Banks must begin a more radical transformation to adapt as technology threatens the traditional European retail banking model, according to Deloitte.
In a report released today, Deloitte warns that while banks may "take comfort from their success in fending off the first internet-based challengers to their market", customer expectations are increasing and the challenges to the existing order are stronger than in the past, meaning the risk to banks' ability to earn returns above the cost of capital is greater than ever.
"Today’s customers are used to engaging directly and immediately with retailers, and expect their needs to be anticipated across a range of products and services. They expect similar responsiveness from their bank," writes Zahir Bokhari, banking leader for Deloitte UK.
Technology and regulation are eroding the core competitive advantages that banks held over new entrants as innovations from non-banks are beginning to fundamentally undermine the traditional integrated bank business model, says the report.
Payment specialist firms like PayPal and mobile payments company Square are benefiting from gaps in the market thanks to the advent of new technologies and the transformations brought about by online and mobile transactions.
Banks should "focus on analytics"
These new companies not only offer a smarter and more effective model to clients, but the access they have to the underlying data about consumers offers them an additional competitive advantage.
The banking sector that is "hamstrung by legacy, IT infrastructure and an outdated distribution model" will become unsustainable, according to the report.
Bokhari believes that banks must take advantage of a period in which central banks are providing unprecedented cheap funding to generate profits and invest in "strategic priorities such as analytics", which should enable them to optimise their networks and exploit the unrivalled treasure trove of data.
"These challenges are daunting for bank executives already battle-weary from the stress of dealing with the aftermath of the financial crisis. But the short-term protection offered by cheap funding must not be wasted. It offers banks the opportunity to redefine themselves for the new digital age," says Bokhari.
The primary focus of the report is the changes brought forward by technology, however it points to modifications in regulations as well as political and economic forces also having a significant impact on the future of retail banking across Europe and beyond.