Modern technology is fundamentally changing the European banking market. As Swedish banks react, they must define their role in the ecosystem and be conscious that a cut of half the personnel in Swedish banks is a realistic scenario.
Modern technologies, as well as the ability to provide services between players and across borders, are fundamentally changing the European banking market. In Sweden, banks are adapting to a system that’s shifted dramatically; from one where they produced all services, to where they’re now part of an ecosystem where most players collaborate in the value chain. It’s a comprehensive and challenging digital transformation.
In the search to achieve economies of scale, we’ve already seen consolidations in certain areas of banking. Fund management is a concrete example. This is the same type of consolidation that the securities companies went through some 15-20 years ago, when stock trading became digital. Then, it took 10-15 years before consolidation and globalisation seriously took off. This time it will go much faster.
Digital investments will separate the wheat from the chaff, with a few areas of operation exempted. Some players lack capital, while others do not have access to the distribution channels required for long-term growth. Fintechs often struggle with the former, while traditional banks often struggle with the latter.
During the ongoing digital transformation, banks will need to increase resources to serve both the analogue business and develop the digital. The problem many banks have is finding the right expertise. Even younger employees will face challenges around the ongoing transformation from analogue to fully digital. It’s a tremendous difference – just ask the old stockbrokers. Furthermore, the banks' reward systems and processes are still mainly adapted to an analogue business, and this makes change slower and riskier.
As banks adapt, they’ll need to define their place in the new ecosystem to safeguard their future and that of their workforces. Those that can provide standardised basic banking services with large economies of scale at a low price are set to be key players. At the same time, various fintech initiatives are being developed that can provide cutting-edge services through banks. In one scenario, banks could become a platform provider with brand, capital and distribution capabilities – and they’d be able to offer advanced and holistic services at a competitive price with continued good profitability. But if, in the process of defining their role in the ecosystem, banks do not produce all the services themselves, then a cut of half the personnel in Swedish banks is a realistic scenario.
We’re already seeing large cuts at some global banks, such as Deutsche Bank and HSBC. But these are mainly based on changes in their product offerings and occur in areas associated with risk-related activities, such as trading, investment product creation and complex financing solutions. Many banks blame complexity for job losses, and difficult-to-control risks and increased regulation only make the complex more complex. Margins in some businesses also fall radically as transparency depresses revenues, while capital becomes more expensive and investments in business and control systems increase.
Those banks that do not have a position to meet the new conditions for an acceptable return will need to liquidate units that do not have a profitable business model. Unlike in the past, banks will need to look beyond financial risks alone. Operational risks such as regulatory compliance and money laundering are also in focus. This is the scenario we see in some of the European banks right now.
As Swedish banks look to the future, compliance is the ticket to play, digital is the way to play, and the enhanced commercial advantage that digital provides is the reason to play. While regulation and technology will spur change, leaders should always keep their focus on defining their place in the ecosystem and looking to the return on investment that digital transformation brings.