Analysts at Deutsche Bank Research say most big bank core systems rely on too many applications patched too many times to cope with rising transaction volumes, regulatory change and digital channel changes in particular.

"This 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.

The rise in IT spend will be offset by a five per cent decline in branch costs, as banks move to introduce smaller banks with fewer teller staff.

"Some countries (Italy, Spain) are over-served by existing networks but overall we expect branch numbers to edge lower but not collapse," states the report. "In DM we expect new branches will be 25% smaller, show 20% lower headcount, fewer tellers, more advisory staff and more automation. They'll likely be cheaper to set up, easier to move and faster to breakeven."

Banks that execute best will cope with much higher customer transaction volumes with little cost increase, will be nimbler in pricing and product launches, more adept at adapting the branch network to changing needs and will drive increased customer loyalty, higher wallet share and lower churn.

A big IT spend is the inevitable consequence, says Deutsche Bank, but timely action now will leave the industry in a better position to fight off new entrants.

"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."