No Success for Foreign Banks Without a Network of Local Branches to Be Close to Private Customers

The European banking market is still highly fragmented especially with respect to retail banking. Customer proximity is essential for success in this segment of the banking business. This is the main reason why the integration of retail banking markets is still incomplete.

European banks that aim at expanding their retail banking business to other EU countries either have to establish their own network of branches or have to take over banks with an already existing branch network in the target country. Both strategies are, however, very expensive. This is the main result of a survey conducted by the Centre for European Economic Research (ZEW) Mannheim, Germany, among 200 financial market experts. The experts were asked for the reasons for the low degree of retail banking integration in the EU.

According to the experts, retail banking integration mainly takes place through local business of foreign banks in the retail banking sector of other EU countries. Cross-border business is much less important. Hence, the best strategy to get access to foreign retail banking markets seems to be to establish branches abroad or to take over foreign banks with an already existing network of branches. This strategy ensures customer proximity, which is still important for success in the retail banking business. For this reason, more than 50 percent of the experts regard the lack of a local branch network as the main reason for the low degree of retail banking integration in the EU.

Further reasons that prevent banks from entering foreign retail markets are the significant market share of domestic banks, such as the Sparkassen in Germany, and differences with respect to contract and civil law. Further obstacles are differences in consumer protection and product regulation. Differences regarding tax systems or technical difficulties are of minor importance.

Almost 38 percent of the experts regard the lack of costumer confidence in foreign banks is an important barrier that discourages banks from entering the retail banking markets in other EU countries. 23 percent of the experts even think that the lack of costumer confidence is a very important barrier to the integration of retail banking markets. In Germany, costumer confidence in foreign banks has suffered from the international financial market crisis, which caused bankruptcies of credit institutions like, for example, the Islandic Kaupthing Edge Bank.

Despite these obstacles most of the experts expect that the degree of retail banking integration in the EU will increase in the long run. Only one third of the experts believe that the integration of retail banking markets in the EU will not increase.

Contact

Matthias Köhler, Email: koehler@zew.de