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Publisher: Informa.
Price: £695.00



This report will explain and analyse:

• The practical impact of EMU on European retail banking

• The operational challenges involved in introducing euro notes and coins in January 2002 and the withdrawal from circulation of legal currencies by 1 July 2002

• The prospects for those EU countries currently outside EMU who may decide to adopt the euro in the next few years

• The implication of EMU for other retailers

• The range of business strategies being implemented by local and international banks throughout the EU, and by their global rivals, to manage these challenges

• The new sources of competition for euro retail banking

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Strategic Focus on Retail Banking & The Euro

Executive brief: This report analyses the immediate priorities of European retail banks in 11 countries, in their current preparations for the introduction of euro bank notes and coins in 2002, and at the final stage of the transition period in their economic and monetary union (EMU). It explains the background to EMU as the greatest single development in the history of the European Union (EU), and its profound implications for retail banking at a time when many drivers of change are transforming the industry.

The report also looks beyond the currency changeover in 2002 to the wider strategic impacts of the euro on retail banks and their competitors in the global marketplace, and at prospects for expansion of the EMU zone.

Its ten chapters and nine case studies analyse and illustrate these strategic and operational effects in practical terms, including action checklists for readers with executive responsibilities.

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The report outlines how:

1. The launch of the euro has been a success

Preparations for the start of EMU by central and commercial banks succeeded during the “Big Bang” conversion weekend at the beginning of January 1999. One of the biggest IT projects in world history was completed remarkably smoothly and successfully, despite some initial problems that have now been resolved.

Although the euro lost 10 per cent of its value against the US dollar in the first six months of its existence, this was not reflected in its purchasing power inside the EMU zone. Its external exchange value has since regained some of that lost ground against the dollar, as Europeís economy recovers strongly from the consequences of the global financial crisis of autumn 1998. The progress of EMU continues to be calm and stable.

Now the challenge for retail banks is to complete the necessary preparations to implement the currency changeover in 2002. When the old national currencies of the euro zone have finally been withdrawn from circulation – by 1 July 2002 at the latest, and by the end of February of that year in some countries – there will be 300 million euro customers for Europeís retail banks. The size and nature of this new single market is of such consequence that few retail banks appear to fully appreciate its implications.

2. Economic integration will have a more far-reaching impact on retail banks in all European countries than the implementation of the monetary union alone

Economic union is a process that will continue long after the euro has been adopted by several more than the current 15 members of the EU. The euro zone is likely to embrace much of eastern Europe in addition to the first wave of 11 countries that will introduce the new bank notes and coins on 1 January 2002. Cultural, linguistic, tax and political barriers between European countries will persist and may impede the development of the full potential of economic union for the foreseeable future. Nevertheless, the euro is likely to be widely used for business outside as well as inside Europe as a global reserve currency alongside the US dollar; this probability may develop quite rapidly, possibly before 2002. Small-business and personal customers of retail banks will benefit correspondingly.

3. The euro creates a new era for European retail banks and their customers

The combination of the effects of EMU and the development of electronic commerce is not only reinforcing previous trends in the European banking industry but has created the potential for revolutionary change. Banks have little choice but to respond to the rising expectations of the euro customer. Such developments may transform the nature and role of banks as businesses.

In-depth case studies include:
• Dresdner Bank • Rabobank International
• Banque Nationale de Paris • The Royal Bank of Scotland
• Bank of Ireland • first-e
• NatWest • Sainsbury Bank
• Credit Lyonnais

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4. The arrival of the euro has already had a dramatic impact in reshaping European capital markets

This is most evident in government bonds, where euro bond markets are developing on a similar scale to the US bond market, although with some important differences. The biggest single impact of EMU for all sizes and types of business throughout the euro zone will be the opportunities presented for shifting from debt to equity finance, and from bank loans to euro bonds. The creation of a single pan-European capital market may take significantly longer than the next two years, but if successful it will create an elite of pan-European companies traded by European traders appealing increasingly to pan-European investors.

The immediate practical effects of EMU during 1999 have been and continue to be wide ranging

From the outset, for retail banks these effects included:
  • reduced transaction costs
  • improved foreign exchange handling services
  • new opportunities for cross-border payments transmission and for pan-European and global cash management
  • changing relationships throughout the banking sector

The abolition of 11 national currencies has presented a large immediate impact on Europeís universal banks in terms of their previous revenues from forex trading. This has combined with market-driven pressures on the long-established overcapacity in Europeís wholesale and retail banking sector. A rapid shake-down in the industry has begun, and is accelerating as a result of EMU. Large- and small-business customers need fewer bank accounts and a reduced number of bank relationships as they gradually realise the benefits of EMU, especially for their cross-border operations.

5. Retail banks are currently preoccupied with practical operational priorities for the forthcoming currency changeover

These include:
  • final conversion programmes for IT and other systems, including cash machines
  • communications, education and training programmes for staff and customers
  • detailed logistical planning for the supply and distribution of euro notes and coins and the collection and withdrawal of the legacy currencies

Most small businesses are likely to convert their accounting systems to the euro in 2001, having been unable to convert IT systems earlier because of the general preoccupation with the millennium date change. Personal customers are becoming increasingly aware of the imminent arrival of euro notes and coins, and of prices in the new currency compared to their old national units of account. The three-year transition period may have seemed a long time, but the scale of the change programmes involved in retail banking is such that all of the remaining time is likely to be needed.

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6. Retail banks need to review their EMU strategies, as well as their operational programmes, and make fresh impact assessments now that the euro is a reality

This might take the form of a simple EMU health check or may require a complete change in business strategy and operational priorities. Too many retail banks have focused on technical changes to transaction processing systems and not enough on the impact of EMU on business strategy.

The need for an EMU review or update is urgent. An inordinate number of European banks and other businesses, large and small, have not prepared sufficiently, despite the major investments already made by the banks, particularly in IT conversion programmes.

7. Banks have several basic choices in the type of business strategy they must pursue over the next two years and beyond, given the impact of EMU

These alternatives are discussed in Chapters 8 and 9. The strategic choices to be made by any bank will be determined by its current scale of operations in Europe, its share of corporate business in its domestic market (whether that is national, pan-European or global), and its particular strengths and weaknesses in meeting the needs of retail customers. Competition is becoming fierce and will continue to increase during the rest of the transition period and beyond 2002 as a result of price transparency. EMU will interact with other established business trends, primarily the development of electronic banking, to present banks with major new opportunities as well as threats to their traditional activities. Disintermediation is only one factor in this mix of changes. Successive waves of mergers and acquisitions will affect banks and their small-business customers as a result of EMU. The electronic euro customer will have much higher expectations and far more power to control banking relationships. The nature and role of retail banking is likely to be transformed as a result. Such changes can only be described as revolutionary.

8. In any event, even without the catalyst of EMU, there is massive scope for efficiency gains in automating paper-based systems, especially in those euro-zone countries where the banking industry is overcrowded with traditional bureaucratic operations

Given the extent of European overcapacity and other established trends affecting the global banking industry, the combined effects of EMU and other disintermediating factors over the next five years could result in a halving of the total number of banks across Europe, from 15,000 in 1999 to fewer than 7,000 according to authoritative studies. Each of todayís national banking industries has unique characteristics, and is at a different stage of development. Deregulation is also developing across Europe, but legislation for pan-European liberalisation of the financial services sector will create consistency within a year or two after the currency changeover. Those banks competing in the most deregulated EU banking markets, such as the UK, have gone furthest in re-engineering their business processes to reduce overhead costs and improve service and profitability. This approach will be progressed as truly pan-European banking develops.

9. Consolidation of the European banking industry is likely to see today’s six biggest banks transformed, by merger, to become just three or so “global aspirants” within the next two years

The biggest banks may absorb one another or be taken over by US rivals who already have a dominant position in the emerging pan-European market. But the real battles may be for the wholesale euro payments business, which is rapidly being automated and commoditised, or for the business of the emerging “super league” of European multinationals. Whoever wins scale and share in the battle for Europe’s corporate banking market will dominate the retail banking sector. Retail banks also face new direct competitive threats, and the possibility of take-over, from a variety of new entrants to the market, including supermarket banks, internet banks and numerous other interlopers. The factors that will determine which of the biggest European banks survive as leaders in the euro zone beyond 2002 depend on their positions in markets both outside and inside Europe.

10. At the same time, the restructuring of other industries across the whole European economy will be reinforced by EMU

This will have a range of further implications for the banking industry as well as their small-business customers, including:

the creation of a new dynamic of business threats that will prove lethal in many cases

new synergies in the way banks and other businesses combine and benefit from pan-European economies of scale and electronic commerce

These dynamics are difficult to predict, and the speed of change in banking and every other European business sector is uncertain. It is likely to vary between countries and sectors across the euro zone; the impact of euro take-up through their supply chains will also vary between industries. Many small firms, as well as retail banks, will go out of business as a result of the powerful effects of all these changes. Pressures on margins are such that retail banks will continue to reduce their branch structures, change their branch service functions, and significantly reduce their payrolls whilst developing new channels to market. They will make greater efficiency and cost gains in back-office functions by outsourcing consolidated transaction processing to shared service centres, and telephone banking to call-centres.

11. What may be good for the customer may be bad for retail banking, in the short term

As the transition period unfolds, small-firm customers in particular will be operating in a buyer’s market in relation to many retail banking services. In 2002 the personal and small-business euro customer will be in a more-powerful market position. The customer’s new opportunities – especially in terms of electronic transactions after shopping around for better deals on a pan-European basis via the internet – may be the biggest threat to traditional European retail banking. The banker’s monopoly is coming to an end. In the longer term the most successful retail banks may be those that realise their digital trading advantages. As Europe’s financial services market is deregulated over the next five to ten years, truly pan-European retail banking will emerge. New entrants are already able to compete with traditional banks on a wholly more competitive basis, with lower overheads, often better prices, sometimes better quality and much faster services, and, crucially, more-successful customer relationship management. As European retail banking opens up to this new type of competition, many traditional banks will simply be outperformed.

12. The four EU countries still outside EMU are likely to join eventually

Greece is likely to adopt the euro by 2001, and Sweden and Denmark possibly by 2002 if their imminent national referenda return a “yes” vote. The politics of UK entry are less certain, with a referendum having been postponed until after the next general election. Whether the UK joins or stays out, the role of the City of London in euro trading remains significant. Small (and large) companies trading into the euro zone from these or other countries outside it now face new business risks as a result of EMU. Most small businesses in the UK, Greece, Denmark and Sweden, and those in Switzerland as well as throughout central and eastern Europe, have yet to appreciate how the euro could fundamentally affect their operations. Their retail banks need to be prepared to advise them.

13. Customer focus is critical to survival and success ... and the euro customer is always right!

This fact of business life will be reinforced by the combined effects of EMU and other changes in the way business is conducted throughout Europe in the next few years. As trading in euros develops between corporates and their customers and suppliers, so the role of the retail banks in helping their small-firm customers to manage the transition will grow. Communications programmes are vital, both internally and externally, for every European business preparing for the final stages of EMU. They are critical to the success of retail banks in handling the currency changeover in 2002.

14. European banks should not rely on scale or share alone

Increasing the scale of a European banking business or developing its share of the market may be necessary pre-conditions for future success in the euro zone, but neither may be sufficient to guarantee survival. An alternative strategy is to emulate the agility and business efficiency of the new rivals to traditional banks in the electronic euro marketplace – supermarkets, internet traders, digital broadcasters, and other large businesses of all kinds – that decide to diversify into internet and TV banking. Every European bank should position itself to take advantage of the prospective massive consolidation in the industry across Europe. And everyone should get ready for some interesting surprises in the coming months and years as a result of EMU.


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