A vast number of nontraditional banks are already entering some European retail banking markets. To help incumbent banks better understand the new entrants’ rationales and competitive platforms, and hence assess potential threats and develop appropriate responses, we can group these nontraditional banks into five categories:

1. Product range expanders such as insurance companies, building societies, and independent mortgage companies. These competitors leverage large captive customer bases by cross-selling an expanded range of financial products. All pose a threat to traditional banks, insurance companies in particular, because they can "lock in" property and casualty and life payouts to customers into customer deposit accounts in the insurer’s own banking operations.

2. Core business supporters—nonfinancial companies offering products in order to foster customer loyalty, increase sales of core nonfinancial products, and understand customer buying behavior. Prime examples are automotive and telecommunications companies, retailers, and post offices. Since making money on banking products is not their chief objective, these players often introduce "irrational" pricing.

3. Global product specialists that attack specific product markets with the aim of dominating them globally. This category includes the largest mutual fund companies (for example, Fidelity) and investment banks, as well as MBNA, Visa, Amex, and General Electric Capital Services. These players base their strategies on superior skills. Competition from them is not new, but it is expected to grow as Europe increasingly features in the expansion strategies of these usually US-based companies.

4. Price arbitrageurs exploiting pricing inefficiencies and cross-subsidies in the retail banking industry. Entrants include discount brokers (in securities and mutual funds) and niche banks engaging in cherry-picking in such products as savings accounts and low-risk mortgages. The effect of these players on margins can be dramatic, even if their impact on volume is likely to be limited.

5. New interface creators that create and manage the interface between product suppliers and customers, thereby transforming the buying process from retail to wholesale. Players in this category include various types of banking product brokers, buying groups, affinity associations, and gateways/gateway operators such as potentially Microsoft. This group could pose the greatest threat of all, though the facts that it is still mostly in the pipeline and that its strategies have not yet been fully developed make this difficult to assess at this point.

Strong competitive platforms

All these new entrants, and particularly product range expanders and core business supporters, seem to have strong competitive platforms (see exhibit). Notably, most of them aggressively exploit new low-cost distribution channels and play on traditional retail bank weaknesses such as cross-subsidies and poor sales and marketing skills. Several of the categories capitalize on inherent strengths, such as large captive customer bases, strong customer relationships and/or brand names, and natural presence at the point of purchase.

Bottom-line impact

All told, these new competitors are likely to have a considerable effect on traditional banks’ revenues. All five categories will hit both volume and margins, although to varying degrees. Scenarios developed for the Swedish market suggest that as much as 20 to 45 percent of existing retail banking revenues are at risk, representing some 45 to 90 percent of the current cost base. Other European markets (apart from Switzerland) are likely to be as vulnerable as Sweden to this new competition, to judge by margin, cost, and productivity comparisons across countries.