Income from deposit business has now more than halved from 2010 levels due to margin pressure induced by the low interest rate phase. In the medium term, with continued low interest rates, the loss of the currently remaining income of approx. EUR 7 bn in this category is also to be expected. On the other hand, income from credit business developed positively. In this business segment, banks generate approx. EUR 20 bn with private customers today, about 16 percent more than at the beginning of the decade. Looking ahead, the development of this line of business will depend on the overall economic situation, although growth has so far been uninterrupted.

Digital offers threatening daily banking

Credit business includes private consumer credit business (incl. overdraft), which rose by 14 percent compared to 2010 and now accounts for more than 25 percent of retail business income. Nevertheless, many traditional retail banks do not address this business segment to the same extent as other lines of business. They (still) maintain the strategically important customer access in daily banking, which new competitor categories increasingly target through digital customer solutions and PSD2. Since more than half of the retail credit business is currently sold using traditional sales channels beyond the POS or online marketplaces, access to customers from daily banking is an ideal platform for expanding consumer credit business, both in original new business and in debt rescheduling.

In addition, established competitors benefit from the positive trend in current account income. Banks are currently earning approx. EUR 7 bn here, amounting to EUR 2 bn more than in 2010. This supposedly comfortable situation in daily banking must not conceal the threat posed in particular by the speed with which digital services are being developed. “Access to customers is of strategic importance, especially for established players—losing it would threaten the very existence of retail banking. The competition for customer access will enter a decisive phase in the coming years,” said Ulrich Hoyer, zeb Partner and Head of the Retail Banking Practice Group.

Construction financing as a driver

One main component of wealth planning for private households is owning real estate and thus construction financing, whose income has grown by more than 25 percent over the past five years. In a market that is generally characterized by rising real estate prices, the banks succeeded in expanding their new business margins again and thus offsetting opposing developments, such as rising equity shares. Foreseeable changes in the channels used, rising customer requirements and significant efficiency enhancements will lead to increased competitive pressure also in this line of business in the future and means that considerable shifts in how well the potential of the approx. EUR 7 bn can be exploited should be expected.

Decline of income potential with private customers in Germany without countermeasures

In 2018, this reduction of the income basis resulted in an industry-wide pool of income of still approx. EUR 2 bn. Based on current macroeconomic scenarios and on the business mix in retail banking, zeb experts expect the income potential with retail customers to fall to EUR 45.6 bn in Germany by 2023—a decline especially driven by the loss in deposit income. In the following five-year scenario, with a slight normalization of risk costs and no further improvements to the cost base, substantial losses will occur: without effective countermeasures, the result in German retail banking will probably fall to - EUR 5 bn in the next five years.

Customer-oriented realignment required

In this market environment, banks will have to intensify their business efforts in growing lines of business in addition to the necessary cost programs and prepare themselves for further intensified competition. “Growth in individual lines of business and, in particular, success in predatory competition require a systematic, customer-oriented realignment of bank sales,” said Dr. Marc Buermeyer, zeb Partner and Head of the Retail Banking Practice Group. Banks should establish a systematic sales process that continuously optimizes the relationship between customer experience, customer data, customer understanding and personalized offers.

Successful technology providers are showing the way: a good customer experience ties customers to a platform and leads to a constantly growing stock of customer-related data, from which insights into customer needs and preferences can be derived. Customized and individually tailored services in turn improve the customer experience. This approach goes well beyond a narrowly conceived use of data analytics focused on campaigns or sales impulses. One of the greatest current transformation challenges for banks in the digital era is to systematically integrate such a self-reinforcing sphere of influence into established banking structures.

Customer orientation pays off

An analysis for the period from 2013 to 2018 shows that customer orientation can actually pay off. The 50 largest European banks differ significantly in their weighting of customer orientation in management and communication. A classification of the banks, for example, according to the prominence of the topic in the annual report communication of recent years, and a comparison of the leading banks with their competitors reveals a positive correlation between financial KPIs and customer orientation. On average, banks with a high level of customer orientation had a price-to-book multiple of 1.2, compared with 0.8 or 0.6 for banks with moderate or low customer orientation. These valuation differences reflect significantly higher profitability (RoE of 9.4% vs. 5.1% and -0.9% respectively) and also higher efficiencies (CIR of 57% vs. 68% and 65% respectively).

About zeb

zeb was founded in 1992 and is one of the leading strategy and management consultancies for financial services in Europe. In Germany, zeb operates offices in Frankfurt, Berlin, Hamburg, Munich and Münster (HQ). Its international locations are in Amsterdam, Copenhagen, Kiev, London, Luxembourg, Milan, Moscow, New York City, Oslo, Stockholm, Vienna, Warsaw and Zurich. Its clients include European large-cap and private banks, regional banks, insurers as well as all kinds of financial intermediaries. Several times already, zeb has been classed and acknowledged as “best consultancy” for the financial sector in industry Rankings.

zeb Contact

Franz-Josef Reuter
Head of Public & International Affairs
Phone +49 251 97128 347
E-Mail franz-josef.reuter@zeb.de