New Decade- New Crisis--European Retail Banking Radar

Kearney, Chicago Kearney, Photo by Karen King New decade, new crisis European Retail Banking Radar Contents Foreword 1 Be bold, act now: the operating models of the future 12 The 2020 retail banking outlook: minimizing Universal banks: using mass scale to deliver both loss and maximizing customer trust 2 standardized and specialized products 12 Revenue will drop at least 20 percent 2 Specialist banks: a quality over quantity approach 13 Meanwhile, costs will by and large remain the same 3 Direct banks: a quicker, more convenient One in eight banks will face losses this financial year 3 form of banking 13 Lifestyle platforms: a new lifestyle companion 13 New decade, new crisis: lessons learned from the Banks need to commit to a new operating model 14 Global Financial Crisis and why this time it’s Doing more with less 14 different 4 Lessons learned from the Global Financial Crisis 5 The knowledge and skills that have helped banks get where they are won’t be enough to get them where In some ways, it’s similar. But in others, they need to be 15 it is very, very different 5 Time to make a decision 15 Banking for good 5 Regardless of the current cost position, the task at Life after COVID-19: building a new banking hand is the same for all: dramatically change the landscape through M&A 16 operating model 6 Post-crisis M&A shows promising results 16 European banks will need to reduce their cost base For some players, M&A may be the only option 17 by more than EUR 35 billion in order to survive 6 The need for efficiency—based on scale and focus— 2021 and beyond 6 will lead to divestment of non-core businesses and acquisitions to strengthen the core 17 A new normal: fortifying your distribution The rise of strategic partnerships 17 channels in a world post-COVID-19 7 Customers won’t go back to how things were, It’s not just about strategic mergers, acquisitions, so neither should banks 8 and divestments—it’s also about what follows 17 The lockdown has accelerated the trend toward A mixed outlook for fintechs 18 a cashless society 9 Why the only constant will be change 18 End-to-end online banking services have become more important than ever 9 Contact centers will go digital—and replace branches as the #1 point of contact for customers 10 Branch closures will continue… 10 …but we will see a new role for bank branches 11 Customers will expect a frictionless experience across channels 11 If it can’t be done in-house, banks will look to acquire a business that can do it 11 A new age for banking 11 Foreword I am delighted to share with you a compilation of five Through identifying these key challenges we hope short articles we recently published under the banner to help retail banking leaders across the region title New decade, new crisis. identify the emerging opportunities we are seeing to support mid- to long-term growth for their The series stems from our successful European organizations. Retail Banking Radar which is now in its 11th year. Our recent 2020 headline analysis concluded that I hope you will find these articles insightful and if you revenue for retail banks across the region will fall by would like to discuss any of the themes covered in an average of 20% by year end, with one in eight retail more detail please do contact any member of the banks facing losses this year, and profitability per Kearney team. customer projected to reduce by approximately 60%. Retail banks are therefore having to weather enormous and unprecedented changes, intensified by the recent COVID-19 crisis. In this series, we examine key opportunities and risks across retail banking over the next few years in light of the pandemic. After months of lockdown, customers’ banking habits—and indeed expectations—have Simon Kent shifted irreversibly toward digital banking. Retail banks Partner and Global Lead, Financial Services, Kearney have come under strain as revenues drop while Connect via Linkedin operating costs have not, leading to a critical review of existing infrastructure, specifically bank branches, employee skill sets, and even employee workplaces. Cost reduction is paramount, but it won’t be enough— banks need to consider a complete transformation of their operating model and articulate a new minimum viable operating model for the future of the bank. For many banks, M&A will be a viable way to make quick and impactful changes to their operating model and the resulting surge in M&A activity will present a multitude of opportunities. While the COVID crisis in Europe is subsiding, it is far from over. Only those who embrace the urgency for change, make bold deci- sions, and take quick action will survive. European Retail Banking Radar 1 The 2020 retail banking outlook: minimizing loss and maximizing customer trust Over the past few months, Our modelling shows that this combination of payment holidays, low base interest rates, reduced nationwide restrictions on travel, economic activity, and reduced revenue from work, and leisure across most management fees of financial assets under manage- European countries have led to a ment will result in an average 20 percent decline in retail banking revenues. This is a base scenario, dramatic drop in consumer spend. relying on a partial recovery toward the end of the Meanwhile, repayment holidays on credit cards and year. However, it’s very likely that revenues could drop loans and offers of interest-free overdrafts abound by 35 to 40 percent, depending on the starting point while base rates have been cut across most countries, and revenues mix between different European banks. leaving banks in a precarious position as their income levels drop while operating costs remain largely Travel, leisure, and entertainment unchanged. It is an unprecedented situation and our spend has ground to a halt and research predicts that despite best efforts,one in eight banks will suffer losses this financial year. Our customers are adopting a wait- modelling has identified three predictions for how and-see approach, especially COVID-19 will impact retail banking profits in 2020: on the lending side. Revenue will drop at least 20 percent Banks are taking dramatic measures to make life easier for their customers. With government support, European banks are granting mortgage repayment holidays, cancelling overdraft fees, and increasing credit card limits. Many countries have also cut their interest base rates in a bid to keep the economy afloat, leading to an additional pressure on revenue for banks. While there are a few notable consumer areas where business is thriving—food shopping, streaming services, and online retail—customers have dramatically scaled back their spending habits. Travel, leisure, and entertainment spend has ground to a halt and customers are adopting a wait-and-see approach, especially on the lending side, where applications for new loans and mortgages have declined. European Retail Banking Radar 2 Meanwhile, costs will by and Our research suggests that the large remain the same average cost-to-income ratio will Along with most other sectors, banks are entering a increase to ~80 percent, with holding pattern where basic operations need to be some banks seeing costs kept afloat as they consider what they reopen and exceeding revenues. what they agree to restart following the introduction of a crisis operating model. Many banks are commit- This is not only the right thing to do, it’s also a shrewd ted to keeping their headcount—a move that plays move. Those banks will be remembered for the active favorably with both the media and public opinion, as participation they took in helping their customers well as being a sensible long-term investment. But through a challenging time. The trust they gain from while the attention is on management salaries and customers will not only be rewarded through bonuses, news is also emerging of pay cuts, reduced increased loyalty and new business but will also working hours, and voluntary unpaid leave across prepare the bank’s customer services for a world regular staff. post-COVID-19. After all, it is unlikely that customers will fully return to their pre-COVID-19 habits and the Most branches have ether closed or reduced their crisis is likely to become a catalyst for a permanent operating hours, and some governments have issued shift toward more digital banking habits. rent deferrals, which may alleviate some of the short-term operational costs. However, for the most One in eight banks will face part operations costs remain the same for banks, leading to a tight squeeze on profit margins. Our losses this financial year research suggests that this will push the average Even with modest impairments, it will be a tough year cost-to-income ratio up to ~80 percent with some for banks—along with most other sectors. Our banks seeing costs exceeding revenues. All of this estimates suggest that up to 12 percent of banks will need to be weathered before banks see an uptick could see losses in the current financial year, with in revenue. profitability per customer being reduced by as much as 60 percent compared to 2019. Some banks have also taken on the additional expense of launching new and improved digital services for The crisis presents unprecedented challenges, and its customers, such as Lloyds Bank providing free digital long-term impact is yet unknown. However, by training and issuing free tablets to elderly customers, looking after employees, proving value to customers, Intesa Sanpaolo launching preapproved credit lines preparing for the worst economic scenario, and to small businesses and families in need, and TSB fortifying core business activities, businesses stand setting up dedicated customer care chatbots among the best chance of emerging from the crisis stronger.

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