Digital disruption continues to put European bank profits at risk

The last three years have seen some significant shifts in the banking landscape thanks to digital disruptors moving in to provide new and innovative solutions across a broad spectrum of core and non-core financial services. This trend was recently highlighted by McKinsey, who reported that European banks are at risk of losing half their profits to digital disruptors; equating to banks in Europe and the United Kingdom currently having $35 billion, or 31% of their profits, at risk.

According to the study, “More severe digital disruption could further cut their profits from $110 billion today to $50 billion in 2020, and slice returns on equity in half to 1 to 2 percent by 2020, even after some mitigation efforts”.

Disruption in the financial industry has been slowly creeping in for years, and banks are beginning to wake up to the reality of how digitisation, which boosts competition and compresses margins, will eat into the profits of fee-paying services provided by banks all around the world at a rapid pace. A good example of a digital commerce firm who is moving into banking is AliPay – who has 400 million registered users.

This sentiment is echoed in the report, which states: “Over time, huge tech companies may be able to insert themselves between banks and their customers, capturing the vital customer relationship and presenting an existential threat”.

Regulation is playing a huge part in opening up the market to new entrants, particularly in Europe, where the UK Payments Systems Regulator (PSR) and parts of the EU payments legislation PSD2, including XS2A, are allowing FinTechs to compete on a more level playing field with their incumbent counterparts. FinTech bridges are also being built between countries across the world, and regulators are providing sandbox environments for new financial products to be tested, further strengthening the disruptor’s position in the marketplace.

Competition isn’t the only option, though, and collaboration could help protect banks’ profits.

Incumbents can work with FinTechs behind the scenes to improve the technology that prevents their business models from evolving, with the disruptors acting as a ‘utility’ that optimises legacy infrastructure. This allows banks to focus on their core business and maintain client relationships, without having to invest significant budget in developing new technologies in-house.

Banking Circle is a business that acts as a financial utility, enabling us to work with banks and FinTechs to optimise cross border payments. To find out how we can extend your value chain, get in touch.

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