In February this year we provided a short overview on the state of commercial banking market in Europe. However, the last six months have been so turbulent that we thought another update on what we’ve been seeing and hearing from clients and in the marketplace would be an interesting and useful exercise.
- What We Said in February
• The banking market is poised for a rebound—but neo banks and alt-fi providers won’t benefit as much
• The credit outlook is favourable—but less so in Europe
• Transformation in banking is accelerating
• Primacy has taken hold—but, again, less so in Europe
• Pressure on NIM continues
Key Takeaway: In a Tighter Market, Where Do You Want to Deploy Your Capital?
No second-guessing the market
Some of the things we said back in February about the market still apply. Inflation is at around 10%, the Bank of England has raised interest rates to 1.25%, and at the time of writing, the European Central Bank is poised to do the same. Particularly in the U.K., no one is willing to say where the cycle ends and there is real concern about stagflation and even recession. War in Ukraine, serious supply chain issues, wage disputes across the public sector, and changing political winds in the U.K., France, and Italy all make second-guessing where the market will go impossible.
These macro pressures will drive lower rates of loan applications. Although alt-fi providers, such as payday loan companies, may find themselves with more demand. And the threat of recession means the threat of default. Those who have provided loans to the lower end of the market may find themselves facing a tsunami of bad debt.
We said in February that Europe was driving transformation in banking and that’s still the case. But we’ve observed over the last six months that there are effectively two tiers of transformation in the market. Smaller lenders are getting more automated and efficient, but at the larger end of the spectrum, in the corporate banking space, they’re still using legacy systems. At a recent roundtable we held, a director at a major bank described its systems as “archaic and inefficient,” indicating there’s real room for transformation.
Collections will be key
Given the threat of recession and bad debt, it’s clear collections will be key. But it’s more complicated than going to customers and asking for your money back. First of all, there’s a cost-of-living crisis developing across many European countries, so banks will find themselves chasing more customers than they’re used to, including customers unfamiliar with being in financial distress. This will require banks to scale their collections operations, most likely with technology, since this is more efficient and the labour market is tight, and to ensure their relationship managers are well briefed.
Further—and relatedly—they’re going to have to do it in the right way. After a review of 11 banks’ collections practices, the Financial Conduct Authority in the U.K. has issued a warning that behaviour even approaching mistreatment will not be tolerated and that they’ll be applying serious scrutiny in this regard for the foreseeable future. So, not only do banks need to scale their collections, but they’ll also need to plan their approach carefully and use technology to ensure personalised, flexible, fair, and transparent approaches to collections on a segment-by-segment, if not customer-by-customer basis.
Primacy not a priority
We said in the past European lenders may have missed the boat on primacy. While becoming a customer’s primary bank is still a big play in the U.S., its importance in Europe has dwindled further. Even though fintechs have lost a chunk of their value since the start of 2022 (around 50% of share value or nearly half a trillion dollars total for U.S.-listed fintechs) they’re still making inroads into customers’ wallets, thereby reducing the likelihood of customers banking with a single provider.
And there are also indications that rather than hoarding information to themselves as a means of developing primacy, banks big and small are looking, in some cases, to find value in data sharing. For example, in the Nordics—no stranger to banking scandal—six major financial institutions have participated in building what they describe as “a clearinghouse for KYC information” (Invidem). Information utilities in AML and KYC create efficiencies, which save banks money. The standard in Europe won’t be primacy, but more how institutions leverage open banking, either individually or in concert, to lower costs and improve customer service.
So, what to take away from all this? We think trends from the last six months suggest banks should be thinking about where best to deploy their capital in a tighter market. With a recession on the cards, high inflation, interest rates rising by more basis points than usual, and food and fuel going through the roof, banks should be concerned and prepared for the months to come.
Balance sheets are higher than at the last crisis, so outright failure is highly unlikely, but even the strongest will see their capital base depleted. So, positioning their money for the best return is key. Banks should be investing in automation where possible and always in the service of releasing relationship managers to handle trickier cases. They should be stepping up and scaling their collections operations with a view to delivering the maximum flexibility for customers. And they should be leveraging open banking and third-party data effectively to create efficiencies where possible.
This difficult market may last for a short time or a long time. Who knows. But what is certain is those who decline to make use of every tool in the box to help their customers on as individual level will find themselves on the wrong side of the regulator and the paying public.
Read the full February report here.