A ten-year study from global management consultancy A.T. Kearney claims that the profits of European retail banks are at an all-time high. This has been driven by a positive economic environment and lower risks, with risk costs relative to total income at lowest level 5% compared to 12% in 2008.

However great this news sounds, the future is not that spectacular for the heritage banks, as the Kearney report suggests it the topline is stagnating. A.T. Kearney’s ‘Retail Banking Radar 2019’ analyzes data from 92 banks across Europe and found that despite continued strong growth in volumes, income remains weak with a dramatic drop in income per client (-1.1% 2018 vs 2017; -11% 2018 vs 2008). Meanwhile, a quarter (24.6%) of bank branches across Europe has closed since 2008.

Simon Kent, partner and global head of Financial Services at A.T. Kearney comments:

“Our ten-year study shows that whilst the industry is stronger, it is stagnating. Not all banks will survive the tide of change as customers increasingly favor digital banks and innovative products and services. Branch closures is a short-term fix to steady the books but it is not enough — traditional institutions need to consider strategic transformation to improve cost and top line and also offer more innovative products and services if they are not only to survive — but thrive — in the new retail banking landscape beyond 2019.”

The neobanks are coming

The banks are facing the tough challenge coming from neobanks in Europe. These new, ‘digital only’ models,are attracting rising numbers of customers. The Radar showed that neobanks’ customer bases across Europe have grown by over 15 million since 2011, compared to a decrease in 2 million customers for retail banks. Up to 85 million Europeans will be customers of these banking models by 2023 according to the study — which equates to around 20% of the population over 14 years old.

UK-based Revolut bank already has upwards of 4 million customers, while Monzo, another leading neobank based in the UK is eyeing the US market, which has been much slower to grow than the European neobank sector.

The Radar report also showed that up to 50% of European customers are ready to share personal data with their banks. European initiatives like the Second Payment Services Directive (PSD2), Open Banking has meant more information sharing between banks, third parties, and their customers, have helped this enormously.

Daniela Chikova, partner at A.T. Kearney comments:

“The shift towards digital banking, only compounded by the introduction of Open Banking, has caused a transformation in how and where customers want to bank. They’re more open to sharing their data with third parties, have greater trust in banks’ ability to hold their data safely and, particularly amongst younger generations, don’t have a need for in-branch banking any more. Open Banking has been a key driver in banking innovation, and we expect this to continue into September as the new Regulatory Technical Standards come in.”