A recent study conducted by PwC has revealed that the European market is overloaded with too many banks. They fear that these banks are attempting to do too much in an environment that has been made even more uncertain as a consequence of Brexit. So, just how over-banked is Europe? And, is fintech investment the answer? Financial software company Misys provides the answers.
If we look at the statistics, Europe is considerably over-banked when compared with the US in particular. At present there are 130 large banks in Europe, which service an economy of 15.3 trillion euros. This equates to one bank for every 118 billion euros of GDP. In Australia, there is one bank for every 141 billion euros, in Canada there is one bank per every 214 billion euros, and, finally, in the US there is one bank for every 302 billion euros. If the banks in Europe are to survive, they are going to need to act quickly to re-engineer their business processes and models so that they can meet the challenge that fintech poses.
The study – ‘The future shape of banking in Europe’
So, let’s take a look at some of the findings of the survey provided by PwC. They state that because Europe is operationally overbanked, there is a huge structural problem, and this means that Europe has become an environment that is not as cost-efficient for banks when compared with other regions around the world. The average cost-to-income ratio across the world is 65 per cent, however, this is as high as 80 per cent in Europe.
PwC feel that banks have not done enough to address the extensive structural challenges that pose severe risk to the existence of their businesses, nor have they done anything to address core business fundamentals. Instead, they have focused their efforts on strengthening their balance sheets, but this does nothing to address the crisis that is clearly happening in European banking.
The banking industry in Europe is ripe for change. While banks are busy improving their bottom lines, they are failing to deal with the numerous problems that surround them. This includes the following:
- Impatient investors – By assessing where bank stocks have been trading, it can be concluded that there is increasing impatience amongst investors to see a performance turnaround.
- Regulations – Structural performance issues are plaguing the sector, and this is something that regulators and policy makers are increasingly turning their attention too.
- Bemused consumers – Customers feel bemused by the service standards and offerings provided by large banks. Providing them with new digital offerings that match their businesses and lives represents a great opportunity.
- Increasing number of challengers – If that was not enough, there seems to be more competition than ever before, especially from businesses able to exploit the agile, lean business models and the new technologies that customers demand.
Due to the numerous challenges that European banks are facing, PwC believes they will be forced to change. They believe that banks will re-focus on operational and market niches, and the customer, to improve their performance, and that a new ecosystem will come about, featuring business-to-business relationships, alliances, and amalgamations.
Embracing fintech investment
Is embracing fintech investment the solution? Although some banks are reluctant, it would appear that this could be the answer. PwC conducted a survey, which compromised of 544 financial businesses operating across all segments, with fintechs included. One of the questions asked was what proportion of the market is at risk to fintechs. Fintechs stated 33 per cent while incumbent players went for 23 per cent.
Moreover, another poll that involved 432 incumbent financial services businesses explored the collaboration between traditional financial services companies and fintechs. It revealed that almost 70 per cent of respondents are engaged in some way with fintech. However, only a mere 11 per cent of these are doing so via in-house development. Is this where financial service companies are going wrong? The collaboration of specialist firms and the use of technology would surely deliver cost efficiency and help to deal with the challenging European banking environment.
— EIB – the EU bank (@EIB) September 5, 2016