Digital bank rush

WHEN JPMorgan Chase & Co finally opens its digital bank in Germany next year, it won’t be alone: The country is becoming a honeypot for big foreign lenders launching online-only brands.

At first glance, this is mystifying, given Germany’s deserved reputation for being among the toughest markets to make money in consumer finance.

But what’s going on says a lot about how the business is changing and the competition that established lenders everywhere will increasingly face.

Deutsche Bank AG and the legion of local savings banks in Germany needn’t panic yet, however.

A splintering of retail banking is coming to many markets, but much of the cash the new entrants are chasing is in the hands of older, less digitally active customers who could prove hard to reach.

Real change in market shares is likely to proceed slowly.

JPMorgan will launch Chase Germany in the second quarter of next year, about five years after the platform debuted in the United Kingdom.

Spain’s BBVA SA opened a digital business in Germany this summer, trying to woo customers with higher rates on current accounts (or checking accounts for US readers).

Banco Santander SA, BBVA’s Spanish rival, recently expanded its Openbank brand into Germany too, alongside the more obvious markets of Mexico and the United States.

Last month, Credit Agricole SA’s new strategic plan emphasised Germany in the French lender’s forthcoming set of digital launches; BNP Paribas SA’s HelloBank! is a relative veteran having pursued growth there for several years already.

These names are all going up against the formidable army of thousands of trusted local institutions with deep roots: the savings banks known as Sparkassen, which aren’t profit-seeking and squeeze the returns available for everyone else.

The newcomers will also battle big established lenders like Deutsche Bank, which has about one-quarter of Germans as customers, and has already spent heavily on modernising its own apps and is promising an artificial intelligence-driven revolution in its retail services as it tries to boost profits.

Germany also has its own clutch of native neobanks, such as N26.

So, what’s going on? How many digital banks does one country even need?

Two simple answers: After years of technology upgrades, branchless, digital-only banks have become incredibly cheap to set up; and Germany has a vast pool of deposits to pursue, more than any other eurozone market.

Technology and regulation are no longer barriers to entry in European markets and initial investment needs are low.

This means the breakeven level of customer deposits banks need to capture has fallen dramatically, according to UBS Group AG analyst Jason Napier.

There are nearly €4 trillion (US$4.7 trillion) of deposits to fight over in Germany, which is about €1 trillion more than France, the next biggest market.

The cost of those deposits in terms of the interest that customers expect is higher in Germany than several other European markets at about 0.8% currently, according to data compiled by UBS.

But with official interest rates expected to settle at about 2% in the years ahead, new entrants can turn a nice profit just collecting customer cash and holding it at the European Central Bank.

Neobanks like Monzo in the United Kingdom don’t do much more than this, while JPMorgan’s Chase UK operation has collected a few tens of billions of pounds from British savers as a small but cheap source of extra funding for its international investment banking business.

Chase is expected to do something similar in Germany.

New competitors will take some market share from existing players in Germany, but their impact on deposit pricing might not be huge.

Deutsche Bank, for instance, hasn’t increased the rates it pays to customers in response to BBVA coming into its market, and yet it still drew more new deposits than its Spanish rival in recent months, according to an insider.

Brand recognition still counts for a lot.

This will change, but it will take time.

The most profitable accounts are likely to be concentrated among older, less digitally active clients who don’t aggressively hunt for the best rates.

But banks that have those customers will see these income pools naturally dwindle over time.

Neobank account openings appear to be concentrated among younger people, who have less savings for banks to target, as well as some older depositors who now hold accounts across more institutions than they used to, according to Napier.

Numbers from Credit Agricole suggest digital banks win 40% of new account openings, but only 3% of revenue, Napier said.

In the United Kingdom, growth in new accounts hasn’t been matched by a rise in the number of people recorded by regulators as switching accounts.

The strategic battle unfolding involves waves of new banks launching, all able to make reasonable profits from a much smaller footprint.

However, they all ultimately hope to become the primary bank for younger customers when they mature and use more financial services. — Bloomberg