Deutsche Bank has released its Retail Bank Strategy report entitled “The Future of Banking”.
In the report, its states that the acceleration of change will lead to a big increase in bank IT spending. “With the press full of reports on innovation in money matters – think progress by Square, volumes in mobile payments at M-PESA, doubled revenue at Monetise, new bank launches like Metro, big data, digital wallets, mobile banking, crowdfunding, P2P lending – we think most investors see mostly downside risk from change.”
The report looks at each topic and concludes that a big increase in bank IT spend is coming which isn’t captured in market expectations. The authors of the report continue by saying, “this spend will deliver an ability to process higher volumes at lower unit costs, reduce branch costs and generate new revenue streams. We do not expect material bank disintermediation by technology”.
There’s no doubt that retail banking is seeing the start of material change. Mobile banking, for example, has average customers interacting over 20x a month, serving themselves more and creating upside from digital sales, efficiency gains, bank expansion into products like those offered by Groupon generating new revenue, supporting loyalty and (maybe) reducing churn.
Most big banks need significant IT renewal. Old mainframe systems are the norm, patched for M&A, geographic & product expansion, and regulation, which introduces complexity and inefficiencies while volumes continue to rise. Unless expensed under restructuring charges this initially drives costs as much as 10% higher. Regulatory pressure will increase exponentially here given resolution planning and operational risk assessments.
A fundamental branch rethink to happen
Digital banking has branch footfall down ~15% YoY. Combined with automation of cash dealings we expect new branches to be 25% smaller with 20% less staff, fewer tellers and more advisors. They’ll be cheaper to fit out, easier to move, faster to break-even, and make for better provision of advice.
Outside of overbanked markets (e.g. Italy, Spain), we expect branch design not numbers will be the bigger change. With 50% of retail costs in branches and operations we think expenses here could fall ~5%.
“We see Big Data as a key driver of this in time, given the requisite investment by banks,” say the analysts. “Combined with the very significant upside to returns when interest rates rise we think that retail banking remains a generally attractive investment prospect.”
“These changes will drive up to a 10% increase in overall operating costs and will be encouraged by an exponential increase in regulatory attention given to operational IT risk,” says the DB Research report.
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