In my previous blog, I mentioned that Europe is the battlefield for GAFA (Google, Amazon, Facebook, Apple) companies from the West and from Chinese and Japanese platforms from the East, in addition to the growing number of new, smaller players entering the banking market.
Over the last 12 years, 1230 new players have entered the market, and represented 6.6 percent of total banking revenues in 2017. This percentage may seem small, but it is large if we consider that it corresponds to one-third of banks’ growth over the period.
Banks have continued to look for scale, mainly at the local level: Last year, 330 banks disappeared in Europe—primarily through mergers—from the 5200 incumbent banks in 2017.
So, what is the future for European mid-size banks? Are they bound to merge with larger players? Or can they exist independently?
I believe the solution is more complex. While some mid-size banks will continue to merge with peers or larger entities, others are testing alternative solutions including:
- Partnering to gain scale, locally or internationally. I anticipate a growing number of business-specific partnerships, such as Kepler Chevreux teaming with Unicredit Group on commercial and investment banking (CIB) in research and stock brokerage. Businesses subject to scale or requiring a specific expertise, like specialty finance, could be in a similar situation. As mutual and cooperative banks have historically created common “factories” in France, for instance, we see similar moves taking place in Italy (where ICCREA Bank is transforming more than 140 banks into what will be the fourth-largest bank in that country) and in Germany (where DZ Bank is performing well after the merger with WGZ Bank several years ago).
Similarly, a series of international consortia is being created in trade finance, with most of them leveraging blockchain technology, to simplify client-facing and bank-to-bank processes. Once the connections of those networks to the other networks (providing inter-operability) and to the existing back offices of the banks (yielding seamless end-to-end processes) are realized, the banks should reap important economies of scale.
Last year, 330 banks disappeared in Europe—mainly through mergers—from the 5200 incumbent banks in 2017
Finally, some banks are proposing or re-proposing white-label solutions to smaller players, in areas such as derivatives, foreign exchange or fixed income. Such solutions could make sense if banks can adapt and size their back offices to integrate this type of new business.
- Partner to benefit from the size of a larger bank. Interesting examples of this approach can be seen in Italy, with several banks collaborating with another large bank to mutualize their credit model stress testing.
- Outsource to utilities. Some businesses need critical mass—the payments business, for instance. The Italian organization Nexi is a good example of cost reduction and innovation at the service of its partner banks, supporting more than 150 banks in managing the cost and complexity of digital transformation in the payments segment by investing in technologies and innovative solutions which are then made available to all partner banks. These encompass acquiring services, outsourcing of ATM processing, ACH services, Open Banking platforms, cash management platforms and other activities.
On the other hand, activities such as know your customer (KYC) are more difficult to structure into a utility format, especially as banks are striving to standardize the data beforehand, which creates significant delays in execution.
- Change the rules. I am convinced that some Tier 2 and Tier 3 players will be able to leverage Open Banking, by focusing on their strengths in a Banking-as-a-Service (BaaS) model. This model can be particularly effective in corporate banking, focusing on either product-driven expertise and innovation or on industry-specific solutions.
Given these options, there may, in fact, be a future for players of different sizes in Europe. But charting such a future requires a clear strategic vision and a willingness to occupy specific niches in the marketplace. In my next blog I will look at how banks can use mergers and acquisitions to secure their position in the marketplace.