Large European banks will face disruption from a range of digital competitors which are unencumbered by decades-old technology systems, according to a Deloitte report.
The ‘Banking Disrupted’ report claims that both the reliance on outdated IT systems and the effects of substantial regulation following the financial crisis mean that the large incumbent banks have seen their competitive advantage “eroded”.
According to Deloitte, banks will face the prospect of large tech firms such as Apple or Google gaining banking licences and rivalling current account services in future. However the main threat will derive from the various technology firms offering targeted services. This includes peer-to-peer lenders such as Funding Circle, which offer access to capital without a traditional bank account, and payments innovators like PayPal.
“Emerging business models are using new technology to re-invent key elements of financial services and new players are undermining the traditional bank business model by cherry-picking more attractive parts of the business,” said Deloitte lead banking partner Zahir Bokhari.
Incumbents will also face competition from challenger banks which have access to off-the-shelf software. This means a small bank can be set up with as little investment as £10 million, and requiring just £5 million per year to run, Deloitte says.
Another major obstacle that established banks have to address is the reliance on legacy systems, with some continuing to use infrastructure built decades ago. In the UK, this has led to numerous high-profile outages, and a subsequent investigation into banking infrastructure by the Financial Conduct Authority.
Bokhari continued: “As competition from alternative sources of funding intensifies, banks will need to re-invent their technology infrastructure. It is not credible to anticipate healthy returns while operating inflexible IT systems based on 1970s technology.”
However, the hope for the large banks is that they can leverage the “treasure trove” of customer data they have amassed using analytic tools to provide more tailored services.