Retail banking sector undergoing unprecedented transformation

Banks hold €270 billion in deposits for Irish households and businesses and provide loans totalling €152 billion

A new report on the future of retail banks in Ireland, published (29th September) by EY and Banking & Payments Federation Ireland (BPFI), has found the banking sector is undergoing a period of unprecedented transformation, with accelerated digitalisation, changing customer trends and increasing competition from fintech and non-bank competitors all contributing to the disruption of the traditional retail banking model. The report, available on the BPFI website here finds that the banks must continue to adapt rapidly to changes, including enhancing online and mobile banking offerings, while also continuing to be of systemic importance to the economy.

Competition

The report findings show customers are no longer using just one institution for all their financial requirements, a development that is driving major transformation across the retail banking market in Ireland. Retail banks, who offer a wide breadth of services, are now meeting competition from close to 20 providers across mortgages, personal loans, overdrafts, SME lending, and payments services with the entry of fintechs and non-bank providers into select segments of the banking market.

Digitalisation

Changing customer trends are also bringing about major changes. Over the counter transactions in retail bank branches have fallen by over 45% in the past three years, while overall digital payments have risen by 65% during the same period. This reflects trends across the EU, where in-branch transactions are falling rapidly and digital wallets are now the most popular payment method amongst consumers.  In response to the changing market retail banks have collectively invested more than €3 billion in the last five years on innovation to deliver new digital services and transform their business.

Talent

These factors are leading to increasing demand for technology skills and roles in retail banking. At least 20% of recruitment in Ireland’s retail banks over the past three years was in the areas of technology and digitalisation, with data analysts, AI specialists, digital engineers and technologists now critical roles in banking. Retail banks predict that at least 20% of recruitment in the next three years will also be in technology.

The ever-increasing demand for these roles means that retail banks must compete with the international financial services sector, multinational technology companies, and the high growth fintech sector to attract and retain talent and skillsets.  However, retail banks are at a considerable and growing disadvantage compared to other banks, IT companies, and corporates as they cannot compete on a level playing field which is a significant challenge.

Profitability and viability

The report finds that retail banks are reorienting their business models, investing in IT and new fintech partnerships, and are diversifying into new income streams. However, profitability pressures remain given the scale and complexity of costs relative to the size of the Irish market.

The future profitability and viability of Irish retail banks is critical to their ability to generate organic capital that in turn is lent back into the wider economy to support jobs, businesses, Ireland’s green transition and overall economic activity.

The report finds that the future financial performance of the retail banks in Ireland is also key to returning the State’s recapitalisation. The dividends, disposals, and fees paid by the three retails banks to date, combined with the current valuation of the State’s remaining shareholding, amounts to 83% of the original recapitalisation. Further growth and profitability of the retail banks will assist in ensuring that the return of that investment continues.

Commenting on the findings of today’s report Brian Hayes, Chief Executive, BPFI said: “The Irish retail banking sector employs 22,000 people, and the wider banking sector contributes €1.6 billion directly to the Exchequer, and a further €11.6 billion to the economy each year. In addition to its key role in underpinning the economy, retail banks hold €270 billion in deposits for Irish households and businesses and provide loans totalling €152 billion, including over 822,500 mortgages to homeowners in Ireland. The sector is extremely important to the Irish economy and will play a critical role in future economic growth and development as we exit from the Covid pandemic. For this reason, it is vital that we properly understand the challenges the sector faces and how we can best address them over the coming period.

"This report provides a comprehensive fact-based assessment of the complex range of issues impacting on the Irish retail banking sector and the factors that will determine its future direction and the journey of transformation that is now well underway. It is the first major assessment of Ireland’s retail banking landscape since the financial crisis, and underlines how much banking has changed – in Ireland and across Europe – since that time.”

There are some considerable challenges for Ireland’s retail banks, but the changing landscape also offers opportunities to further pursue diversification, innovation and the sustainable finance agenda, and to play an even more central role in Ireland’s economic and social progress in the coming years. I believe this is an important report to reflect on as we debate and consider the future of Irish retail banking

Also speaking, Colin Ryan, EY Ireland Financial Services Leader, said: “The report captures the essence of the key challenges facing the Retail Banking sector here in Ireland and the competing demands of its stakeholders.  The timing of this report is critical. Competition in the market is at an all-time high and consumers increasingly want to tailor and control their banking experience by using digital channels – something which has become ever clearer over the course of the pandemic. There is an opportunity now to step into a constructive and future-focussed dialogue that can solve for each party and define the journey to a purposeful, safe and progressive retail banking sector for Ireland.” 

The Future of Retailing Banking in Ireland is available on the BPFI website here.

Article Published: 29/09/2021