In 2030, are banks completely disconnected by their business model ? Or do we still have integrated banks, as we currently do in 2022? Well, the banking landscape has not changed dramatically. Retail, investment, wholesale and private banking, and asset management are mostly still under one roof, but banks have gone through some fundamental transformations.
Let‘s start at the beginning: banks still exist in 2030 because no-one can better solve the problem of asymmetric information. We still have universal banks, with specialized banks and neo-banks alongside them. In recent years, we have also seen enormous growth in non-bank financial intermediation. And on top of that has been the emergence of fintechs, which have developed algorithms that work with big data, but do not own big data. By 2030, fintechs have not made banks obsolete. They have either worked with them or been taken over by banks to expand their ecosystems.
Rudi Vander Vennet
Professor of Banking and Financial Economics Ghent University
For many years now, it has been clear that economies of scale and diversification provide substantial financial benefits for banks. Yet in 2022, this did not spur M&As between financial institutions - mainly because most European banks exhibited market/book values below 1.
In 2030, the M&A market looks different. The EU has finally moved towards the European Deposit Insurance Scheme (EDIS), which protects all European depositors. Consequently, national regulators no longer limit the transfers of liquidity between banks of the same group. Meanwhile, European banks are also more highly rated. Cross border mergers will finally
have happened, with some big deals causing a
Profitability of European banks
By 2030, the profitability of European banks has changed fundamentally. For years , banks’ net interest margin was a drama, due to low interest rates. Until the ECB stopped quantitative easing . Long-term interest rates then rose gradually and continued to evolve according to the real interest rate: the interest rate minus inflation.
The real interest rate rose because Europe, for the first time, implemented a countercyclical budgetary policy with investments in the Next Generation EU framework. We invested massively in climate transition, digitization, and innovation that increased productivity. And when real interest rates rise, longterm nominal interest rates reach levels that allow banks to achieve a healthy net interest margin again, as a source of profit, next to their non-interest income.
Challenges old and new
The biggest challenge for banks in 2030 is still improving cost efficiency. The number one problem in this regard is their legacy IT infrastructure. Banks have all made investments to automate as many processes as possible. But this has not fundamentally reduced the cost of financial services. It is the eternal conundrum: IT costs rise initially, but this is necessary to reap efficiency benefits later, if any.
And since IT is the backbone of banks more than ever, cyber security also remains a top priority. Will we have this under control by 2030? I‘m not sure. With a serious cyber-attack, hackers can take down banking systems and steal or even delete customer data. And outsourcing, even in the cloud, remains a weak spot.
That risk is even greater with digital currencies. Blockchain technology allows useful innovation in decentralized finance, but regulators will never allow unbacked crypto assets such as Bitcoin to become legal tender. In 2030, we understand that cryptocurrencies are just another class of risky assets. While the ECB has already launched the Digital Euro to offer a central bank backed alternative to cash, its launch didn‘t change lives. Not even for the banks.
Sustainable to the core
Another area in which banks have been fundamentally transformed to their deepest fibers is ESG. In 2030, this is a dominant consideration among banks.
Outside-in: all banks have done their best. If they still offer company cars, they are electric. They have also taken the S of Social seriously with noticeable diversity in the workforce, in all dimensions. The G of Governance has already been in place since 2022.
Inside-out: it was more difficult. After all, only now does the European Taxonomy provide guidance to banks as to which investments can be made, and which will never comply. Mortgages and commercial real estate loans will be priced according to the EPC score in 2030. Those who want to borrow for a home with an E or F rating will get a renovation loan. The associated energy savings should allow the borrower to service the renovation loan and reap further benefits afterwards. The benefit for the banks is that they comply with the E requirements and that the value of the underlying real estate increases.
Businesses will have an e-ID with the bank in 2030: an ecological identity card, where you are green, brown, or a shade in between. Brown businesses will only get a loan if they have a demonstrably viable transition plan. Which is good for the companies, society, and the banks themselves, since they then pass climate stress tests more consistently, because of less exposure.
These climate stress tests have put banks in a straitjacket. We still don‘t know how to get a full picture of all the ESG data. But once this was more-orless in place, the European Central Bank required financial institutions to hedge against climate risk in their loans and investment offerings. Since then, there has been no opting in or out when it comes to ESG. Full compliance is the standard.
About the interviewee
Prof. Dr. Rudi Vander Vennet is Professor of Banking and Financial Economics at Ghent University and founder of the advanced Master in Banking and Finance. At the same time, he is a non-executive director of Belfius Bank and Belfius Insurance.
30 Voices on 2030: The new reality for financial services
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