The FINANCIAL — European banks must initiate an overhaul in order to fend off new and varied challengers as the spectre of Brexit looms over the sector. This is a key finding of a new report by PwC which predicts the banking industry is set to emerge from the recent crisis into a radically different regulatory, technological and economic environment that will shape its profile and structure for the next decade and more.
According to the report, a new ‘ecosystem’ will emerge, comprising a network of amalgamations, alliances and business-to-business relationships, as firms seek to improve their performance by re-focusing on their customer, market and operational niches.
The PwC report argues that this development will enable the industry to better support customers and society and return to a growth agenda. But there are risks to this, and there will be bumps along the way.
While Brexit and its aftershocks – together with other disruptions – pose a threat, they also represent an opportunity for all firms – incumbents and challengers – to harness the disruption in a positive way.
Incumbent banks gradually consolidate and adapt to new conditions but not fast enough to prevent challenger organisations of various forms from taking a sizeable – perhaps 20% – and permanent share of the market.
This trend quickens, and a tipping point is reached beyond which the challengers become the new incumbents and the present incumbents either fade away or are reduced to playing a utility role. In this scenario, it is possible that a new banking crisis, and a new round of public intervention, could precipitate the transition.
The third more optimistic scenario sees the banking industry – together with other financial services and technology sectors – move on from vying for who gets what share of the payments, deposits, loans and securities market. Instead, it addresses itself collectively to customer service innovation and solving contemporary societal challenges.
The third scenario is the most likely outcome, says PwC, partly because the market is already evolving in that direction, naturally rather than by design. The parallel is drawn with the emergence of the so-called ‘sharing economy’ which has come into being through developments in the socio-economic environment, rather than being institutionally driven.
The report finds that this evolution is already happening: a recent PwC global survey on fintech, found that, of the 68% of incumbent firms that engage in fintech in some way, only 11% report some form of in-house development (‘D.I.Y. fintech’) or straight acquisition of FinTech companies (9%); the rest involves collaboration with third parties.
Banking is a dispersed industry, and financial innovation is an even more dispersed activity, the report concludes. PwC concludes that policy makers need to recognise and embrace this – the last thing that is needed, in Europe or anywhere else, is for innovation hubs from Silicon Valley to New York, London, across Europe, the Middle East, Africa and Asia to become disconnected from each other, from the sources of finance that feed them, and from the markets and people they serve.
