Germany may be left with just a fraction of its more than 1,600 banks by 2030 as digitization, the rise of alternative financial services providers and growing competition from foreign players chip away at the country's three-pillar banking system, global management consultancy Oliver Wyman says in a new study.
The report projects that the number of credit institutions could stand at 150 to 300 over the next 10 to 15 years. The drastic decline will be driven mainly by changing competition, the segmentation of the financial services sector and disruptive forces such as technological innovation, Oliver Wyman said in its 2018 report on German banks.
To stay afloat in the changing environment, banks will need to have a clear market position and become more flexible and able to innovate, the experts advised.
3-pillar model a drag for German banks
The long-standing three-pillar model, which splits the German banking market into public, cooperative and private banks, has been criticized for preventing deeper consolidation, given that it bars cross-pillar mergers. Germany has by far the highest number of banks in Europe with 1,658 credit institutions, nearly 3x as many as second-ranked Austria, according to the latest ECB data.
The model has also been a drag on profitability, mainly because of the different mandate in the public and cooperative bank pillars, Oliver Wyman said. The banks in those pillars are owned by, respectively, German state government and their own members, and their mandate is principally focused on achieving overall economic improvement in their own state and ensuring that all customers in the region have access to bank services.
The profitability of German banks has remained relatively stable between 2013 and 2016 despite growing regulatory pressure and low interest rates, but German banks lag far behind U.S. and other European peers, the report said. The average after-tax return on equity of German banks was 1% in 2016, compared to 9% at U.S. banks, 6.5% at French banks and 5% at Spanish banks, Oliver Wyman estimated.
Disruptive forces
The German banking market has been characterized by two contradictory trends in recent years, the report said: On one hand, consolidation has been ongoing within the pillars, but on the other the overall structure of the market has remained stable.
Around 40 German banks a year have closed in recent years, but roughly 95% of these have been small institutions within the cooperative and public pillars that either merged with lenders in their area or became part of a larger banking cooperative.
This intra-pillar consolidation is not enough to strengthen the German banking system as new entrants, such as fintech companies and foreign banks, begin to provide the services and products offered by the other three pillars while competing with each of them, the study said. This "fourth pillar" challenges the traditional banking model in Germany and changes the expectations of customers.
The growing segmentation of the financial sector also disrupts banks' long-held position of dominance, under which they were the unchallenged universal providers of products and services, the owners of the venue where the products are distributed and the operator of all platforms in the value chain.
Innovation, regulatory changes and shifting socioeconomic trends will add to the disruption and evolution in the system, meaning that many banks will not survive over the next 10 to 15 years, the report concluded.
