European retail banks need to radically overhaul their technology infrastructure if they are to face off the competitive threats to their business from a host of new startups, says consultancy Deloitte.
Banks have successfully faced down technological developments - such as the rise of the Internet - that threatened their model in the past but this time could be different, predicts Deloitte.
Banks' core competitive advantages over new entrants are being eroded by technology and regulation, making it difficult to generate returns above the cost of capital.
Governments across Europe have been keen to encourage new entrants into the market since the economic crisis. Inadvertently, the crisis has helped in this respect thanks to more generous deposit guarantee schemes, which present a clear arbitrage opportunity for new banks that may have previously have felt that they lacked the brand strength to compete.
Another factor which could entice new entrants is cost. Deloitte estimates that it can cost as little as £10 million to set up a small bank, and another £5 million a year to run it, thanks in large part to cheap off-the-shelf software.
Banks also face threats from firms that do not want to be banks but are targeting specific areas. In payments, firms like PayPal have had huge success while the likes of Zopa and Funding Circle have shown the potential for P2P lending.
Meanwhile, the technology titans cast a shadow on the industry. Deloitte argues that the real danger here is not that a Google or Apple will one day support a banking subsidiary with a huge balance sheet. It's that by innovating around it in support of their own core business, such a player could fundamentally undermine the traditional integrated bank business model.
Zahir Bokhari, lead banking partner, Deloitte, says: "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.
"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."
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