Adapting to an increasingly digital world will be key to the long-term success of Europe’s big banks, according to a report published on Wednesday by Fitch Ratings.
The large European banks’ ability to modernize their banking platforms and improve digital services “will be critical to remaining competitive in the long term,” the Fitch report says.
The banks are facing increasing competition from digitally savvy upstarts, the report notes, which are enjoying some success in retail banking. That said, Fitch believes that “economies of scale should give Europe’s large banks an advantage once they have successfully updated their infrastructure,” the report says.
For the upstarts, the costs of compliance, credit risk management, and regulatory systems and staff will weigh heavily on them as they grow, the report adds.
Additionally, smaller retail banks will also need to invest to address issues, such as cybercrime, that come along with greater reliance on technology. This represents “one of the greatest risks facing banks and one of the hardest to control,” the report says.
The report also notes that the cost of modern systems is high, and that the need to make these significant investments is coming at a time when interest rates are at record lows and regulatory changes are weighing on earnings too. “Banks that take too long, or which cannot afford to invest on a continuing basis, may see their franchise fall behind,” it says.
The ability of the banks to adapt their business models to meet these challenges may be critical for ratings, the report concludes.