As Ulster Bank and KBC ramp up plans to exit the market, retail banking in Ireland has reached a critical juncture with far-reaching implications for the wider economy, writes Elaine O'Regan
In mid-August, an article appeared in the Financial Times, heralding a “once in a generation” growth opportunity for Ireland’s banks.
Irish lenders were primed for expansion, the article said, amid rising interest rates and the exit of both KBC and Ulster Bank from the market, leaving behind €30 billion in loan books and one million customers.
While the exits may be good news for AIB, Bank of Ireland, and Permanent TSB—the three remaining full-service high street lenders in the Irish market—the contraction of the sector is of wider concern.
“Industry stakeholders face fundamental questions about the sector’s sustainability and direction,” Brian Hayes, Chief Executive of the Banking and Payments Federation of Ireland, said.
“As it stands, the profitability of the retail banking sector in Ireland is among the lowest in Europe, measured in terms of return on equity. Irish retail banks must hold back an estimated €2.5 billion in additional capital for mortgages, impacting the price of products and the share valuation of retail banks.”
These banks need to be profitable to generate organic capital, which is lent back into the wider economy to support jobs, businesses, and economic activity, Hayes said, and “this will require new and diversified sources of income as well as further efficiencies in operational costs.”
The biggest challenge facing Ireland’s retail banking system now is the need to continue running core functions while also meeting a diverse set of needs among competing stakeholders.
“Financial regulators place a strong emphasis on strength and stability, while shareholders need to focus on sustainable profitability,” Hayes said. “These demands and expectations are not necessarily mutually exclusive. However, there is a need to acknowledge and seek a means to achieve balance between stakeholder demands.”
Retail banking review
As government officials prepare to present the draft report on the Retail Banking Review to Minister for Finance Paschal Donohoe, TD, in the weeks ahead, Hayes called for an informed and open conversation between all stakeholders and “meaningful and effective dialogue”.
“We need a viable, safe, innovative, and purpose-led retail banking system, which serves its customers, the economy and society. A stable and viable retail banking sector is a fundamental prerequisite to a well-functioning modern economy and society,” he said.
A new discussion paper on consumer protection, published at the start of the month by the Central Bank, noted that structural changes in retail banking, including the withdrawal of Ulster Bank and KBC and branch closures by other retail banks, was impacting “availability and choice” for both consumers and small businesses in Ireland.
The discussion paper is the first stage of the Central Bank’s review of the Consumer Protection Code. The Irish financial system has “extensive scale and reach” at both retail and SME level, it noted, including 5.4 million current accounts, €101 billion in credit to households, €22 billion to SMEs, and €2.64 billion payment transactions in 2021.
As KBC and Ulster bank continue to progress market withdrawal plans announced last year, some one million customers will need to move their current and deposit accounts to new providers.
The Central Bank was, it said, “closely monitoring” this mass account migration process, including assessing ongoing implementation plans at an individual firm and sectoral level to ensure the protection of affected consumers.
CCPC submission
In its submission to the public consultation for the Retail Banking Review first announced in July 2021, the Competition and Consumer Protection Commission (CCPC) expressed its own concerns about the impending increase in concentration levels in retail banking in Ireland.
“With KBC and Ulster Bank closing, small businesses here will have access to just two full-service banks, while for consumers, there will be just three,” CCPC member Brian McHugh said.
“When you have just two or three players in any market, you would generally have competition concerns, because the evidence shows that customers in these situations tend to be worse off, not just in terms of price, but also quality and innovation.”
While there had been some entry into the market at product level—in mortgages and business lending, for example— the CCPC noted that much of this was being provided by non-bank lenders, and that there had been no entry into the market by a full-service provider and no indications that such entry was likely in the near future.
It was therefore vital that public policy and regulation facilitate entry into market, the CCPC said; that the mandate of the Central Bank of Ireland be amended to include competition objectives; and that its revised Consumer Protection Code promote fair competition in financial services.
The CCPC also called for an evaluation of the operation of the Bank Switching Code as part of the Central Bank review of the Consumer Protection Code, and that the Government engage at an early stage with the proposal for a European Digital Identity Wallet to maximise consumer engagement and protection.
“What we want to see, ultimately, is a more competitive landscape for banking in Ireland where we have new entry into the market. We are not specific about exactly what that might mean. We don’t know what the right solution is, but what we do want is to have lots of different providers coming into Ireland, offering consumers and businesses a variety of products,” McHugh said.
“We have to ask why we are not seeing more European players moving into the Irish market and competing here as they do in lots of other markets. There is a need for Ireland to be at the forefront of any efforts to promote the European banking market and make it easier for other players in Europe to move into the market here under common EU rules.
“I don’t know if we’ll ever see another full-service provider coming into the market here and opening a full branch network, but ultimately, we need to have competition for both pricing and innovation.”
Jobs in banking
Central to the continued viability of the retail banking sector at a time of “evolving consumer and regulatory demands”, would be its ability to attract the skills needed with competitive pay and career opportunities, Brian Hayes said.
“Retail bank employees and potential recruits are subject, under both Irish legislation and administrative orders, to the most restrictive remuneration conditions in the EU. They are clear outliers when compared with graduates and employees in financial services and a range of other sectors. This places Ireland’s retail banks at a considerable and growing disadvantage,” he said.
“The skills composition within banks is evolving rapidly, and the normalisation of pay and employment conditions is needed in the sector to attract the skills and employees necessary for the provision of services expected by Irish consumers.”
The Financial Services Union (FSU), meanwhile, wants an “open transparent model of engagement on the future of banking” involving all relevant stakeholders.
“Stakeholder banking is common across the EU. A new governance framework involving workers and consumer directors on the boards of banks would put the voices of customers, business, and staff, at the centre of decision-making,” FSU General Secretary John O’Connell said.
“This is a big strategic focus now for the FSU—and it isn’t just a trade union matter, it is something the Financial Conduct Authority in the UK has identified in its own regulatory approach, identifying ‘worker directors’ as one option for providers.
“It is about having a sustainable banking sector that doesn’t trample over people for profit and the race for digital. That’s not to say that change won’t, or shouldn’t, occur. It is about how this change will occur. We don’t want to see announcements of sudden branch closures in the future and all that entails for staff and customers.”
Digital challengers
According to the results of a survey published in May by the Department of Finance, just one percent of people in Ireland have their main current account with a digital bank.
Carried out as part of the Retail Banking Review, the survey of 1,500 consumers found that 97 percent conducted their main current account banking activities through a traditional retail bank. Despite this, however, close to one-in-five said they were using a digital provider for banking or payments at least occasionally.
The main appeal of fintech providers compared to traditional retail banks is that they offer instant money transfers, free banking, and allow customers to split bills as well as providing a user-friendly app, the survey found. Fifty-eight per cent of fintech customers strongly believe that the services offered by fintech providers are a very good substitute for the services offered by more traditional banks, it said.
“Speed, convenience, and simplicity are at the core of positive customer response to digital banking, and we can’t ignore the new players joining the market,” said Billy O’Connell, Head of Accenture’s financial services business in Ireland.
Revolut, the UK-headquartered digital bank, officially launched as a bank in Ireland earlier this year, operationalising its European specialised banking licence here, while N26 is licensed by the German Central Bank, operating in Ireland on a European Passport.
Dutch neobank Bunq has, meanwhile, secured Central Bank authorisation to launch an Irish IBAN, and also recently acquired Capitalflow, a specialist digital lender to businesses in Ireland.
“Early traction in this market has been based around highly frictionless, digital-first experiences for payments, money transfers and features like money management across demographics in Ireland, but new digital players continue to face challenges for providing complex lending and highly regulated products,” Billy O’Connell said.
“New players are driving enhanced and innovative propositions—shaping customer expectations in the market and tapping into this need for new ideas, but they aren’t necessarily replacing banking services. Most people retain traditional bank accounts for core activities, like receiving salaries and taking out loans, so incumbents locally still retain a large market share despite disruption.”
At the same time, O’Connell said, traditional retail banks are investing in new digital offerings and capabilities, releasing high-end apps, and improving online banking services, to compete with neobank challengers.
According to the BPFI, Irish retail banks have collectively spent more than €3 billion in the last five years on technology and innovation projects to deliver new digital services for customers.
Synch payments
Synch Payments, a mobile money app joint venture involving AIB, Bank of Ireland and Permanent TSB secured CCPC approval earlier this year.
“The ability to make instant peer-to peer-payments, without the need for complex payee addition journeys, is a key customer need, and it is envisaged that Synch Payments will address this need, with all Irish customers being ‘auto-enrolled’, so that they can make payments using just their phone number,” Accenture’s Billy O’Connell said.
To continue to be competitive in the future, however—particularly among younger demographics—he added that traditional retail banks would need to commit further investment to more advanced services, such as end-to-end digital account opening, digital accounts aimed specifically at “juniors”, share dealing, and cryptocurrencies.
“Decades from now, the banks that will be successful will be those that shape their businesses continuously to the needs of customers, employees, and other stakeholders, honing their abilities to identify opportunity and innovate efficiently,” O’Connell said.