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Tech Disruption In Retail Banking: Austrian Banks' Bricks And Clicks Model Still Does The Trick

(Editor's Note: This article is part of a series of commentaries on retail banking sectors, illustrating how technology disruption forms part of S&P Global Ratings' analysis of banks.)

S&P Global Ratings thinks Austria's banks are fairly well positioned to meet the population's traditional preferences through their large branch networks and a cash-friendly infrastructure. Yet new players are pushing into the market, which could alter the playing field. Consumers still-dominant liking for walk-in banks and cash payments is buying banks time to upgrade their digital front-end solutions and back-end infrastructure. Although online and mobile banking services are already part of everyday banking, customers tend to seek face-to-face contact for more complex banking services, such as long-term financing, where they often research online but purchase offline. However, customer behavior patterns are changing rapidly, and those leaving for an online account elsewhere might not return to the bank for a mortgage loan in the future.

We do not expect any material rating effect from tech disruption over the next two years. Nevertheless, over the longer term, we foresee the potential for increased competition as the use of technology proliferates. Incumbent banks could lose market share to new players as the commoditization of core banking products progresses and greater transparency could threaten product margins. The viability of Austrian banks' business models will therefore become increasingly reliant on achieving operational efficiency and a lean and modular information technology (IT) setup that enables them to respond quickly to changes in trends and expand into adjacent services.

We illustrate our current view of disruption risk for Austrian banks through our TRIP analysis (which examines a banking system's technology, regulation, industry, and preferences). We do not assign an average or overall disruption risk score because we believe that a higher score in one category will not necessarily offset a lower score elsewhere (see chart 1). We consider that the current structure of Austria's competitive and overbanked industry poses a key tech disruption risk, while we view risks from other factors as moderate.

Chart 1

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Industry: Disruption Risk | High

Incumbents are standing their ground against new players

Austria's three largest banks--Raiffeisen Banking Group, Erste Group, and UniCredit Bank Austria--together account for more than 65% of the market in terms of customer loans and deposits. However, these statistics mask the granularity of the first two, Erste, which is made up of 47 domestic savings banks, and the Raiffeisen Banking Group representing the cooperative banking sector with almost 400 independent banks (see chart 2). The members of these groups enjoy considerable operational flexibility. We generally believe their decentralized banking and decision structures may impede an efficient rollout of new technologies. UniCredit Bank Austria, No. 3 in the market, is the only significant institution that's part of a larger foreign banking group. As such, it benefits from the group's economy of scale, also regarding IT solutions, but its strategy is approved by the parent, which reduces flexibility. Nevertheless, we see a few digital success stories. Erste Group, for example, has successfully established its standardized online and mobile banking platform "George" in four markets.

Chart 2

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In our view, the Austrian banking system's complex structure burdens it with higher costs, more onerous decision-making processes, and slower innovation. Branch density in Austria, with about 41 branches per 100,000 inhabitants, remains among the highest in the EU, which has an average of 34 branches (see chart 3). Therefore it's no surprise to us that the banking system reported cost-to-income ratios of about 64% in 2018, according to the European Central Bank (ECB). We continue to forecast most Austrian banks' cost-to-income ratios will exceed the 59% average we project for the top 100 European banks this year (see "Global Banks 2020 Outlook: The Unrelenting Hunt For Returns," published Nov. 18, 2019, on RatingsDirect).

However, these averages tell only part of the story. Austria's larger financial institutions often seem more efficient than the smaller ones, partly due to higher returns from their operations in Central and Eastern Europe (CEE), which tend to have lean structures. Austria's No. 4 and 5, Bawag P.S.K. and Oberbank, are even stronger from that perspective, with favorable cost-to-income ratios of about 50% or lower. This is different from the situation in other parts of the EU, for example the Nordics, where many small banks operate in very profitable market niches.

Chart 3

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We acknowledge that most Austrian account holders' preference for visiting bank premises, as well as the independence of local banks, which might be reluctant to close branches, are the main reasons for the dense branch networks (see chart 4). Yet customers are increasingly shifting toward online channels. This means, the rigid cost structure from having a lot of branches is straining banks' operational flexibility, while restricting the amount of funding available for investment in transforming their operating model.

Chart 4

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The market has seen its share of new players--including challenger banks, fintechs, and Big Techs--but we think the effect on banks' revenue bases will be manageable for now. Austria has not been a prime target for market disruptors in the past, due to its small scale and rather conservative customer base; however, its proximity to Germany in terms of regulation and language makes it a logical second choice. Dutch direct bank ING started operating in Austria in 2004, amassing a customer base of about 6% of the Austrian population since then, but its retail credit portfolio of about €275 million in 2018 still accounts for less than 0.1% of household lending in the country (see table 1). ING's situation is representative of other new entrants and fintech banks, such as Revolut, N26, and Monzo, all active in Austria, in that it may have built a sizable customer base but has so far not significantly threatened incumbent banks' core revenues, suggesting banks may not be too concerned at the moment.

Table 1

Overview Of Austrian Online Banks
Bank Customers Offer Customer deposits (mil. €) - 2018 Customer loans (mil. €) - 2018 Founding year Parent
easybank AG 1,300,000 (reported as of December 2018) Current accounts, savings, consumer lending, mortgages, leasing, investment products, business accounts and lending 3,967.0 1,547.0 1997 BAWAG P.S.K.
ING Austria 547,234 (reported as of December 2018) Current accounts, savings, consumer lending, mortgages, investment products, wholesale banking not disclosed 275* 2004 ING Group
Hellobank 80,000 (reported as of May 2018) Current accounts, savings, consumer lending, investment products not disclosed not disclosed 1995 (as direktanlage.at) BNP Paribas
Bankhaus Denzel AG 44,467 (reported as of December 2018) Savings, car leasing 251 297 1991 DENZEL Gruppe
Generali Bank AG 43,500 (reported as of December 2018) No new business 469 430 2002 Generali Group
Autobank AG 33,500 (reported as of December 2018) Car leasing, factoring, savings, dealer financing 360 333 1990 ---
flatex.at 33,000 (reported as of December 2018) Investments, brokerage services N.A. N.A. 2006 FinTech Group AG
DADAT Bank 20,000 expected for early 2020 Current account, savings, investments, mortgages through cooperation not disclosed not disclosed 2017 GRAWE Group
bankdirekt.at 18,000 (reported as of April 2019) Current accounts, savings, consumer lending, investment products not disclosed not disclosed 2007 Raiffeisenlandesbank Oberösterreich
*The presented amount of ING Austria's customer loans solely relates to its retail loans. Its wholesale portfolio amounts to €762.4 million as of December 2018. The presented data relates to the largest Austrian online banks for which customer data was available. As such, this list is not exhaustive. Sources: S&P Global Ratings, S&P Global Market Intelligence, press research, and company reports.

So far, most customers regard their fintech or direct bank accounts as secondary accounts that are convenient for single services, such as credit cards, peer-to-peer payments, foreign payments, or consumer lending. But their salaries still go mainly to incumbents. However, we still see reasons for Austrian banks to sit up and take notice. Fintech banks tend to have a far younger customer base than traditional banks, which could support market share gains as younger generations open their first bank accounts. The effect on incumbents' revenues will come with a time lag once those customers mature and start seeking income-generating bank services. But the immediate effects are already apparent, since customers are getting used to the convenience of the mobile services fintech banks offer, which they also expect from their house banks.

Austria's domestic fintech landscape is still small, but expanding. With a fintech funding volume of €6 million according to Raiffeisen Bank International, Austria trailed the top 10 European fintech markets in 2018. In contrast, the U.K. is the European leader with more than €1.5 billion of investments (Innovate Finance). Ireland, No. 10 in Europe, attracted about €18 million in investments, a level that we estimate Austria surpassed in 2019 with notable investments in Bluecode (€12 million), bsurance (€4 million), and cashpresso (€3.5 million). This emerging startup environment, despite challenging incumbent banks' position, also provides an opportunity for collaborations and partnerships between banks and startups to facilitate the transformation process. As such, 52% of Austrian banks collaborated with fintechs in 2018, according to the Financial Markets Authority (FMA). Raiffeisen Banking Group and Erste Group have also established dedicated fintech labs to foster collaboration.

Large tech companies are potentially a bigger threat for traditional banks in the long term, given their brand awareness, established global digital ecosystems, and ample availability of customer data. In Austria, their activities are still largely limited to payments. However, in some other markets, we already observe increased interest in core banking services. Paypal, for instance, has ventured into lending to consumers and small businesses based on their transaction history. Amazon has similar offers in place in the U.S., while Apple launched a credit card offering in cooperation with Goldman Sachs in 2019. Once introduced in Austria, we could expect an increasing risk of commoditizing and aggregating banking products in the future.

That said, we don't believe Big Techs want to become full-fledged banks and avoid the regulatory burden, but would rather focus on offering financial services in several areas close to their supply chains, perhaps through white-label solutions from banks. Potential areas could include consumer lending, working capital financing, or traditional debit and credit cards (see "The Future of Banking: How Much Of A Threat Are Tech Titans To Global Banks?," published Jan. 15, 2018).

Austrian banks are increasingly joining forces to develop IT solutions. For example, IT service provider ARZ (Allgemeines Rechenzentrum) provides more than 20 Austrian banks with software and advanced analytical services, using an aggregated data pool from all the banks. We believe this collaboration is an essential step for small institutions to remain digitally competitive, since it allows them to benefit from state-of-the-art technological capabilities that would have otherwise not been feasible. However, this also adds concentration risks.

Nevertheless, industrywide cooperation on technology is not the norm. Unlike Swish in Sweden or Twint in Switzerland, there is no common mobile payment system in Austria with significant market acceptance. We see as positive that Austrian mobile payment solution Bluecode and six other European payment system providers have created EMPSA (European Mobile Payment Systems Association), whose goal is to create a pan-European mobile payment scheme. However, we estimate that Bluecode's market share in Austria is still negligible.

Technology: Disruption Risk | Moderate

Tech is ready, but convenience trumps functionality

New technology is at the root of financial innovation, and Austria is playing in Europe's midfield. The country ranks No. 7 on the European Commission's Digital Economy and Society Index, which measures the digital competitiveness of EU members. The index ranking--led by Nordic countries--reveals lower internet usage and a shortage of IT personnel as key constraints to Austria's progress in digitalization. Austria's network infrastructure is only average compared with that of European peers. The roll-out of 5G, which is set to begin in 2020, is pivotal to improve network coverage for future needs, but we acknowledge that Austria's current infrastructure is more than sufficient to facilitate standard banking services.

We don't think technology alone poses the largest risk for Austrian banks because new technologies are generally available to all players, including incumbents and new entrants. It's the speed of implementation that matters, creating a digital divide between early adopters and laggards. Some established Austrian banks are struggling with costly legacy IT systems, rigid organizational structures, and their inability to attract much needed IT talent. This hampers efficient implementation of new solutions across banks' operations. What's more, fintechs and challenger banks have a competitive edge through green low-cost IT with strong data architectures that support state-of-the-art solutions and advanced analytics. Moreover, even within Austria's large banking groups, we observe disparities among member banks' digital capacities, which we view as a major stumbling block to their ability to catch up with many European peers.

Banks' digitalization efforts require large upfront IT investments that are yet to generate sufficient returns in the medium term. We see progress in the scope and functionality of online and mobile banking applications, such as multibanking or third-party plug-ins, and mobile banking usage is catching up with online banking. Although these solutions may be necessary for banks to stay competitive, these investment needs are consuming much of the cost savings generated through branch closures and other efficiency initiatives. Its crunch time for most banks, in our view, because core banking services are increasingly being offered online, including mortgage loans. If they cannot keep up, they will lose a vital competitive advantage, which will hurt their profitability in Austria's low-margin environment.

Austrian banks' adoption of cloud technologies is in line with that in other countries; about 40% of financial institutions have used cloud services according to the FMA, compared with 42% in Germany, 41% in France, and 30% in the U.K. (Finastra). The use of big data analytics is less prevalent. According to the FMA, only about 20% of Austrian banks use it to detect fraud, boost cyber security, and exploit cross-selling opportunities, among other things, while more than 80% of banks have recognized its potential and plan to use it. Use cases based on distributed ledger technologies (such as blockchain) remain rare in Austria. This is characteristic of the Austrian banking industry where we've seen banks quickly becoming followers, but few being digital first-movers.

That said, emerging technologies rather than customer preferences appear to be the main factor driving innovation at Austrian banks, according to a recent FMA survey. This puts traditional banks at a disadvantage compared with challengers that often provide customers with the digital experience they've become used to, for example, from Google, Amazon, and others. Austrian banks' selective disclosure of digital performance indicators makes it difficult to get a clear picture of their digital capabilities and make comparisons. By contrast, among banks internationally--especially in the Nordics--disclosures have included nonfinancial indicators in recent years.

Preferences: Disruption Risk | Moderate

Cash is king, but online banking is the heir apparent

The use of online and mobile banking is rising, but many clients in Austria still appreciate being able to visit a branch and have face-to-face meetings when taking long-term financial decisions. We expect this will persist for some more time. Compared with other European countries, online banking penetration is weak overall ranking at No. 16 among the 28 EU member states (see chart 5), although popular among the young population, which is not surprising. However, the preference for brick-and-mortar banking remains high across all age groups. A recent survey by Erste Group suggests that less than 10% of 15-29 year olds would choose digital banking only, whereas almost 80% prefer using both branch and online banking. Unsurprisingly, the preference for branch banking is even higher for the older, less tech-savvy age groups. It's no wonder that traditional banks are maintaining their large but costly local branch networks.

Chart 5

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At the same time, the adoption of internet banking has increased significantly, to 67% in 2018 from about 35% in 2009. This development is comparable with mobile banking, which according to the Austrian central bank (OeNB) about 36% the population used in 2018. We believe most commonly used banking activities on mobile apps include checks of the account balance and bank transfers, services all banks now offer. However, we see a clear divergence in customer satisfaction of mobile applications among banks (see chart 6). This gap between technological leaders and laggards could widen as further banking services go mobile, putting the loyalty of an increasingly digital customer base at risk.

In our view, Austrian banks face the challenge of finding the right balance between staying physically close to customers while developing their IT capabilities. This is even more important because clients' demand for digital banking services could speed up in line with global trends, becoming much faster than we've observed in recent years.

Chart 6

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Austria remains one of Europe's top cash nations. The average number of Austrian customer card payments in 2018 was less than one-third of the yearly card payments in Denmark, Sweden, or the U.K. (see chart 7). Austria's cash-usage ratio therefore ranks among the highest globally, supported we believe by the country's cash-friendly infrastructure and comparably low acceptance of card payments, especially for small amounts. As a result, ATM density is among the highest in Europe: one ATM per 870 people. Customers can make cash withdrawals nationwide and free of charge at most ATMs, thanks to cooperation agreements among most Austrian banks, while in many other markets cash withdrawals from another bank incur a fee. However, in line with the global trend, the share of digital payments is rising (see chart 8). In 2018, contactless payments represented 68% of all card transactions in Austria, which we attribute to greater convenience. Payments below €25 usually do not require authorization via a personal identification number or signature, which makes card payments more attractive than cash for smaller amounts. Mobile payment solutions are relatively new to Austria. Apple Pay was launched in April 2019, in addition to some bank-specific solutions; Google Pay is not yet available in Austria. We predict an increasing adoption of digital payments, but don't expect cash to be relegated to second place anytime soon.

Chart 7

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Chart 8

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In our view, digital conservatism in Austria arises predominantly from the population's security and data privacy concerns, which are much more pronounced than for example in the U.K. Moreover, we believe the lower demand for digital banking is also a result of the population's geographic spread. Urbanization has been less pronounced in Austria than in other countries, at 58% compared with an average of 76% for the EU. The country's rural character is reflected in high customer loyalty to traditional bank advisors and branches, in our opinion, and the personal interaction bolsters customer relationships. We believe this also explains the extensive branch networks of the Raiffeisenbanks and Sparkassen, which have historically aimed to be closer to clients than private banks. However, we believe the abundance of branches somewhat dampens customers demand for digital banking.

It remains unclear whether retail customers' conservative attitude and reluctance to share financial data will ultimately curtail the true competitive potential of digital banking in Austria. The experience of other countries such as Sweden and China suggests that initial hesitance could ultimately be overcome.

Regulation: Disruption Risk | Moderate

Austria is becoming more open, and considering a fintech regulatory sandbox

We currently assess Austria's regulatory framework as a neutral factor for promoting innovation or disruption of retail banking. The country's banking regulation is on par with that of other EU countries, and has benefitted from harmonized micro- and macroprudential policies since the 2009 financial crisis, including Basel standards and European bail-in regimes. We acknowledge the political and regulatory commitment to facilitate financial innovation, but much needs to be done.

So far, FMA, the Austrian regulator has established a dedicated point of contact for fintechs to seek guidance on regulatory and supervisory expectations, similar to what we observe in the majority of other EU member states; and the Federal Ministry of Finance has convened a Fintech Advisory Board to promote digitalization of the financial sector. More importantly, Austria is considering the introduction of a regulatory sandbox that allows fintechs to trial their business models for a maximum period of two years before a full business launch. The proposed legal framework is comparable with that in the five EU countries where sandboxes are currently in place (Denmark, Lithuania, the Netherlands, Poland, and the U.K.) in that it does not allow participants to carry out regulated financial services without a license. The law was to take effect in 2019, but the Austrian government's collapse in May 2019 delayed its implementation. It has since been confirmed as a goal under the new government program, and so, remains on the agenda. Other legislative advances have largely followed guidance from the EU. Overall, in terms of measures to support financial innovation, Austria seems quite aligned with many European peers, but lags the U.K., which we consider to be a pioneer in that field.

That said, the Austrian regulator has increased its efforts to strengthen banks' digital resilience, making it one of its supervisory priorities for 2019. In 2018, it introduced a set of rules for IT security (FMA Guidelines on ICT Security in Banks) and launched a cyber-stress test that mimics real-world cyberattacks to assess how banks respond to them. The cyber simulation demonstrated that Austrian banks are generally well prepared to cope with cyber threats, and the lessons learned will inform further supervisory and regulatory actions.

As of May 2018, the EU's General Data Protection Regulation imposes stricter rules about data confidentiality and access, alongside harsh fines for noncompliance. Its revised Payment Services Directive (PSD2), which took effect in January of that year, indicates that regulators are aiming to establish a more level payment services playing field. PSD2 constitutes a threat to banks' franchises and customer bases (see "European Banks Face Risks In Race To Implement PSD2," published May 16, 2019). We see risks stemming from changes to the traditional acquirer-issuer card-based payment model, which could lead to lower payment revenue. PSD2 also has the potential to transform traditional banking relationships, especially with customers that are increasingly using third-party applications to manage their finances.

However, PSD2 also creates opportunities for banks, which can use the new rules to accelerate product innovation, generate revenue, and retain strong client relationships. Austrian banks can also benefit from establishing a centralized platform for payment services or from becoming a data aggregator. For instance, Erste Group offers third-party plugins from partners on its online and mobile platform to enhance its features. The Directive also allows banks a more detailed analysis of their customer data, which will help them gain a better understanding of their clients and improve their products. Banks can also take advantage of new data aggregators, and we expect increasing pressure to deliver better digital solutions and invest in IT infrastructure.

Austrian Banks' Dual Digital And Branch Model Still Supports Our Ratings, So Far

Our credit ratings on many Austrian banks remain strong in a global comparison, supported by the country's economic strength. We do not see an immediate effect from digital transformation on our bank ratings in the near term, since many clients still prefer branch banking. Nevertheless, the banking sector will have to do better at balancing digital innovation with physical proximity to its customer base.

If legacy IT or organizational structures prevent the efficient roll-out of new technology, we see risks that the potential for cost savings and additional revenue will be lost, hurting future profitability expectations. We will continue to closely monitor how Austrian banks' digital journey evolves, and who will be the digital winners or losers. We believe this will increasingly weigh on individual bank ratings.

Related Research

  • The Future Of Banking: Research By S&P Global Ratings, May 15, 2019 [A list of all of the articles on the Future of Banking.]
  • Global Outlook: Banks Can Largely Fend Off Tougher 2020, Nov. 18, 2019
  • Tech Disruption In Retail Banking: U.K. Banks Embrace The Tech Race, Nov. 14, 2019
  • Tech Disruption In Retail Banking: GCC Banks Are Catching Up As Clients Become More Demanding, Sept. 8, 2019
  • Banking Industry Country Risk Assessment: Austria, June 19, 2019
  • The Future Of Banking: Will Retail Banks Trip Over Tech Disruption?, May 14, 2019
  • Tech Disruption In Retail Banking: German Banks Have Little Time For Digital Catch-Up, May 14, 2019
  • Tech Disruption In Retail Banking: China's Banks Are Playing Catch-Up To Big Tech, May 14, 2019
  • Tech Disruption In Retail Banking: Swedish Consumers Dig Digital--And Banks Deliver, May 14, 2019
  • Tech Disruption In Retail Banking: France's Universal Banking Model Presents A Risk, May 14, 2019
  • The Future Of Banking: Is PSD2 Yet Another Threat To Revenues In Europe?, May 16, 2017

This report does not constitute a rating action.

Primary Credit Analysts:Gabriel Zwicklhuber, Frankfurt + 49(0)6933999169;
gabriel.zwicklhuber@spglobal.com
Markus W Schmaus, Frankfurt (49) 69-33-999-155;
markus.schmaus@spglobal.com
Anna Lozmann, Frankfurt (49) 69-33-999-166;
anna.lozmann@spglobal.com
Secondary Contact:Harm Semder, Frankfurt (49) 69-33-999-158;
harm.semder@spglobal.com

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