Retail banking: The real use of digital

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Technology is an opportunity not a threat – international retail banks need to realize that.


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Too often banks see digital technology as a threat, especially in Europe. Branches made them incumbents; closing them is a hassle. The return from investment in new technology is uncertain. 

This is the wrong attitude. The internet has been a chance for banks to boost their profitability for more than two decades – and it should help further boost profits in the decades to come. Digital banking is not just about staving off competition from new branch-free competitors. It is a means to cut the cost of serving existing customers – and new ones.

Spain is home to some of the world’s biggest retail-focused banks; technology is at the forefront of all their strategies, if somewhat belatedly at Santander. But in Spain, perhaps more than elsewhere, digital investment sometimes seems too much about shoring up their positions. 

This is understandable given how important branches have been to their profits. The relative lack of mid-cap corporates in Spain has made retail a large part of the banks’ businesses. This retail focus, rather than technology, is why their efficiency ratios are better than their European peers.

Bricks and mortar

However, with more than 60 branches per 100,000 people, Spain is the most bricks-and-mortar-heavy banking market in Europe, according to figures from the European Central Bank cited by Autonomous. Internet penetration is lower in southern Europe, but that is only part of the explanation. 

More important is that the Spanish mortgage bubble funded unsustainably large branch networks – not everyone wants to properly recognize that. As a result, sometimes the technology investments at Spanish banks look like gimmicks. Banks should use tech to cut the costs of their branches and back offices. The branch of the future is not a collection of blinking boxes in garish colours. 

More exciting is that technology gives a relatively cheap and easy avenue for growth abroad and in new products (and not necessarily just strictly banking products). This is good news for lenders with limited room for home-market growth, but with the ability to harness international economies of scale. If the banking union project gets going in earnest, international growth in digital banking could be especially fruitful in Europe.

Over time, KBW reckons online platforms, like CaixaBank’s imaginBank, could become bigger than the legacy-encumbered, branch-centric banks they grew out of, and which might eventually die. For internationally minded banks these platforms also offer the chance to expand in other countries without the risks and mess associated with acquisitions. ING and more recently BNP Paribas’s Hello bank! and BBVA’s Atom Bank have shown the way. The next could be Santander’s Openbank.