European banks’ market share is under serious threat from the emerging fintech companies offering bank customers more user-friendly and agile banking alternatives. According to data from Mastercard, 25% of European bank customers are considering changing to a digital-only bank by 2022. To retain their customers, banks must focus their efforts to compete with the new tech companies.

Olivier Denecker, a Partner with McKinsey & Company’s payments practice, shares his assessment of how European banks can act in the changing market and address customer demands. We also asked Wolf Kunisch, Head of Group Strategy, Public and Regulatory Affairs at Worldline Global, to share his observations at the end of this article.


You have been working with payments and consolidation processes at McKinsey for more than 22 years. What are some of the major changes in banking catalysed by Covid-19 that you think will affect how consumers, as well as banks, will act and prioritise in the future?

The transformation of the payments industry landscape started long before the pandemic, although Covid-19 has certainly accelerated it. The behavioural changes among consumers and businesses have been profound. In North America, for example, online card payments exceeded the physical point of sale card payments for the first time ever. Also, cash usage in Europe and many other parts of the world dropped quite dramatically during the pandemic. These are very positive developments in that they help advance the adoption of new technological infrastructures, with retailers and consumers connected to faster payment systems. Other new trends such as open banking have also seen a substantial uptick in adoption during Covid-19.

This pandemic-induced acceleration of ongoing change in the payments ecosystem seems to have been powerful enough to have pushed us into next-generation payments. On this side of all the lockdowns and other health and safety restrictions, cash is considered much more of a “low-value” payment mechanism, generating no data or additional revenue.

Which bank customer trends do you predict will increase and how do you see the banks turning that to their advantage?

Customer requirements have increased quite dramatically compared to ten years ago when payments were just something that needed to work in the background. Payments have become much more tangible and experience-driven, especially for merchants, but also for consumers. In the past, the payments function stayed below banks’ strategic radar, with a lot of help from big technological partners. Today it is one of the most visible aspects of the changes in banking.

Another aspect of the acceleration brought on by the pandemic is changes in the positioning along the value chain, which has also been underway for a long time. An example of this is several international card players transitioning from being focussed on cards only to branch out into the merchant space by buying companies that complement e-commerce gateway plays. In Europe, for example, we are seeing a lot of acquirers looking to expand in this way and asking themselves how they can use scale on one hand and focus on the other. We believe that focus creates value for everyone in the value chain. Banks have to make sure that they do what they think they do best and have a vision of what they want that to look like in the future. They also have to ask themselves whether they need to build everything themselves or consider scaling through partnerships and other alliances.

Banks are the second-most used service provider by consumers, next to social media, and payments are the number-one driver for that. These days, bank customers rarely go to a physical branch although they make at least one payment a day. This point of contact is very important. It has made banks increase their focus on payments and this shift comes with the increasing needs and demands of clients, growing competition and massive investment requirements to stay competitive and compliant. All of this has become a bit of a burning platform for banks as it’s a lot to sustain.

What would you advise banks to focus their attention on to survive and even benefit from the technological and digital disruption wave in the payments industry?

The strategic questions every bank should ask are ‘Where do we want to be?’ and ‘What do we want to be known for?’. While many of the products that banks offer are must-have products where one bank cannot really be much better than the rest of the market, there are areas where it is possible to differentiate. Once the direction is defined, the bank should continue to the next question: ‘How good are we, really, compared to other banks?’. Combining those two dimensions, they can find out if they want to be a leader or a follower in certain segments. If a bank has the vision and yet still is not good enough, then they need to invest.

If a bank has great ambitions, strong management and wants to be a leader within its field, then the problem is how to maintain focus. Most banks want to be everything for everyone, which is increasingly difficult unless we are talking about a major bank with a major budget. If a bank does not have the ambition of differentiating itself within payments, they still need to update their products and systems to keep up with the market. Unfortunately, most banking systems are not geared to change rapidly.

In recent years, banks have experienced increased competition from new players in fintech, payments organisations, the token industry, neobanks and challenger banks. In order to properly compete, banks can invest in new technologies, but they can also partner. Do you believe a partnership is sometimes the right solution for the banks, and which main challenges can partnerships solve?

Banks can seek a partnership with a player helping them build their skills and solutions, or they can hand over some of their businesses to a partner that can develop this even better than the bank could itself. Most banks choose to focus on creating value by partnering with other banks or specialists at creating utilities or outsourcing services. Banks can also partner in the areas where they want to differentiate to find a partner that can bring distinctive skills, whether it is in analytics, or distribution, etc. Through partnerships, banks can accelerate the road to market and to skills and spread the investment over a number of players.

Of course, there is no one-size-fits-all in banking. There are banks with a 5% share in 15 countries and banks that have a 50% share in one country. Some banks have mostly retail customers, and other banks have mostly corporate customers. The investment required to serve everyone is a very difficult element that is driven in various measures by technology, competition and regulatory concerns. All in all, it is a very big burden. The problem is that only a small part of banks’ investments go into things that are differentiating. Most of it goes into keeping up with the demands of the market and regulatory requirements.

The whole world is shifting toward digitisation and banks will benefit from this, as will everybody else. The question is, which banks will be able to adjust and gain from this new context the fastest? Banks still have a very strong position when it comes to trust and, if banks succeed in combining trust and the digital experience, they have a nice winning formula. But not all banks are equally equipped to win.

Banks must reflect on where they want to lead and where they want to follow. It is also important for banks to be conscious of where they are in a really good position in terms of core technology, or scale, etc., and where they are less so. Depending on that overlay, banks might want to double down on investing in things they really want to grow and know they are good at while in areas where they want to continue their transaction business but have no real need to differentiate, they can seek to benefit from a partner’s or a community’s investments to accelerate development or reduce the cost. Outsourcing does not mean that the banks lose focus; it means that they have chosen a focus. They ensure they can allocate managerial attention and time to specific initiatives because they can trust that the rest will be done in the right way.

An increasing number of countries are preparing or have already adopted allegedly pro-innovation rules. If, however, the objective is to gain short-term advantages or if these rules remain limited to parts of the crypto empire, this strategy will fail.

Being progressive in a sustainable manner means starting with profound philosophical, ethical and socioeconomic reflections that result in coherent changes not only of regulation but also of civil law, taxation, governance models that involve all citizens starting at a municipal level and, first and foremost, education. It is no surprise that countries that have a long and rich culture of liberal democracy and entrepreneurship, such as some Scandinavian countries and also Liechtenstein and Switzerland, are particularly progressive in the crypto domain. Also, it helps not to have a rigid legacy system that blocks innovation by default, which is why so many smaller countries are becoming fierce competitors in the crypto space that no one had on their radar ten years ago.


Another interview


As a supplement interview with Olivier Denecker of McKinsey, we asked Worldline’s Head of Group Strategy, Public and Regulatory Affairs, Wolf Kunisch, a couple of questions within the same field.

“The strategy of banks in payments is key for Worldline.”-Wolf Kunisch

Do you believe a partnership is the right direction for the banks?

Partnerships are about specialisation and investments. Banks today have a high value because they have customer relationships, and they need to make the best out of them, which can be difficult for them because they cannot invest. So, they need to find a good equation of either doing a commercial partnership where the bank can leverage its client relationship to generate business with a specialist or even enter into an equity-based partnership, where you can allocate the value of leveraging investments versus owning customer relationships in a different way. I think that there is a good reason as to why some banks do not want to move out of the game completely, but I can also see why they might have a hard time investing or competing under the specialisation that is required.

How do banks maintain their level of security when entering new partnerships?

There is a special level of security requirements in payments which is different from the average banking security. The most obvious example is PCI-DSS (the Payment Card Industry Data Security Standard), which has been around for 15 years and started as a driver for banks to look for partners and processes because they did not want to do PCI-DSS on the whole scope but would like to outsource it. It is a very old example, but all of the new requirements also in terms of regulations, rules, PSD2 etc., make it hard for a bank to keep up from an investment perspective. The whole specialised payment security is probably best done by payment companies or by those banks that have enough money to throw at the problem.

Can banks maintain a seamless customer experience when partnering?

We should not forget that this is mainly B2B. I would argue that merchants in the B2B space are used to having a single contact person at the bank and then they have to deal with different parties for different things, which will be transparent if it is well done. As long as the bank keeps the customer ownership, they can easily partner with someone for the execution.


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