The payments directive will reinforce the digital alternatives: “Too many European banks believe that their business model is solid”, they warn.
Digital initiatives such as the recently launched Pora virtual currency, promoted by Facebook and a network of 27 other partners (including Uber, Spotify and eBay), have once again placed the traditional business models of the company under the spotlight of analysts.
A warning to trad banks
The German credit rating agency Scope warns that the traditional banking intermediation business is under threat, especially in the European market. “Technological advances that change consumer habits have been moving faster than the ability of many banks to deal with them”, the document says.
Most entities in the Old Continent maintain models based on financial intermediation. But “the new digital world favors the final consumer, not the intermediary”, they note, pointing to the threat of loss of business quotas that the sector already has in front of it. “Too many European banks believe that user behavior is changing more slowly than is normally thought. And that, therefore, its model is solid as a rock”, they indicate, to then underline that, for now, they have not been too concerned about the threats of the new digital competitors.
In a recent report on the Fintech sector, the Financial Stability Board (FSB) estimated the global investment in these technologies in the last year at 112,000 million dollars. A record number used, above all, in developing innovations that decentralize digital technologies and boost new businesses within the financial sector.
Platforms for cross-border payments, solutions based on node networks (blockchain) … The FSB report highlights the potential benefits of these new technologies, ranging from greater global financial stability (due to a greater dispersion of risks) to greater resistance to cyber attacks.
Bad forecast for the most traditional banking
“But these technologies will have an increasingly disruptive effect on the more traditional banking business models, with clearly negative consequences for those entities still reluctant to move outside their comfort zones in the digital age,” warn from Scope, adding that it will be in Europe where these impacts will still be “more painful”, due to the greater relative weight of the banking sector in its economy, compared to other geographical areas such as North America or Asia.
Not all European banks are equally exposed or present the same weaknesses. According to the analysts of the German rating agency, the big banks of the Old Continent face risks, but they enjoy certain advantages such as their greater diversification (both geographical and business) and the superior capacity to tackle important investments in new technologies or digitalization
The main threats are looming
In European second tier banks “that have remained too dependent on their more traditional business routes, such as loans to retail clients and companies, as well as deposit capture”. These models are based, for the most part, on the cross-selling of products and services to their users.
But the new technologies specialized in decentralization point precisely to these income channels, “which will necessarily put the old business models in the category of endangered species”, say the authors of the report, adding that from September it is foreseeable that this trend will accelerate, since the new community directive on means of payment, known as PSD2, will come into force definitively.
Scope believes that the launch of PSD2 will open the banking market and strengthen consumer confidence in new digital competitors and new decentralizing technologies. And as the alternatives become more widespread and digital products and services become more of a raw material and have less added value, “the danger for banks that are slower to transform will be that they will only be left with the activities of higher risk as natural business routes”, predicts the report, which concludes, by way of diagnosis, with the idea that these less digitized entities will be less and less attractive to investors.
Also published on Medium.