Deloitte Luxembourg yesterday reported on emerging challenges for European retail banks, claiming that these financial institutions are unlikely to make returns in excess of their cost of equity for several years to come.
Since the financial crisis, the profitability of banks has been suffering within the area of payments, and according to Deloitte is likely to experience intensified competition based on the upcoming implementation of EU regulations and directives.
These findings were borne from discussions held between Deloitte Luxembourg and payments experts from retail banks, card and non-card payment schemes, payments processors and non-bank payment service providers. The aims of these talks were for Deloitte to identify the challenges emerging for European retail banks based on the introduction of the Interchange Fee Regulation (IFR) in December 2015 and the revised Payments Services Directive to be implemented in 2017.
With a view to uncovering expert views on the developments within the sector and the best response thereto, respondents were asked to evaluate the effectiveness of new, non-bank payment services providers on their payments revenues, as well as future ownership and governance of non-card payment schemes and possible consolidation among payment processors.
Retail payments are expected to account for around €128 billion in revenues in 2015, representing a quarter of total European retail banking revenue and subsequently making payments a key revenue stream of strategic importance. The estimated impact from the adoption of IFR will be modest in terms of the direct loss of revenue attributed to capping of debit and credit card fees in the EU.
However, the 2017 Directive opens up the payment market, enabling agile and non-bank players to enter the segment of payment services, without having to own or maintain the heavy infrastructure of traditional retail banks, which is a challenge for European retail banks.
Martin Flaunet, Partner and Banking Leader commented: "If these non-bank players succeed and gain a foothold within payments their involvement is expected to increase over time and they may ebentually move into other banking services, similar to PayPal that already now offers PayPal Credit in Europe".
He continued: "Although, some industry experts think that new retail payments services will not affect banks’ profitability much, as the initial effect will be to displace traditional cash payments, we think that this status quo will not remain".
The report suggests that three scenarios will emerge, these being a 'new oligopoly', in which newcomers will be restricted to a handful of big players backed by brand-name and scale; a 'utility model, wherein the customer is willing to experiment forcing the parment service industry to use applications which are run on "banks rails", leading to low-margin and high volume utilities; or a 'parallel payments infrastructure', opening up the payments systems to new methods based on crypto-currencies using block-chain technologies.
"Consequently, a dominant strategy both for small as well as big banks would be to collaborate with card payment networks which are already large and global," concluded Patrick Laurent, Partner and Technology and Enterprise Application Leader. "Albeit, that larger banks do have the means to pursue innovative in-house solutions rendering them able to face the increasing competition, it is a delicate balance to ensure that they do not over-invest and 'go it alone' in an innovation race, that they are unlikely to win given their culture, regulatory environment and systems."
Photo by Deloitte
