemoths. The industry giants will use their scale to astutely manage costs with a no-frills offering that has simple choices and a high level of standardization, which will appeal to older generations and the late adopters. This model will eventually evolve into the industry’s product factory, providing an off-the-shelf solution for smaller banks and institutions.

Advisory banks. These institutions will pride themselves on strong client relationships and deep insights about their client base. The service model will change with new client segmentation and pricing, based not only on assets under management but also on clients’ needs, the services they want, and the degree of personalization.

Digital banks. New online banks will quickly build up their digital capabilities by acquiring or partnering with neobanks or fintech companies. As the traditional branch network rapidly and dramatically scales down, digital banks will be the experts in transformation and change management, using gamification and rapid innovation to keep their clients engaged.

Lifestyle platforms. Institutions that dare to leap outside of financial services will integrate access to a variety of service providers, including government services, home utilities, and daily purchases. These innovators will integrate social media capabilities and crowd wisdom to become a one-stop solution for consumers’ daily needs—from shopping and entertainment to travel.

Preparing for the transformation