British bankers confident London will remain EU's financial centre

07 November 2016 Consultancy.uk

Nearly three quarters of British bankers believe that London will remain Europe’s financial powerhouse in five years’ time, countering recent concerns that UK’s capital city will lose its top spot to rivals such as Paris, Amsterdam, Zurich or Frankfurt.

For decades the UK, London in particular, serves as the heart of Europe’s financial services industry. Today the sector today generates between £190 to £205 billion pounds of revenue each year and employs about 1.1 million people, and, as a result, the industry accounts for more than 20% of UK’s total services exports. Yet following Britain’s decision to opt out of the European Union, several reports have emerged which warn for Brexit’s impact on the competitive position of the industry. 

According to a report by Oliver Wyman, commissioned by the finance industry group TheCityUK, Britain’s financial industry could lose up to £38 billion pounds in revenue in a so-called ‘hard Brexit’, a scenario in which the UK would give away access to the single market. If banks, insurers and other financial services players lose the right to freely sell their services across Europe, then up to 75,000 jobs could disappear – losses which come on top of the large reorganisation programmes that are currently flowing through the City’s veins. The government could miss out on £10 billion in tax revenue per annum, the report by the consulting firm said. 

Another report, by PwC, highlighted that UK’s vote to leave the EU would mean that London would lose its status as Europe’s most economically attractive financial services capital, with Dublin in the driving seat to take its top spot. Other predators looming on the horizon to snap a share include Paris, Amsterdam, Frankfurt, Munich, and Zurich.

British bankers confident London will ramain EUs financial centre

A new analysis, conducted by Synechron Business Consulting in conjunction with research agency TABB Group among 80 UK-based financial services executives, shows however that there is a (considerable) disparity between what external experts think and what bankers themselves believe. Despite the fact that 78% of executives surveyed agree that Brexit will have a negative impact on UK financial markets, 72% said they believe London will still be the financial centre of Europe in five years’ time. In other words, many consider that the implications won’t be as significant in the long-term as cautioned by others, and when it comes to dealing with the impact, they believe London’s strong position in the financial services space will enable the city to rebuff pressures.

“The study found that the majority of British bankers believe that London will remain the financial centre of Europe, painting a very hopeful picture of the future”, says Tim Cuddeford, Managing Director at Synechron Business Consulting. 

One reason that may deter British banks from relocating to another European financial centre is the hefty price tag that comes with it. According to Synechron’s analysis, the average relocation cost per employee amounts to roughly £50,000 per year. 

Preparing for Brexit

The research further found that the majority of banks are not willing to wait and see what agreement the UK government agrees with the European Union and how the industry will deal with the uncertainties. 55% of the executives said that their bank has set up ‘Brexit Steering Committees’ to prepare for life outside the EU, a number which mirrors a claim made recently by the British Bankers Association (BBA), which said that many large and small banks are considering their options outside of the UK.

“Banks are no longer waiting for the Government to trigger Article 50 and have begun setting up Steering Committees to plan for life outside the European Union, with some already considering relocating staff to other cities around Europe”, says Cuddeford.

Banks considering to move abroad over Brexit fears

He adds that whilst Brexit poses an unforeseen challenge for financial institutions, the prospect of rising compliance costs appear inevitable, contrasting a popular view that Brexit would reduce red-tape for financial institutions. In the research, 56% of senior British capital markets executives fear that compliance costs will increase following Britain’s decision to leave the European Union, with not one executive expecting regulatory costs to decrease.

Executives have mixed views on how the UK should best proceed. 19% of respondents believe that the UK should pursue the ‘Norway option’ and negotiate to remain part of the European Economic Area, whilst 18% believe the UK should follow the ‘Swiss model’ and negotiate bilateral treaties. “Whether London pursues the Norway option or the Swiss model will be a nod to what regime the financial centre views as a better model. And, perhaps most importantly, the rift between the UK and continental Europe is likely to widen”, comments Joost Loves, a Managing Director at Synechron Business Consulting based out of Amsterdam.

Impact on Europe

Interestingly, 8 out of 10 executives believe the EU will also be negatively affected by Brexit. This could, in part, be because 51% of managers believe that Britain is in a position to negotiate a bespoke trading relationship with the EU that is tailored to the interests of the UK. Loves: “While the UK focuses on the impact of Brexit on London, undoubtedly, Brexit will also have a rippling impact on continental Europe as well.”

Profile

×

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.