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Where are European banks most vulnerable?

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Where are European banks most vulnerable?

Incumbent European banks are under extreme pressure. Emboldened and enabled through open banking regulation (PSD2), digital-first...

3 Minutes Read

Incumbent European banks are under extreme pressure. Emboldened and enabled through open banking regulation (PSD2), digital-first challenger banks and fintechs are making meaningful inroads into traditional banking in Europe by capturing incumbents banks revenue and luring away previously loyal customers. With new digitally enabled services springing up – from lending to foreign exchange (FX) to wealth management – consumers have more choice of banking services than ever before.

As regulators level the industry playing field in this way, and technology lowers the barriers to entry and changes the dynamic, banks need to redefine their operating and business models for the new competitive environment.

Incumbents are fast realizing the threats they face, but where, in their value chain, will they be most vulnerable to disruption?

In our recent study, The New Banking Genome, we found that unsecured consumer lending and FX are two areas in incumbents value chains where they are most vulnerable, and they have concerns about their ability to maintain a strategic advantage here. Its no surprise that these were the first areas targeted by fintechs, whose streamlined digital operating models enable them to undercut banks’ high-cost service, think of Azimo , TransferWise and Revolut.

But its not only the fintechs and challengers that concern incumbents. What was particularly intersting was that in our study incumbent banks view technology providers such as Google, Amazon and Facebook as the primary threat in FX in the next 3 years, even over the fintechs!

Our data indicates that almost half of incumbent banks (45%) worry that they will lose their strategic advantage in unsecured consumer lending. Challengers and fintechs are wise to this opportunity and 74% think they can gain a strategic advantage in this area.

Further backing up this fact is that fintech growth in this area is booming. A 2017 study by the Cambridge Centre for Alternative Finance found that the alternative finance market across Europe grew by 41% during 2016 (the latest year for which data was available). And consumer lending is the single biggest sub-sector: peer-to-peer (P2P) lending sites account for 34% of the marketplace.

In the UK alone, by Q1 2018, P2P lending reached £9bn in loan originations, having provided finance for approximately 50,000 business and 221,000 individuals from 150,000 investors.

One of the reason these fintechs are beginning to dominate in unsecured consumer lending is that they can provide highly detailed analysis of potential lenders credit risk. Incumbents legacy IT system are once again proving to be a hindrance.

So the threats have been laid bare. Fortunately, technological, cultural and structural changes can be made in order for incumbent banks to remain resilient to the threat of technology providers, fintechs and challengers. To understand more, download our report, The New Banking Genome which provides a framework for making this change.


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