Banking Disrupted. How Technology is threatening the traditional European Retail Banking Model.

Interview with Olivier de Groote and Yves Dehogne

managing partner clients & markets/ partner, Deloitte Belgium


Stéphane Darimont (SD) [Banking Boulevard]:There are many challenges ahead for retail bankers. In the Deloitte study “Banking Disrupted. How technology is threatening the traditional European Retail Banking Model”, your firm points to a combination economical, regulatory and technological factors that are radically affecting the competitive environment of retail banks. I suggest we start this interview with the impact of low interest rates.


Retail bankers are indeed threatened on many fronts.

As to the current level of interest rates, we observe that the economic crisis has severely impacted the current & saving account economics of retail banks, which is a fundamental component of their traditional business model.

In the context of the current economic slump central banks cut their base interest rates down to very low levels to promote investments. When the base rates amounted 4 or 5 percent before the 2008 crisis banks could remunerate their clients’ current accounts at a rate which was substantially lower by several hundreds of basis points than the one they enjoyed on their own deposits on the wholesale markets. Now that base rates are close to zero, that sort of math does not work anymore…

(SD): In response to the 2008 banks crisis, the regulators adopted a series of new rules and regulations meant to increase the level of protection of banks clients. Amongst them is a reform of the deposits guarantee scheme which did also impact the competitive environment of the retail banking business.


Yes, the recent failures of both large and small banks across the world highlighted that banks are not immune to the threat of insolvency, and also that they are subject to systemic risk. In response, European governments have developed transparent, actively-marketed deposit guarantee schemes whereby the guarantee in EU member states is much more generous than before the crisis. Most customers are now aware that deposits held with any member of such a scheme is effectively underwritten by up to €100,000 by the state, compared to €20,000 until 2009.

The logical conclusion for those with deposits below these thresholds, i.e. most retail customers, is that incumbent banks have lost their perceived security advantage over challengers. This generates a very clear arbitrage opportunity for new or niche banks that may previously have felt they lacked the brand strength or heritage to compete. However, currently there are still few arbitrages, probably due to low level of interest rate.

(SD): Bankers competitive environment is also impacted by the emergence of new entrants from the technology sector who innovate and challenge them by developing payment services for instance...


That’s correct. Electronic payments have become key to providing convenience to customers, as the use of cash diminishes, and with it the importance of a physical presence. Payments innovation is coming primarily from non-banks, like PayPal. Moreover, cash-rich Internet players, such as Google and Apple, are also demonstrating an interest in this space.

In our view, the danger is not that non-banks replicate the universal banking model but that by innovating around it, new entrants fundamentally undermine the integrated bank business model.

Payments are attractive to these players because they offer control over the customer purchase experience and ownership of a rich seam of transactional data –from which the new entrants have a proven capability to use new technology and analytics to extract value.

European regulators are to some extend supporting them by making it increasingly difficult for banks to exploit their ownership of the payments network as a barrier to entry.

The danger for banks is that the current account balances that they currently own or control, will reduce. One risk is that some of the ‘float’ associated with current accounts may come under the control of the new entrants.

Another risk is that non-bank players obtain banking licences in order to offer narrowly-defined current account products (probably without offering a full suite of traditional banking products), to take market share.

The recent wave of new banking licence applications across Europe shows that players that previously relied on wholesale funding, like credit card or mortgage monolines, see lump sum Internet deposits as an easy market to tap, and one that may prove more resilient than their more traditional sources of bank or capital-market funding.

(SD): This seems to imply that it is urgent for retail bankers to adapt their strategy.


Well, while the threats outlined are very real, their extent and the time frame over which they will exert themselves remain opaque.

However, it is worth casting an eye across to the grocery sector to see the consequences of too much reliance on traditional ways of doing business. In the space of a few years, an inflection point has occurred where the online business has moved from being complementary to core.

So the lessons for banks are clear. They are going to have to be more aggressive in presenting the case for investment at the expense of short-term profitability.

(SD): What should banks do to optimise their customer acquisition costs?


Without a change in the economics of customer acquisition, banks risk ceding much of their revenue to search engines, independent aggregators and payment specialists. However, they retain the advantages of incumbency. We believe a reshaped banking sector can rise to these new challenges.

There are several key tactics we would highlight. First, banks must protect and better leverage the residual value from branches. There are plenty of examples where, in their eagerness to cut costs, banks have choked off new acquisitions. Banks must strike a better balance between cutting excess capacity and protecting new business share. To do this they need to understand where to have branches and what to do with them, based on a real understanding of the micro-markets in which they operate.

Deloitte has experience in the assistance of banks in this field. As a matter of fact, we have helped some of our client understand how factors such as population, demographics and the local economy – both current and forecast – affect customers’ banking needs.

Such a study leads to the classification of bank locations into several key types of micro-market, which paint a new picture of consumer demands for products and services.

Understanding these micro-markets is the essential first step in creating the optimum network and significantly reducing cost-to-income ratios.

Second, banks should use analytics on their customer data to improve the economics of acquisition through direct channels. Many of the segmentation strategies used by banks today focus on cost-to-serve or generic needs (e.g. life stage for retail customers, industry for SMEs). This is useful for cross-selling to existing customers. However, analytics can be used much more effectively as a cost-effective means of new relationship-banking acquisition. Clearly, truly effective analytics relies on having a rounded customer view. This is something that banks currently struggle with and where we can help.

Third, banks have to get better at digital cross-selling. In the aggregated digital world, the winner is most likely to be the provider that can extract the most value from the lowest price point for core product(s). In the past, banks have done this well.

(SD): The digital transition for retail banks will obviously necessitate substantial IT investments to be made. In some cases they will even have to consider the replacement of their core banking system…


Traditional banking is under severe threat from digital disruption, and it is high time to reconsider the ‘core’ in core banking systems.

The central challenge is that banks have designed their IT systems to support processes that deliver products across multiple channels. Bank systems are, therefore, arranged around products rather than around customers.

Digital transformation, on the other hand, demands that customer data be leveraged to provide services at the point of need. A simple example is how search engines use search patterns to auto-complete search words. By contrast, the rich customer data banks collect often gets lost within product silos.

Turning this product-centred model on its head would allow banks to serve not just customer needs but also to capture their experience and address their future expectations

For the past five years, Deloitte has used information from The Banker database to analyse the relative performance of banks using modern core banking systems, compared to banks using legacy software.

What this analysis shows is that banks running modern core banking systems have materially better profitability metrics. Over the past five years, banks using third party banking applications have enjoyed a 19 per cent higher return on assets, a 28 per cent higher return on capital and a 6.5 per cent lower cost-to-income ratio on average than banks running legacy applications

(SD): What is your conclusion?


Banks’ core competitive advantage over new entrants are being eroded by technology and regulation.

So banks are faced with tough choices. They must first identify the aspects of their business model they can sustainably defend, and invest in them. In the short term, they should take advantage of a period in which central banks are providing unprecedented cheap funding to generate profits.

These earnings are temporary in nature, and should be invested in strategic priorities, such as analytics. New analytical capabilities will enable banks to optimise their branch networks, and allow them to exploit their unrivalled treasure trove of data.

Finally, this short period of cheap funding offers a window for banks to choose how to address legacy IT systems.

These challenges are daunting for bank executives already ‘battle-weary’ from the stress of dealing with the aftermath of the financial crisis. But the short-term protection offered by cheap funding must not be wasted.

Rather, it offers banks the opportunity to redefine themselves for the new digital age.

Contact Deloitte:

Olivier de Groote                          Yves Dehogne
Managing Partner Clients & Markets                          Partner                
+ 32 2 749 57 12                          + 32 2 800 20 45