Importance of banking sector is sliding down globally, says EY

04 October 2016 Consultancy.uk

Banks are across the globe becoming progressively less relevant to their customers. According to a new study by EY, digitisation and the emergence of FinTech companies, among others, have seen the relevance of banks globally fall to its lowest point in history.

Banks have for decades been at the heart of economies, markets and in peoples’ financial lives, with few able to manage their business and financial matters without banking services. According to accounting and consultancy giant EY, banks were until recently 100% relevant for their customers. They were the only place where stakeholders could go for financial services or specific banking products.

Through a range of trends that have come together over the past years, such as digitisation, the growth of the alternative finance market, changing customer expectations, the emergence of FinTech and the rise of banking products from non-banking players, the relevance of the banking sector has however, of late, been on the slide. This is evident from the EY’s Bank Relevance Index (BRI), for which the consultancy surveyed 55,000 bank customers globally. 

Importance of the banking sector

The latest edition of the BRI index saw the banking’s sector score drop to 75 (on a scale of 0 to 100). According to the business advisory the index score mainly says something about the relevance of the banking sector as a whole, with large differences both between countries and between different banks within the same country (sometimes >10%). To arrive at the index scores for banks worldwide, EY looked at four different variables. The first variable looks at the financial institution consumers see as their primary financial services – the more people cite their bank as their primary financial services provider, the higher this component of the overall score. The other variables are confidence in their bank, the product mix which consumers access from their banks and intent to purchase products from their bank in the future. A lower relevancy means that banks risk losing their competitiveness, and that they may lose market share vis a vis substitute markets/products. 

Scandinavian banks retain the highest relevance scores worldwide according to the study, with an average BRI score of 81. Finland has the highest score: the relevance of the banks in the Nordic country is given a score of 82.7. Also, Norway, Denmark and Sweden are in the top six countries for bank relevance. In the list of most relevant banking sectors, Germany is in second place with 81.1 points out of 100, followed by New Zealand with 80.6. The relevance of the UK banking sector is still slightly above the global average with a BRI score of 75.6. 

Average bank relevance by country

Following Scandinavia, Oceania and Western Europe, index scores are the highest in North America, Eastern Europe and Northern Europe (UK and Ireland). In terms of the relevancy score, banks in Africa, Latin America, Asia and the Middle East tend to score under the global average, with the lowest scores in the Middle East – which average a score of 67.6. The countries where banks are the least relevant to consumers are Saudi Arabia (59.7), Indonesia (66.9) and China (69.5). Of the European countries in the study, only Italy scored well below the global average with an index score of 71.6.

According to a recent study from Accenture, millennials and the mass-affluent are most likely to shift from their primary bank.

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The business and operating models of digital-only banks

04 April 2019 Consultancy.uk

In recent years, several digital-only banks have successfully managed to nestle themselves in the banking landscape, with their popularity continuing to increase. Looking at it from the customer’s point-of-view, there is little difference between these FinTech unicorns; looking at the bigger picture, however, reveals significant variation in their business models. Matyas Fekete, a consultant at KAE, explores some of the main similarities and differences in digi-bank business and operating models. 

What about the profit?

Unlike in the UK, in most of continental Europe, bank accounts and corresponding banking services are historically paid-for services. The fact that digital banks offer most of their services free of charge has undoubtedly helped them build a large customer base. On the other hand, despite comparatively low set-up and minimised operational costs compared to that of traditional banks, and given the lack of revenue stemming from the typically no-fee model, profitability has proved difficult to achieve. Monzo, for instance, recorded a net loss of £30+ per customer in its most recent financial year. 

In the start-up world, it is customary to focus on expansion rather than profit – see the case of Uber, for instance. Still, while profitability might not be their number one priority in their early stages of development, it must be a long-term goal of any business. With their ever-growing customer base, digital banks are increasingly under pressure to turn their business from loss- to profit-making. 

Credit where credit is due

Digital banks pride themselves on their fair (often meaning “free”) proposition and have so far stayed clear of offering loans (including credit cards & overdrafts), traditionally amongst the most lucrative products for traditional providers. Though somewhat reluctantly, newcomers are also realising that offering lending products is one of the most straightforward ways to offset losses made on their free, often high-cost services (e.g. overseas ATM withdrawals). Monzo, N26 and Starling have recently started offering credit products to their customers, with their loan offering expected to be extended to a wide range of services, from mortgages to overdrafts. Correspondingly, creating a lending portfolio can also pave the way for launching an interest-paying savings offering – a proposition seen as a basic banking product that is yet to feature in most digital banks’ portfolios. 

The business and operating models of digital-only banks

The premium customer

While most digital banks offer most of their products for free, some have extended their offering by paid-for premium services in order to create a revenue stream. As these premium features – including different types of insurance, unlimited free transfers/withdrawals, faster payment settlement or concierge services – are often offered in a subscription format, customers are typically prompted to pay for the full package rather than just the desired service(s), providing a significant revenue stream for the bank. Revolut, for instance, was amongst the first digital banks in Europe to break even earlier this year, a feat largely due to revenue from its premium subscription.

SMEs like digital too

Traditional banks typically service small and medium sized businesses under their retail rather than corporate banking arm. Having their product offering tested with consumers, and consequently gaining a reasonable customer base, digital banks have also identified SMEs as an ideal segment to extend their target audience to. The five FinTechs profiled have already gone, or plan to go, down this path by following up their consumer solution with a business account. While both propositions are typically built on similar features, some providers charge businesses a monthly subscription (e.g. Revolut), while others apply additional fees to specific services (e.g. TransferWise), banking on the expectation that businesses are more likely to be willing to pay for banking – something they are already used to doing. 

The marketplace model

While most digital banks offer a wide range of banking services, some of these tend to come from partnering with third-party providers. For instance, Starling Bank’s only proprietary product is its current account, which serves as a basis for the provision of ancillary services, ranging from loans to insurance, to investment opportunities. Instead of developing these services in-house, Starling enables a select group of partnering financial service providers access to its platform in exchange for a fee. In effect, Starling is using its customer base to create a market for its partners, charging a commission for each acquired customer. 

In such cases of digital banks applying this marketplace model, the majority of their income often comes from partners rather than customers. Naturally, only banks with a large enough customer base can be successful in this set-up, underlining the current intensity of competition amongst digital banks.

Banking as a Service

While customer-centricity is heralded amongst the main USPs of digital banks, some are looking beyond offering consumer-facing services to diversify their revenue streams. Starling, which is among the few digital banks built on its own proprietary platform, has recently leapt into the Banking as a Service (BaaS) industry, making its technology available to other start-ups looking to launch a digital bank. Naturally, this raises the question whether the two offerings could threaten each other’s success. Generally, as long as such partners operate in different markets, the two business lines should be able to thrive alongside each other. Further along the line, however, such partners could easily end up expanding their banking solution into the same market(s) as they aim for global success, and by doing so, becoming direct competitors. 

Different approach, same result?

It is fair to say that consumers in Europe looking to bank with a digital-only provider would have a difficult time finding relative advantages/disadvantages amongst the leading players in the industry. Still, despite the limited surface-level variety, exploring the business models of leading digital banks reveals different approaches to the challenge of making money. Alongside the more straightforward method of offering paid-for premium features/subscriptions, some are banking on the value that access to their customer base offers to third-parties, while others outsource their technology to neobanks wanting to focus on the Fin rather than the Tech. With competition amongst digital banks heating up, it will be interesting to see which business model(s) prove to be the winning formula in the long term.