The end of Universal bank model?

Between costs, regulatory pressures and the entry of new players into the sector, the role of traditional and mainstream banks is at risk.


Digital disruption is hitting financial services industry. This is not just about technological changes, it is a profound overhaul of the whole retail banking model and of the way it operates.  The whole market structure will change.

Bank branches are getting empty, mobile banking is on a massive rise, FinTech investments and market inroads make the news everyday, changing market dynamics worldwide.

The whole concept of universal bank is being challenged as never before, full service banking model is under heavy attack. Recently Barclays CEO claimed that the “universal bank model is dead”.

Why that? Many things are changing in retail banking nowadays but perhaps the two most important drivers of change are: a) high burden from new regulatory demands; b) digitization and proliferation of digital channels (omnichannel demand). Both are causing a significant structural increase in operating costs. For instance the avge administrative costs/employee of the whole cluster of large European Banks has risen by 68% in ten years, from 2003 to 2013, despite attempted cost reduction plans.

The same regulatory and digital factors are playing a significant role in squeezing  retail banking revenues, on the bases of  greater transparency and “all for free” typical on line demands. Most of the European banks have missed in last years their income/cost  targets and a long run of low interests level doesn’t help margins at all.

Therefore, despite in Europe the whole sector has laid off more than 250 jobs from 2007, returns are very weak, ROE is at historical lows, and the distribution model is still far over branched.

The retailing bank industry is still struggling to change its operating models and distribution footprint. A more radical thinking and planning is needed.

The truth is that the full service model is no longer a viable answer to market demands. Banks rely on old fashioned IT systems and architecture, with very complex product offering schemes. As a result it is estimated that IT takes a high 14% of costs, but at the same time 75% of this is just for maintenance. Moreover, some researches have shown that 80% of retail banking revenues are made by just  5% of products. In a nutshell, high costs, little returns.

Digital competition and more in general non traditional new competitors are exploiting all of this, remarkable   inroads and starting to eat up business from incumbent banks.

Nowadays in Europe you don’t need a bank to manage your transactions. You can open up a payment account with a Payment Institution or an e-money account with an ELMI (Electronic Money Institute) that can issue a prepaid card as well with associated  Iban (same account identification code used for checking and savings account). In USA as well players like Simple offer you mobile banking accounts without the need of having a banking licence.

Moreover, Shadow Banking is growing and it is estimated to be worth $71tn. Pension funds and asset mgmt companies are replacing traditional banks in corporate capital market financing. Corporate bonds are growing. New, even hybrid versions of funding and lending alternatives are blossoming almost everywhere. From crowdfunding to p2p lending platforms, they all bypass traditional retailing banks offering.

Universal banks, with more and more stringent capital and RWA (risk weighted assets) regulatory requirements and high NPL (non performing loans) stocks, are losing ground to new players in providing financing and capital and new palyers on the digital investing, pensioning and trading side are strongly coming as well.

The reshaping of retail banking model will be strong, large and will be definitive. This is not just a bad moment.

Among others, two major trends  will overhaul retail banking market dynamics:

1) Verticalization and specialization; b) Disintermediation and creation of new marketplaces.

First point, verticalization. It’s the “breaking banks” i.e. the unbundling of the full service model of the universal bank in bits and pieces. All retail banking pieces are at risk here. From payments  and transactions to investing and trading, from lending to risk assessment, from small business banking services to funding and capital gathering.

In every single vertical segment there are FinTech challengers well positioned to take business from traditional, incumbent retailing banks. Any segment has got it’s own challenger hero, with more followers too, not only from the US. From Lending Club to Kickstarter, from Wealthfront to Dwolla, from TransferWise to Kabbage. Lending Club IPO perhaps made history at the end of 2014 but it looks as just the first of a new wave ready to materialize.

These FinTech are already taking significant portions of the business: Lending Club itself has managed loans for over $6bn already, Wealthfront is managing assets for over $1bn and so on.  In UK the alternative funding sector has already collected over £1.7 bn loans in 2014, and Nutmeg is gaining thousands of clients,  growing as well in the robo-advisory vertical, along with other new startups.  One key point here: FinTech specialized players have a much more efficient cost structure than incumbent banks, do not have to face with IT and distribution legacy platforms.  They can potentially expand internationally more easily, being focused and streamlined.

And the banks? Let’s be realistic. They are used to lose some business. Not so universal if you think of Paypal – $230bn transactions value in 2014 – , credit cards schemes, Money Transfer for instance. But this time it is more serious, any piece is under attack. They can be pushed  out of business. Banks need to narrow the focus, quickly adapt and become choiceful, change the pace of innovation and overhaul business processes.

In a word, they must become FinTech banks as well. Banks can do it not just incubating but acquiring some FinTech startups as well, letting them lead and digitally transform the vertical segment they are focused on for the whole bank. Bear in mind banks are IT companies in essence, handling money and bits.  Will they remember this?

At the same time banks have to choose what to give up in order to simplify operations and product range. There’s no other way, either you change and streamline or you die long term. Some first movers are already acting this way, BBVA last year bought Simple, the mobile payments and (basic) banking challenger in US, just recently Fidelity has acquired the FinTech startup e-Money, that delivers a digital advisory solution.

Going down this path banks could simply outsource some of their product  factories, optimizing their value chain and focusing more on integrated omnichannel delivery  and real personalized customer relationship and offering. The challenge will be moved into maintaining ownership of customer relationship. But if you today get very little out of that and bear inefficient costs, you don’t have much to lose.

Second point, disintermediation and creation of new marketplaces. Banks first of all must help economy’s money flow. In doing this they can connect investors with borrowers, more in general supply with demand. There is nothing wrong in streamlining their heavy product factories, narrowing the focus and turn specific vertical offering into a more efficient and effective marketplace with third party partners.

Zero capital absorption, low costs and good revenues to help their balance sheet. Banks have much to offer in exchange: clients, a solid reputation in security, trust. Trust is key, too much underestimated by banks.  Newborn FinTechs have the technology but are hungry of customer’s trust. If they want to achieve scale they need. This can be a nice win-win, if banks culturally change their naturally close mindset.

It’s happening. In UK for instance Santander and RBS have signed a commercial alliance with Funding Circle, a P2P lending startup. Their small business clients in search of financing will be offerered access to Funding Circle investor platform. Moreover, the London-based InvestUp crowdfunding FinTech startup is currently running pilots with two of the top six banks in the U.K. A good win-win. If you don’t have your own solution why letting your customers going elsewhere by themselves? Collaboration and coopetition are great solutions if designed and deployed in the right manner. Banks can become themselves marketplaces, offering third party products and solutions to their customer base and can even use the marketplace to attract new clients. There are several examples everywhere, banks offering third parties loans and/or revolving credit cards, or mutual funds open ranges, third party pension plans and so on. It is impossible and unaffordable to do everything.

The alternative would be simply to be fully bypassed and disintermediated by new, non traditional financial  competitors. Google for instance is not just one of Lending Clubs investors, it has become its business allied and will offer to its small business clients and partners (eg. app developer but not only) Lending Club financing services. You better move.

Welcome to the new era of retail banking.


Celent: IT spesa in Banking: una prospettiva globale, il 2015.

Oliver Wyman: Le sfide future – Lo stato del settore dei servizi finanziari 2014.

PwC – Retail banking 2020. Evoluzione o rivoluzione? 2014.

AT Kearney: 2014 al minuto Radar bancario. 2014

RES – Ricerche e Studi SpA – Affinità e distanze di tra le Grandi Banche Internazionali Sulle sponde dell’Oceano causa, Fondazione Ugo La Malfa 2014.

Oliver Wyman: A denaro e informazioni di business – Lo stato dei servizi finanziari dell’industria 2013.

Oliver Wyman: La forma delle cose a venire – Che storia recente racconta il futuro della European Banking 2013

Bain & Company – European Banking -Striking il giusto equilibrio tra rischio e rendimento, il 2013.

Oliver Wyman: Multichannel banking 2010

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