Failing Profitability of European Banks – An Opportunity for Rising Digital Banks?

For over a decade many European banks have struggled to stay above the profitability line, according to Kearney’s 2021 European Retail Banking Radar Despite implementing significant cost reduction measures, such as reducing branch networks and laying off employees in numbers, European banks’ cost-to-income ratios (CIRs) have remained largely unchanged.

Then came the 2020 COVID-19 pandemic which took its toll on what remains of regional banks’ struggles. This was evident in the declined loan demand by customers, skyrocketing provision for loan losses as banks expected more businesses to go insolvent, hindered bank liquidity, dip in fees and commission, shrunken net income due to lowered interest rates, and a downturn of issuance and trading activities in capital markets. The multiple recessions and consolidation of niche-based digital banking solutions developed by disruptors over the years didn’t help matters.

The result of these effects and more was a 62% drop in post-tax profit and net losses recorded across many European financial institutions, so much so that the European Central Bank (ECB) warned that profits may remain weak till 2022. 70% of European banks generated a profit per customer below €100 in 2020 – that’s one in ten banks reporting a loss, and a 30% drop in profit per customer. Large banks lost market share, suffering a 5% drop in revenue year-on-year (YoY).

 In contrast, US banks performed fairly better, weathering the coronavirus effects better than their European counterparts. They boast of losing only 1% YoY revenue and suffering a 37% drop in post-tax profits. We can attribute this performance to the US economy taking a dent off the pandemic impact (3.5% GDP drop) compared to the blow suffered by the Euro Zone economy (6.8% GDP drop).

Opportunity for Small Digital Banks?

To aid the current profitability crises, experts have advised large retail banks to focus on core strengths, restructure costs and transform operating models. Kearney’s 2021 European (RBR) identified major industry trends that European retail banks are struggling with, in 2021. Among these are; digital responses to coronavirus impact on banking, people proposition (mode of operation), and increased consolidations. The report suggests that to improve profitability, banks must digitalize more operations and services, embrace the agile method, and consolidate operations among others.

In reality, however, larger banks might have a harder time implementing these compared to smaller, more agile and digital banks. The logistics of transiting from a traditional/legacy entity with extensive tentacles to a fully agile banking organisation alone eludes many large banks. For others, it’s quite impossible to run all banking operations 100 per cent digitally with an agile framework. While large banks can achieve agility and digitalization, it would be slow and long and potentially harmful if not properly managed.

This presents an opportunity for smaller agile banks and financial enterprises in Europe that has a better digital outlook and are offering niche-based, specialized banking services. Their small size and digital flexibility allow for quicker response to market changes, better personalization of banking services and easier cost control with potential exponential growth.

The surge in the demand for digital banking solutions in 2020 equally aids their course and explains why many digital challenger banks (DCBs), fintechs and specialists bounced back faster from the pandemic shocks compared to their traditional counterparts. While the world expects to see some consolidation among medium and large European banks in 2021, small specialists and challenger banks are already performing extremely well, with a high return on equity.

The trend would not go away anytime soon, in fact, analysts expect it to get only better. A larger portion of the banking public (individuals and corporate) got a taste of full digital or advanced personalized banking for the first time during the pandemic and that taste still lingers. The demand for more hangs in the air. All that small agile banks and specialists need to do is reach out and take it faster than most large banks can through innovation and at far lesser cost.

Seizing the Gold’ with SpotBanc

Breaking the entry point into digital and specialist banking is easier today than it was decades ago due to the technological advancements of digital banking software and platforms. This is the best time for small and medium specialist financial institutions such as EMIs, private banks, virtual account managers in Europe to increase the digitalization and reach of their services and operations through agile methodology.

The downsizing and other cost-reduction measures carried out by big banks today simply open up a gateway for smaller and more efficient digital banks to fill the needs left by their bigger counterparts. Niche-based banking is fast becoming the new way of banking as financial services become more specialized and personalized.

New fintech launching products to markets can do so faster leveraging ‘ready-made’ banking technologies offered by white-label banking solution providers like SpotBanc. In the scheme of things, market opportunities wait for no one; the fastest to market with the better products and operating models seizes the gold. Through modern banking technologies and tailored-fit solutions, Spotbanc gives your organisation the competitive edge in taking advantage of these market opportunities in the most efficient and cost-effective way. 

The gold lies ahead, are you ready to seize it? Contact us today.

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