report will explain and analyse:
practical impact of EMU on European retail banking
operational challenges involved in introducing euro notes
and coins in January 2002 and the withdrawal from circulation
of legal currencies by 1 July 2002
prospects for those EU countries currently outside EMU who
may decide to adopt the euro in the next few years
implication of EMU for other retailers
range of business strategies being implemented by local
and international banks throughout the EU, and by their
global rivals, to manage these challenges
new sources of competition for euro retail banking
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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
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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launch of the euro has been a success
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.
integration will have a more far-reaching impact on retail banks
in all European countries than the implementation of the monetary
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.
The euro creates a new era for European retail banks and their
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.
case studies include:
Nationale de Paris
Royal Bank of Scotland
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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
immediate practical effects of EMU during 1999 have been and continue
to be wide ranging
From the outset,
for retail banks these effects included:
foreign exchange handling services
- new opportunities
for cross-border payments transmission and for pan-European
and global cash management
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.
Retail banks are currently preoccupied with practical operational
priorities for the forthcoming currency changeover
- final conversion
programmes for IT and other systems, including cash machines
education and training programmes for staff and customers
logistical planning for the supply and distribution of euro
notes and coins and the collection and withdrawal of the legacy
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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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.
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
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.
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.
Consolidation of the European banking industry is likely to see
todays six biggest banks transformed, by merger, to become
just three or so global aspirants within the next
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 Europes 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.
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:
of a new dynamic of business threats that will prove lethal in
in the way banks and other businesses combine and benefit from
pan-European economies of scale and electronic commerce
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.
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 buyers 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 customers 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 bankers 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 Europes 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.
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.
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.
banks should not rely on scale or share alone
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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