European banks should note global disruption trends
10 March 2020
There are plenty of signals coming from the global banking sector that should give European banks pause for thought over their future. This was clear to me when I chaired a recent discussion with the Association for Financial Markets in Europe, which represents major international banks and asset managers among others in the financial market. The discussion came as our in-depth report, Investment Bank of the Future, set out the global trends that are forcing the banking industry to evolve - such as climate change and technology.
Among the views from the senior banking executives that I heard, there were interesting contrasts of opinion in how banks should respond to these trends. There was, however, a clear consensus that capital markets players across the globe will have to transform their business models in order to survive present and future industry disruption.
With some cost-income ratios at European banks in excess of 100%, the case for change is self-evident. Meanwhile, investment banks burdened with complex, legacy back-end systems and significant process inefficiencies have to transform. The challenge is how they move forward when the investment required is substantial.
Challenging the establishment
In our view, there are three main potential sources of disruption to the industry: the established banks themselves, companies from other sectors - such as technology or retail - which might move into banking, and the start-ups and FinTechs. The prevailing view from most European banks is that, as the established ones, they are best placed to become the disruptors themselves.
The view from Asia is very different. In Asia, the FinTechs and start-up banks are directly challenging the business of the established players. And while they are not engaged in a full-frontal assault, they are playing in specific areas that threaten to erode some of the large banks’ most profitable activities.
European investment banks then, may find that their confidence is misplaced. Of course, the barriers to entry in the capital markets are high. An established client base is one substantial barrier, and obtaining a licence is currently a distant prospect for most start-ups and FinTechs. But as the market in Asia demonstrates, newer players are challenging the fringes and carefully targeting unregulated parts of the value chain - such as corporate lending - and creating profitable niches.
It is much the same pattern that we have already seen in retail banking, where new players have been able to pick their spots and harness their technological prowess to disrupt markets that have long been the preserve of the large, established banks. In response, banks in Asia are finding ways to partner with new entrants in order to deliver new services and capabilities across the value chain. As a result, new ecosystems are forming.