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Tech Disruption In Retail Banking: Irish Banks Are Working With, Not Against, Fintechs

S&P Global Ratings believes that Irish banks face a moderate risk from tech disruption. Despite the state's regulatory efforts to foster new technologies across the economy, banks and financial service providers' pace of innovation is proving sluggish.

Until recently, the biggest Irish banks had focused their efforts on strengthening their balance sheets and overall profitability profiles. This left less room for investment in the technologies needed to offer innovative products and enable the development of their internal digital transformations. Now that legacy issues are largely solved and with a higher interest rate environment that supports significant revenue growth, Irish banks have greater scope to focus on and invest in new technologies. We expect, however, that it will take them some time to catch up with the digitalization of bank services across much of the rest of Europe.

Consumer preferences in Ireland also seem to be slowly shifting away from 'traditional' modes of banking toward the use of online services and apps for daily banking activities. The stickiness of cash-usage remains strong in the country, relative to some European nations, and we expect that to persist in the near term.

Irish banks digital efforts have typically centered around improving cost efficiency and data management. More recently, there have been greater efforts to make existing products available online and accessible though in-app capabilities, but little progress toward offering truly new or innovative digital products like instant payments.

Despite Ireland's generally strong preference for cash, some of the population does prefer digital services, including instant payments through banking apps. Irish consumers also seem to adopt new digital products, like mobile payments, faster than the wider European community. Digital-only banks (or neobanks) and fintech companies have identified the opportunity to meet those consumer preferences and have proven to be strong competitors in specific products. We think it is unlikely, however, that they can become substitutes for traditional banks' one-stop-shop value proposition in the near term. Aside from neobanks, like Revolut, most of the new and relatively smaller players in the industry (or related to the banking industry) are collaborating with the larger banks. These partnerships complement banks' offerings rather than compete with them.

TRIP Analysis Shows That Irish Banks Face A Moderate Risk From Tech Disruption

We base our current views of disruption risk for Irish banks on our four-factor analysis of the Irish banking system's technology, regulation, industry, and preferences (TRIP).

Chart 1


Technology: Disruption Risk | Moderate

Increasingly solid technological infrastructure foundations

Fintech companies that have entered the Irish market are mostly niche players, resulting in a new and more fragmented landscape for some financial product offerings.

The digital financial solutions providers landscape in Ireland is quite diverse with both international fintech operators (like PayPal and MasterCard) and local players (like Stripe and Fenergo) operating across various sub-sectors, including banking, regulatory technology (RegTech), payments, insurance, blockchain, and lending. There are about 400 fintech companies operating in Ireland.

Chart 2


Fintechs' typically benefit from significantly lower cost structures than banks, which despite investment in technology are burdened with the cost of transitioning from big legacy systems to newer ones. While the contenders have the technology and the capacity to introduce new and innovative products or services, they remain constrained by the environment in which they operate (i.e., the limits and rules inherent to the Irish financial system and customer preferences).

A good example of this is the money transfers arena. Currently, payments in Ireland are only instant if they are closed-loop (between accounts of the same financial entity). This is because no traditional bank has adopted the European credit transfer scheme SEPA Instant Credit Transfer (SCT Inst). Neobanks operating in Ireland, like Revolut (which has about two million users in a country of five million people) and N26, introduced for their users the possibility of doing instant payments and transfers across the EU. However, since no bank in Ireland has SCT Inst, users of these apps in Ireland find themselves able to make an instant transfer to someone in other EU country (whose bank has adopted SCT Inst) but not to someone with an Irish bank account. A significant number of Irish bank-users have therefore opened secondary accounts in Revolut or N26, alongside main bank accounts with the traditional retail banks, to make instant payments inside Ireland and across the EU.

In reaction to demand for easier and faster payments and money transfers, three of Ireland's main banks (Bank of Ireland, Permanent TSB and Allied Irish Banks) received approval to form a joint venture called Synch Payments. This app (which is still in development) should enable money transfers using only a mobile number linked to the IBAN of the recipient account (rather than the SWIFT code, IBAN, and full name of the recipient). Similar services have been in use for several years in some European countries. The joint venture only partially solves the issue in Ireland, since it doesn't involve Irish banks adoption of SCT Inst, and it doesn't mean banks' clients will have access to instant transfers outside of Ireland.

Despite some operating environment limitations, Ireland's technological infrastructure is quite advanced, relative to the European Union context. The Irish population's digital skills are among the most advanced in the EU, with 70% of individuals having at least basic digital skills (versus 54% in the EU), while 40% of Ireland has above-basic digital skills (26% in the EU). The number of Information and Communications Technology (ICT) specialist has increased in recent years and remains above the EU average, not least because many tech companies choose Ireland for their headquarters.

Chart 3


In terms of connectivity, Ireland's 5G coverage has also significantly expanded in recent years and remains above the EU average, with 72% of populated areas covered versus 66% of the EU. The Irish government has a set of ambitious programs in place to continue developing the technological infrastructure and be a forerunner in the integration of digital technologies and the development of the digital economy. And, in addition to government-funded fintech innovation hubs, big companies like Mastercard, Accenture, and Citi Bank have established their own innovation labs and tech hubs in Ireland to foster the development and growth of fintech startups.

This relatively strong mix of technological infrastructure and talent has enabled the main Irish banks to implement new technologies through partnerships with smaller and larger technology providers as well as via internal development. Those innovations have included cloud computing, blockchain, and the application of artificial intelligence (AI).

Table 1

Irish banks' partnerships with technology providers
Bank Digital financial solution provider Initiatives and projects
PTSB Experian 1. Decision analytics product from Experian: used by PTSB when preparing for Basel II. 2. Categorisation as a Service (CaaS) product applied to Know Your Customer. Allows for automatic recognition of a customer's income and expenditure to allow PTSB to quickly understand customers' financial situations and enhance lending decisios as well as the customer journey.
PTSB CreditLogic Partnership with fintech to offer a faster, tailored mortgage application process. Leveraging AI, open banking, and analytics, this technology enables customers to search for mortgages, determine their eligibility, apply in five steps, and receive approal in less than one hour.
BOI NBA Engine (Next-Best Action) Internally-developed. Uses AI to transform its digital offering and provides every BOI unit a new channel of communication with their customers.
BOI WorldFirst Collaboration to offer a foreign exchange and payments service that allows businesses in the U.S. to make fast and safe international payments with no transfer fees.
AIB IBM Cloud Solutions Uses the IBM z15 platform to manage traditional operations and provide AIB with the tools to deliver new digital services in an agile way. Includes data analytics and process automation to enable AIB's hybrid cloud strategy.
AIB Payzone Online payments solution.
AIB nCino Collaboration on the transition of nine AIB internal systems into a single comprehensive platform via the use of cloud computing.
AIB & BOI Deloitte EMEA Financial Services Blockchain Lab, Institute of Banking Collaboration on an education platform for the financial services industry. The platform verifies and tracks the education and regulatory credentials of bank employees, using blockchain for security and management of the information on a decentralized ledger.

Most tech-related projects and collaborations relate to banks' operational efficiency rather than new, tech-enabled products and services. This is likely due to clients' historical bias toward the 'status-quo' in banking--as noted earlier. Demand for newer products has emerged in some areas, like instant payments, and customers have adopted these new products faster than the European average, for instance in mobile payments.

Regulation: Disruption Risk | Moderate

An innovation-friendly and startup supportive regulator

The role of the Central Bank of Ireland (CBI) as the integrated regulator for the financial services in the country has increasingly been linked to fintech and its impact on the financial sector. The Irish government and the CBI have worked on a strategy, called "Ireland for Finance", to develop Ireland's financial services sector, with technology and innovation as pillars.

The CBI relies on its Innovation Steering Group (ISG) to coordinate and prioritize fintech activities, including the use of new technologies and innovation within the central bank. The main priority actions of the "Ireland For Finance Strategy" include implementation of the second phase of the ISG, developing institutional resources to support consumers to engage with fintech, the development of an 'insurtech hub', programs to support Irish fintech companies' international growth, and a series of activities to raise Ireland's global visibility as a hub for fintech.

The government and the CBI have set out a supportive platform for fintech growth by establishing enterprise agencies and funds that invest and collaborate with fintech businesses. Some of the key funds are:

  • The Ireland Strategic Investment Fund, which has invested in fintech companies such as Global Shares, Fenergo, Fexco, and Stripe.
  • The Disruptive Technologies Innovation Fund, a €500 million fund established under the National Development Plan in 2018 and which has invested more than €300 million so far.
  • The Irish Innovation Seed Fund, which includes financing from the European Investment Bank.

The CBI has also played a supportive role via its innovation hub, where fintechs can engage informally; through the creation of the National Digital Research Centre, a national accelerator program for tech startups including fintech; and by funding different research centers like ADAPT and the Science Foundation, which invest and collaborate with fintech programs.

Two enterprise agencies, Industrial Development Agency Ireland (IDA) and Enterprise Ireland have funded CeADAR, a market-focused technological center that researches and develops AI and data analytics for use by businesses (including financial companies). Enterprise Ireland also invested about €18 million in equity co-funding at about 80 startups between 2016 and 2021.

The Irish Government has also implemented fiscal incentives to foster the development of new companies and new technologies. That includes corporation tax relief for startups, an R&D Tax Credit, and cash accounting for value-added-tax for companies with turnover below €2 million in a fiscal year.

We consider the actions of the CBI and the Department of Finance to be a good starting point to foster technological development in the Irish Financial Services sector. However, the initiatives lag those of other regulators in some respects. For instance, Ireland doesn't offer a sandbox approach to innovation that enables live testing of new financial products in a controlled environment.

Chart 4


We are aware that most of the tech-related regulatory initiatives to foster financial innovation in Ireland arise at the European Commission in Brussels. But we consider efforts made at the EU level to be a good basis for member states, because they also aim to harmonize regulation across the region. Ireland is actively participating in those conversations.

Industry: Disruption Risk | Moderate

With asset quality and operational improvements almost complete, it is time to focus on tech and digital

Irish banks have traditionally been less profitable than their average European counterparts due to their higher-cost structures, and higher levels of non-performing exposures (NPEs). In recent years, the main Irish banks successfully implemented cost reduction and optimization plans and have improved their asset quality via balance sheet clean-ups and improved underwriting standards. The exit of two banks (Ulster Bank and KBC Bank Ireland) impacted about one million customers (out of a population of five million), according to the Ministry of Finance. It also provided the remaining three banks, which acquired the exiting banks' performing loan portfolios, with the opportunity to increase their scale while containing their cost bases. That, coupled with the recent increases in interest rates, is allowing the Irish banks to bridge the profitability gap to the main European banks.

Chart 5


Irish banks have also made efforts to diversify their income streams, favoring non-interest income sources like asset management or investment banking activities. AIB's acquisition of Goodbody in 2021 and BOI's J&E Davy in 2022 are both examples of that. By reducing dependency on general interest rate levels, Irish banks are generating a solid platform for future revenue growth, which can fund further technology R&D. These benefits are expected to materialize over the medium-term.

Irish banks have been investing in technology related to mobile applications, cloud services that allow for seamless data storage and processing, and cybersecurity. Investment has also flowed into open banking application programming interfaces (APIs) to comply with the EU's revised Payment Services Directive (see "The Future Of Banking: Is PSD2 Yet Another Threat To Revenues in Europe?" May 16, 2017). According to the Banking and Payments Federation of Ireland (BPFI), Irish retail banks spent a total of €3 billion between 2017 and 2021 (about 9% of their operating revenues over that period) on technology programs aimed at improving and digitalizing key systems and services.

However, these initiatives and actions have been the standard across banks and no breakthrough ideas or plans have emerged from Irish banks' investment in new technologies. Moreover, it seems that their IT systems are generally still not in great shape. Irish banks have experienced several IT glitches and failures in recent. In August 2023, an issue at BOI prevented some customers from accessing accounts online (with both mobile app and digital services unavailable for almost one day) and erroneously increased deposits in some accounts. The bank swiftly addressed the incident but suffered public criticism, while the regulator questioned the adequacy of IT systems in domestic banks and existing controls to ensure operational resilience. This should push banks to accelerate required investment and system replacement, where necessary, especially now, when they are enjoying extraordinary profits due to the high interest rate environment.

A possible contributor to the banks' innovation deficit could be the difficulties they face when trying to compete for IT talent against fintech companies. Irish banks were subject to salary caps following the financial crisis of 2007, when the Irish government took stakes in them. Some of them, like BOI, are no longer limited by this cap following the Government's exit (in September 2022 for BOI). Others, like PTSB and AIB, remain partially state-owned and thus subject to the limit. Overall, salary and benefits packages of traditional Irish banks are not sufficient, compare to tech companies, to attract the talent needed to foster disruptive innovation to the banking system.

Fintech companies operating in Ireland tend to be niche players, resulting in a new and more fragmented competitive landscape for specific financial product offerings. In this context, we are unlikely to see these new players completely substituting traditional banks' positioning as a one-stop-shop. However, in the medium term, they could become relevant competitors in specific services, enabled via newer technology and due to better targeting of younger generations. Still, fintechs may find it difficult to gain market shares if incumbent banks are not too slow to introduce similar products and services, via internal development, through partnerships with the successful fintechs, or (less likely) via acquisitions.

Preferences: Disruption Risk | Moderate

Shifting behaviors have led to increasing tech adoption

While Irish banks spent the past decade focused on profitability and asset quality improvements, and made only tentative tech advancement, their clients' habits and preferences have evolved.

Almost 30% of the Irish population continues to prefer cash, compared to 22% in the eurozone, according to the European Central Bank's Study on the payment attitudes of consumers in the euro area (SPACE) 2022. Nonetheless, non-cash payment methods like cards, contactless, and mobile are gaining in popularity in Ireland, where the rate of cash usage for point-of-sale (POS) transactions is 54%, below the eurozone average of about 60%.

Mobile payments remain relatively little used in the eurozone, but Ireland ranks third in their use across the region. The number of daily mobile interactions have almost doubled over the last three years, according to banks' reports.

Chart 6


Different factors explain the apparent divergence between the Ireland's preference for cash and its outsized adoption of card and mobile payments (compared to other European countries).

Automatic teller machine (ATM) density in Ireland is lower than the EU and eurozone average, with 44.9 ATMs per 100,000 people in Ireland versus 62.7 at the European level (see chart 6). This could reduce the number of times people withdraw cash, which can limit the use of cash for payments, despite stated preferences.

Chart 7


Ireland's relatively young population's willingness to use new technology also likely contributes to greater adoption of mobile payments compared to most of the eurozone. Some 47.5% of the Irish population is between 15 years and 49 years (42.9% in the EU), while those over 50 represent 32.9% of the Irish population (42.2% in the EU).

COVID-19 also significantly accelerated the trajectory of digital and cash-less payment as people's habits changed due to social distancing measures and related health and safety concerns (see chart 7). According to the CBI, the number of withdrawals from ATMs by Irish residents fell by 40% in 2020, compared to 2019. Mobile and digital payments increased around 65% during over the same period, based on data from the BPFI.

Chart 8


As mentioned above, preferences for physical currency remain relatively high. Despite a scarcity of ATMs compared to other nations, around 73% of Irish adults regularly use the machines, according to a study conducted by the Department of Finance in 2022. Another example of the relatively sticky preference for cash was observed last year when AIB reversed a decision to remove cash services from 70 of its 170 Irish branches following opposition from customers, the public, and media attention.

On the digital banking front, Irish retail banks have seen an exponential increase in customers' banking app usage, including for the purchase of banking products, which has outpaced other European countries (see chart 8).

Chart 9


No Imminent Risk From Tech Disruption On Irish Bank Ratings

Irish banks' focus on asset quality and operational improvements has started to bridge the profitability and investment gap with their European counterparts in recent years. Though already partially observable, most of the benefits of the clean-up and cost-cutting efforts are expected to materialize from 2023 onwards. Continued collaboration with fintech and increasing implementation of new technologies could further streamline processes without the need for significant investments (compare to full internal development). At the same time, profitability improvements will give Irish banks room to couple fintech collaboration with additional IT investment, further fueling technological advancement in retail banking.

We are aware of the potential threats stemming from neobanks, like Revolut, which is gaining a sizeable customer base and is expanding its product offering. However, we do not see this risk as imminent, as incumbent banks' proposition remains the preferred option for individuals' core banking activities (i.e., salary payment, mortgages, utility bill payment).

Related Research

This report does not constitute a rating action.

Primary Credit Analysts:Anastasia Turdyeva, Dublin + (353)1 568 0622;
Laura Jimenez, London +44 2071760839;
Secondary Contacts:Cihan Duran, CFA, Frankfurt + 49 69 3399 9177;
Miriam Fernandez, CFA, Madrid + 34917887232;
Salla von Steinaecker, Frankfurt + 49 693 399 9164;
Letizia Conversano, Paris + 353 (0)1 568 0615;

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