In the age of globalisation, local market representation and proximity to customers is deemed essential by both US and EU banks, writes Chris De Noose, chairman of the ESBG/WSBI management committee.
In a globalising world, the requirement for local market expertise is increasingly important. Globalisation has increased the need for tailored and adapted responses to local circumstances. The need for banks with wide networks of branches that guarantee a physical presence is growing, given that a majority of retail banking customers seems to perceive non-physical forms of banking as a complement, rather than a substitute, to banking in a local branch.
A multi-channel strategy is best at meeting market demands. This locally focused, decentralised banking model, offering proximity banking to customers via the use of branches as the main distribution channel, is a characteristic of member institutions of the European Savings Banks Group (ESBG)/World Savings Banks Institute (WSBI).
In countries where savings banks and socially committed retail banks with a proximity banking model are present, these institutions are generally considered by the retail customers as a key element for regional development and the local economy. Their service, rates and channel mix is highly appreciated and the fact that savings banks have a dense regional branch network and are therefore easy to reach is a considerable advantage.
Decentralised and mid-sized
A key trend in the industrialised world has been the significant decrease in the number of banks. ESBG/WSBI’s research of the retail banking markets on both sides of the Atlantic shows that between 1985 and 2003, the US and EU have experienced reductions in the number of credit institutions of 44% and 41%, respectively.
Parallel to this evolution, there has been an increase in the number of branches in both markets over the same period: between 1985 and 2003, the number of branches increased by 12% in the US and by 7% in the EU. The number of branches per credit institution is thus growing in both the US and the EU: a sign that local market representation and proximity to customers is deemed essential.
The US’s top five credit institutions in terms of assets held 37.6% of the industry’s assets in 2003, while in the EU-15 the situation varies significantly from 22% in Germany to 84% in the Netherlands. However, the prevailing banking model continues to be characterised by small institutions with a domestic or locally focused business model: 94% of US banks have less than $1bn in assets and 87% of EU banks have less than €1bn in assets.
Stable anchor of SME finance
Small and medium-sized enterprises (SMEs) are widely regarded as the backbone of the economy. This explains why there is regularly expressed concern about the future of financing small businesses.
More concretely, the growing concentration of the banking sectors in the EU and the US has led to concern about the possible disappearance of the types of banks that fund SMEs, such as savings or mid-sized proximity retail banks. Dedication to SME financing is an important element of the savings banks’ concept of proximity banking, as local funding matches and efficiently responds to the needs of mid-sized businesses.
Evidence of the reluctance of large banks to finance enterprises has been reported in both regions. Savings banks, on the other hand, have always maintained strong and long-term relations with the SMEs in their region. In Germany, three out of four entrepreneurs have a banking relationship with a savings bank because they need a financial partner that not only knows, but also meets their needs and backs them when times are difficult.
Pluralism and diversity
WSBI and ESBG members exemplify the wealth of the proximity banking model in terms of legal forms, ownership structures and corporate social responsibility (CSR) activities. Their pluralistic nature is testament to the fact that entities that are united by a common philosophy of proximity banking need not fit into one standardised mould to be successful at what they do. Retail banking needs are best served by markets in which actors with different company ownership forms and legal forms are able to compete and thrive alongside one another.
To allow a truly pluralistic market to thrive, it is important to recognise that no form of ownership is superior to another – different forms exist to fulfil different missions and there is more than one legitimate mission that can be fulfilled by entities offering banking services.
Proximity banking model
The aim of all savings banks is, at its most basic, the profitable provision of banking services. Members of ESBG/ WSBI pursue a banking model with a double bottom line: they aspire to meet the (local) financial needs of all retail banking customers, including groups that are generally not well serviced.
If pluralism was abandoned, one concern is that increased market power resulting from high levels of concentration would lead to increased social exclusion or a ‘crunch’ in SME financing, respectively. Access to affordable financial products and services at a nearby bank branch is a major concern for retail clients and these needs are efficiently met by savings banks.
Access to finance is not only vital for SMEs, however; it is equally important for customers in the lower income range. Providing access to all strata of society keeps or moves the lower income customer segments into the formal financial system, allows them to save, to take loans, to insure their homes and – in many cases – to break the chains of poverty. That is why access to finance that is triggered, for instance, through the provision of remittances is one of the underlying principles of our members’ business activities.
There is value, therefore, in promoting pluralistic markets that leave room for all types of ownership structures while fully respecting the principle of ‘same business, same risks, same rules’. It maintains customer choice and is therefore a means of preserving competitiveness. The alternative, which is to have a small number of players with similar structures, would limit competition and would therefore be detrimental to the consumer.
Past lessons
The business model of the savings banks, which often goes back to the 19th or even 18th century, has developed into an efficient, social, pluralistic and competitive proximity banking model. Its rich and diversified heritage has contributed to and will help further in meeting the challenges that the banking industry will face this century.
Proximity banking will be the focal point of attention in the coming months. In Kuala Lumpur on September 20-22, representatives of savings and proximity banks will gather for the 21st WSBI World Congress to discuss ‘Savings banks: the retail gateway to a global market. Driving sustainable development’.
The aim is to answer questions such as: In an ever globalising market, how do savings and retail banks contribute? How can retail and savings banks be gate-openers to globalisation benefits for customers? As retail banks that pursue a return both in terms of profit and in terms of society, how can savings banks enhance their role as socially committed actors and drivers of sustainable development?
Having a say
The EU/US Retail Banking Forum in Washington on November 16-17 will run discussions on supervision, payment services and retail banking, with a special focus on mortgage credit. It aims to be a platform for the exchange of views and knowledge between professionals in the fields of retail banking and financial regulation. So consumer and SME organisations, regulators, academics and players in other banking sectors have an opportunity to present their opinions on current and future challenges in the banking sector at the WSBI/ESBG World Congress and the forum.
The proximity banking model will play a major role in efficiently responding to these challenges.
