According to the recent study by PwC, the significant profitability gaps, and low earnings performance is a Europe-wide phenomenom, and the current business model needs to be improved necessarily.

In the recent years, the banking sector in Europe suffered from the financial crisis of 2008 and from the sustained European debt crisis at 2010. The banks have to comply with much more complex regulations outlined by the European Central Bank and struggle with the still low interest rate. In addition many startups provide financial services such as lending, investing or payments so watch-and-see approach is not a winning strategy any more.

Let’s have a look at a banking sector from a profitability perspective. According to the recent study by PwC, the majority of the European banks showed significant profitability gaps and did not achieve their CoE (cost of equity). Low earnings performance is a Europe-wide phenomenom. These figures imply that the current business model needs to be improved necessarily.

The banks may consider becoming so called “platform banks.” It could be achieved by establishing new products and integration of offerings from FinTechs. In this model, the banks do not control the whole value chain and share the client basis with subcontractors. It will enable the incumbents to concentrate on the high-margin business. Moreover, the banks will have to integrate the external offerings and appear as an interface between clients, products and external providers.

The second possible option is to become the “digital banks”. Although the current incumbents have improved their digital offerings for the clients, the back-end infrastructure remains traditional. The modernization of the back-office processes will give them the competitive edge and give the power to satisfy the needs of upcoming generations of digital natives.

The last solution taken into consideration is operating as OEM banks. This model is inspired by automakers and is characterized by a low degree of the vertical integration. The key factor is the efficiency of the activities performed by the subcontractors. These external providers can take over non-client-relevant processes such as day-today servicing of loans.

The banking sector in Europe is at the turning point. The above mentioned models of new operating plans are only a few of many possible solutions which the banks can apply to their new strategies. The specialists claim that it is the fact that the vital decisions need to be made and that financial companies have to rethink their approach to business. To see the results of these changes the customers will have to wait-and-see a little longer.