What is a diversified banking landscape?

Diversified banking landscape

The best possible banking landscape is one that meets the needs of its customers in the best possible way. This is the guiding principle of the Belgian banks.

Financial institutions also carry considerable social responsibility in Belgium. They have various roles to play:

  • raising savings and using them responsibly
  • providing credit to households, companies and public authorities
  • supporting (export-oriented) companies in their activities
  • ensuring a safe payment infrastructure
  • acting as a catalyst for economic growth

Added value is expressed in various ways. The direct line between the banks and society is that of lending. The role of the financial sector in lending has already been described in detail above: between 2007 and 2012, each additional euro in savings was converted into at least one euro of credit to households, businesses and public authorities, as a result of which credit volumes peaked in recent months. Furthermore, this lending was done at the lowest interest rates in all of Europe. This has clearly stimulated the economy in recent years, and it increased the added value provided by the banking sector to society.

However, a less visible way in which the financial sector creates added value has to do with the services it offers society, for example through its distribution model or through the activities it performs.

The distribution model of the banking sector

Let us start with the distribution model. In essence, Europe has two banking distribution models. With the first, which more or less describes the situation from Scandinavia to the Netherlands, the emphasis is firmly on electronic banking. The density of branches there is less great, and the consumer is responsible for many of his banking tasks. In southern Europe, so from France to the Mediterranean Sea, another distribution model reigns: there, branches are the norm, and banking has much more of a human face.

The Belgian distribution model actually offers customers the best of both worlds. An effort is made to provide both a dense network of branches and a wide choice of alternative methods of banking (online banking, mobile applications, etc.). What is more, here the market is highly diversified: there are online banks, niche banks, small and large banks, savings banks and universal banks, etc

The consumer does very well by this. He enjoys as wider range of services than in northern Europe, with more branches and possibilities for personal contact, but also with all the facilities to bank electronically 24/7. At the same time, however, the cost of these services is considerably lower than in the southern countries that offer a comparable network of branches.

However, the question also arises as to whether the financial sector in Belgium will still be able to maintain this unique retail model of brick (an extensive network of branches) & click (a sizeable multi-channel offer) over the next few years. After all, a model that aims to offer the consumer the best of both worlds comes at a price. The combination of an extensive network of branches and an extensive multi-channel offer means that the cost of banking in relation to turnover (the so-called cost to income ratio) is higher in Belgium than elsewhere. It is therefore logical that the low profitability of the sector also exerts pressure on the distribution model and its affordability for the customer.

It must be made clear that the distribution network is facing major challenges. It is expected that the number of branches will drop further as a result, as will employment within these branches. However, the way and the extent to which that will happen depend on whether the critical conditions can be met to maintain the current distribution network in a particular form.

Belgian banks still believe that the current distribution model best meets the needs of its customers and of the economy, and it is therefore the sector’s aim to retain the strengths of the versatile Belgian distribution model. To succeed in this, however, a number of conditions have to be met:

  • a stable regulatory framework is needed that provides clarity in the long term (including for the tax treatment of savings accounts)
  • specific banking levies must not increase any further
  • the financial sector must be able to generate additional income from electronic payment transactions
  • the costs associated with physical notes and coins must be reduced
  • the income and revenue generated by the multi-channel model must increase

These conditions must be met so that the distribution model as we know it can remain intact. The fact is that this evolution will not stop. According to a study by the consultants McKinsey on behalf of the European Financial Markets Association (EFMA), the continued digitisation of society and the financial sector will inevitably bring about major changes in the distribution networks of financial institutions:

  • consumers will interact more with their financial institution and less through physical contacts with their bank branch
  • bank branches will become smaller and bank employees will mainly become experts within a specific field
  • transactions will mostly be automated

As a result of these changes, the distribution network will be faced with a number of major challenges: the size of the branches will change, as will the management of costs. Employees will also have to be managed and deployed differently, and banks will have to learn to deal with the more stringent requirements of the regulators. In any event, McKinsey’s findings are in line with the conclusions drawn by the students of Solvay Business School at the end of their reflection process: the Bank of the Future project (see Bank of the Future)

All that study work thus shows that the number of branches can be expected to drop, as can employment within these branches. Only the way and the extent to which this will happen are still up for discussion: this will depend on the conditions and peripheral circumstances under which these branches will have to work in the future. The demands of the banking sector customers are a key element in this discussion.

The activity model

One important aspect of these conditions and peripheral circumstances lies in the activities banks may and can develop in the future. The fact is that the Belgian banking landscape is not only highly diversified thanks to the distribution model used by the banks – every combination of brick & click – but also by the wide range of activities they perform.

Among the 104 banks registered with Febelfin there are small and large banks, niche banks, savings banks and universal banks. Each of these institutions meets specific needs in specific segments of society: providing credit, for example, but also providing advice for stock exchange floatations or private placements, setting up hedging mechanisms for foreign exchange or interest rate risks, or financing export activities.

These last tasks account for the lion’s share of what we in Belgium call “investment banking”. In Belgium, “investment banking” has little to do with the so-called speculative behaviour of which certain, mainly Anglo-Saxon, investment banks have been accused. On the contrary, it has to do with the healthy financing of the Belgian SME economy.

This SME economy is responsible for the lion’s share of economic activity in Belgium. But because Belgium is such an open economy, these small and medium-sized enterprises are often highly active on foreign markets. To be able to fully develop their activities, these SMEs therefore need banks that not only offer retail activities, but also provide access to capital markets. Only in this way can businesses hedge themselves against possible fluctuations in certain foreign currencies or raw material prices that are specific to operating on international markets. It is only in this way that businesses can gain badly needed access to financial markets for capital operations that can finance their growth. This makes the activities of commercial banks in Belgium an essential part of a healthy economy.