Neobanks pressuring traditional retail bank models
Research from A.T. Kearney projects that 1 in 10 banks will disappear in the next five years across Europe, as all-digital neobanks increase their market reach.
A.T. Kearney’s “Retail Banking Radar 2019” report examined 92 banks across Europe, and found that though profits are at an all-time high, income remains weak – with income per client collapsing -11% between 2008 and 2018. The report also found that a quarter of bank branches closed in Europe since 2008.
“Our ten-year study shows that whilst the industry is stronger, it is stagnating,” Simon Kent, partner and global head of financial services at A.T. Kearney, said. “Not all banks will survive the tide of change as customers increasingly favor digital banks and innovative products and services.
“Branch closures are a short-term fix to steady the books but it is not enough – traditional institutions need to consider strategic transformation to improve cost and top line and also offer more innovative products and services if they are not only to survive – but thrive – in the new retail banking landscape beyond 2019,” Kent added.
Neobanks, which offer solely digital products and lower fees (passing on the savings of a limited to non-existent physical footprint), have quickly gained in popularity in Europe. Since 2011, the neobank customer base has grown by more than 15 million, while traditional retail banks have lost 2 million customers. A.T. Kearney projects that up to 85 million Europeans will be neobank customers by 2023.
In the US, the digital “disruptor” banks have, thus far, had less of an impact. Research from Q2 and Cornerstone Advisors relates that 3.25 million accounts have been opened across the seven leading neobanks in the US – holding about $1.68 billion, or 0.014% of US deposits. The biggest US players include MoneyLion and Chime.
Successful European incumbents like Monzo, however, are hoping to drive further adoption in the US by expanding their operations stateside. German neobank N26 raised $300 million in new funding earlier this year to push its US expansion plans.
European fintech has been aided by an advantageous regulatory framework in regards to open banking – which allows third-party apps to plug into consumer data from traditional financial institutions. Personal finance apps, for example, are easily able to plug into a consumer’s data from their regular bank to give advice, instead of using less-secure avenues like screen-scraping.
The UK and European Union have implemented a number of regulations promoting open banking, including the Second Payment Services Directive (PSD2).
The US, meanwhile, currently has no regulations similar to PSD2 pending, so American financial institutions aren’t required to open up their customer data to third-party providers.
A 2018 Ovum report, however, relates that 82% of banks in the Americas are pursuing open banking strategies.
Related: Transaction banking facing technological disruption from fintech
