zeb.Retail Banking Study 2020
This autumn, zeb, the strategy and management consultancy for the European financial industry, analyzed the economic situation as well as developments in German retail banking for the 20th time and derived implications for the industry. According to the study, retail banking earnings potential with German retail customers fell to EUR 49.3 billion in 2019 (-2 percent year-on-year) and will continue to decline in 2020 to an estimated EUR 47 billion. This represents a year-on-year decline of 4.9 percent and is around 16 percent below the 2010 level. The coronavirus pandemic is thus having a significant impact on the earnings situation. Above all, short-term setbacks in consumer financing and an interim high in the investment business, which was triggered by the capital market fluctuations in spring and driven in particular by increased securities sales, are evident.
Compared to 2010, income from deposit-taking business has now virtually disappeared due to margin pressure induced by the zero or negative interest rate phase. On the other hand, income from credit business developed positively. With EUR 22.6 bn, banks now generate almost half the total income in this business segment from retail customers – approx. 28 percent more than at the beginning of the last decade.
Digital offers threaten everyday banking
The credit business includes consumer lending (including overdrafts), which rose by 14 percent compared to 2010 and now accounts for more than 25 percent of retail business income. Nevertheless, many traditional market participants do not address this business segment to the same extent as other lines of business. They still hold the strategically important customer access in everyday banking, which new competitor categories increasingly target through digital customer solutions and PSD2. Since more than half of the retail lending business is currently turned over using traditional sales channels outside of POS or online marketplaces, access to customers from everyday banking is an ideal platform for expanding consumer lending, both in new lending and in debt rescheduling.
Established competitors in particular are benefiting 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. In particular, market pressure due to established competitors’ offers of accounts without a basic monthly fee has eased. This supposedly comfortable situation in everyday banking must not conceal the threat posed by the speed with which digital services are being developed. “Access to customers is no longer based on current accounts alone and 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, Partner at zeb.
Construction financing as a driver
One main component of wealth planning and formation for private households is owning their own home and thus construction financing, whose earning potential 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 improvements will lead to increased competitive pressure also in this line of business and mean that considerable shifts in how well the potential of the currently approx. EUR 9 bn can be exploited should be expected.
Net income from retail customers in Germany continues to decline
The stagnation of the earnings base described above resulted in a “black zero” as the sector’s net profit in 2019, compared with a figure of around EUR 2 bn in 2018. This year, due to the coronavirus crisis, a sector loss of almost EUR 3 bn is expected for the first time. The stagnation of total income in the coming years at around EUR 47 bn, which is driven by the business mix in retail banking with the negative margins in the deposit-taking business, accompanied by a tendency for risk costs to normalize slightly and without further improvements in the cost base, will result in substantial losses in a five-year scenario: without effective countermeasures, net income in German retail banking will probably fall to EUR -5 to -7 bn in the next five years.
Isolated rays of hope
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. “We increasingly see the need for differentiated programs that seize the opportunities offered by digitalization and address both efficiency improvements and new sales opportunities that boost earnings,” said Dr. Marc Buermeyer, Partner at zeb and Head of the Retail Banking Practice Group.
One example that addresses both income and cost levers is banking via smartphone. It is to be expected that mobile banking will continue to develop as a primary customer touchpoint and will thus become an even more important sales channel in retail banking in the future. However, earnings potential can only be leveraged with mobile solutions which offer simple and convenient application options that win customers over and which will include additional value-added services in the future. The stronger focus on customer needs also opens up business opportunities in ecosystems that go beyond traditional banking products – but usually depend on significant changes in the business model and substantial investments into technology. Meanwhile, a systematic shift of customer service interactions and their at least partial automation allows significant cost savings in the traditional sales infrastructure. If it is done well, closeness to the customer is maintained.
By systematically addressing the sustainability megatrend, additional opportunities for earnings growth can also be created in retail banking. The population’s increased affinity for sustainability is reflected not only in everyday life but also in finance and leads both to increased demand for sustainable products and services and to a greater willingness to pay for them. In the medium term, additional earnings potential of around EUR 1.6 bn in retail banking can be expected.
Considerable dynamism in transformation
The coronavirus crisis has spoiled the last illusion of being able to avert impact of low interest rates without fundamental changes in direction. At the same time, there has been a significant increase in customer understanding and willingness to change with regard to new digital customer interaction channels. The result is a broadly increased dynamism in the realignment of business models in retail banking. Banks must systematically manage market pressure and accelerate the transformation to digital and sustainable business models.
As a leading strategy and management consultancy, zeb has been offering transformation expertise along the entire value chain in the financial services sector in Europe since 1992. In Germany, we operate offices in Frankfurt, Berlin, Hamburg, Munich and Münster (HQ). Our international locations are in Amsterdam, Copenhagen, Kiev, London, Luxembourg, Milan, Moscow, Oslo, Stockholm, Vienna, Warsaw and Zurich. Our clients include European large-cap and private banks, regional banks, insurers as well as all kinds of financial intermediaries. Several times already, our company has been classed and acknowledged as “best consultancy” for the financial sector in industry rankings.
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