European Banking Transformation and M&A Conference

Transforming the market, creating value

From technological disruption and shifting customer expectations to agile challengers snapping at the heels of established institutions, the future of banking is with us today.

Banks must find answers to the pressing challenges they face or risk another decade of sub-par returns or even being side-lined altogether. But this is also a market that’s alive with innovation and opportunities to seize market share and fire up growth.

In March, we hosted more than 600 market participants from around 25 countries at our European Banking Transformation and M&A Conference. In sessions ranging from the potential threat from Big Tech entrants to fast-tracking transformation through M&A, more than 70 panellists mapped the contours of the emerging landscape and led a debate on how banks and other market participants can navigate through it.


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Tech and data savvy innovators are raising the bar for efficiency and customer service. Established banks have the resources to copy these capabilities and may eventually catch up, which is great news for consumers.

The problem is that keeping pace with lean and agile challengers is likely to be prohibitively expensive in a sector already grappling with unsustainable costs and sub-par returns on equity. And the legacy issues that make it so difficult to compete are as much about culture as high staff numbers and outdated and multi platform technology.

A new ‘market map’ is therefore set to emerge as many banks move beyond reliance on proprietary solutions towards a more collaborative marketplace model, in which they provide a gateway for bought-in products and services. The move to open banking will help provide an efficient ‘plug and play’ platform for third party partnership. Other options explored at the conference include a utility model for basic services and ‘speed boats’ at the side to serve more high value and high touch operations such as specialist lending.

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With around 6,000 banks and a pressing need to drive down costs, the European market would at any other time be ripe for major consolidation. Yet the conference discussions highlighted a wariness about the management demands of integrating large institutions when banks are under pressure to modernise. Bringing together two inefficient banks would also just create a larger but still inefficient institution.

The conference felt that we are likely to see a series of smaller and more targeted ‘smart’ acquisitions as banks look to modernise their capabilities and lay the foundations for new business models. This could be specific talent and tech to drive innovation. Other focal points include specialist lenders and other high margin operations operating a particular points in the value chain.

The high multiples and sometimes difficult cultural fit that comes with these acquisitions underline the importance of establishing clear criteria for value creation upfront and building this into targeting, valuation, due diligence and integration planning. Moreover, the conference discussions highlighted the difficulties of acquiring technology on a scale to meet the demands of a large bank and integrating these capabilities into existing systems.

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Disruption is gathering pace as a multitude of forces collide – demographics, customer expectations and tech-driven innovation.

The interactive disruption room at the conference gave participants an opportunity to try out merging technologies such as voice recognition and virtual reality for themselves, while giving their views on the impact.
What’s clear is that the more bankers interact with and understand the potential of disruptive tech, the more they recognise the implications and how much they need to do to keep pace. While only less than 30% of banking and capital markets organisations in PwC’s recent CEO survey highlighted the speed of tech change as a threat to their business model, nearly 70% of conference participants visiting the disruption room came away saying that Big Tech is now the biggest threat to the established banking market.

Highlighting how customer expectations are shifting, 83% of participants visiting the disruption room believe that voice recognition will become the norm in personal and working life and 73% believe that it will transform financial intelligence and hence commoditise retail banking.

Embracing disruption is an opportunity to set the pace in an increasingly open marketplace. Ignoring it not only risks falling short of customer expectations, but also opening the door for Big Tech and other entrants to move in.

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FinTech capabilities are firmly on the M&A radar as established banks look to acquire the talent and technology to drive innovation, differentiation and growth. In turn, the conference highlighted the strong appetite among many FinTechs for sale as they look to gain access to the capital, investment and customer-bases that would enable them to take to the next level.

Yet clashes of culture can destroy value, with key FinTech talent at risk of feeling stifled within large corporations and slow decision making structures.

Describing their deal experience, several FinTech leaders highlighted the importance of establishing a clear community of interest between buyer and seller from the outset. They also stressed the value of close engagement between key personnel on both sides in parallel with due diligence and negotiations. Holding out for the highest price can be a mistake as it narrows the field of buyers and risks disappointment at the next funding round. It’s far better to look for buyers with common aspirations and longer term return horizons, even if this means settling for a lower valuation.

For buyers, key priorities include determining what capabilities are wanted from the deal – for example, a specific technology or people with particular type of expertise. It’s also important to determine the scalability and durability of any tech platform within the very different operating environment of a larger institution.

Divestment of performing as well as non-performing loan portfolios is now coming to the fore as banks look to free up capital for investment and new business acquisition. A key trend is divestment to non-bank acquirers with lower capital demands, while retaining the administration of the loan and the customer relationship.

We’re also seeing a growing move towards a capital-light model in which the bank continues to manufacture the loan arrangement, but immediately transfers it from its balance sheet.

Insurers and pension funds are also looking increasingly at loan portfolios. Areas of particular interest to insurers include long-dated investments that match their liabilities such as infrastructure. The key priorities include ensuring cash flows meet the matching adjustment criteria needed to control their own regulatory capital demands.

Insurers tend to favour the same senior tranches as banks. This leaves room for other investors to carve out a strong market presence. Targets on the radar include SME lending.

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Contact us

Richard Thompson

Richard Thompson

Partner, Financial Services Lead Advisory, PwC United Kingdom

Tel: +44 (0)7711 495236

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