Swiss retail banks expect technology to increase competition but not as dramatically as anticipated.

A new study by auditing and consulting firm EY, in collaboration with the University of St. Gallen, reveals that while incumbents are aware that bigtechs, neobanks and fintech companies are driving innovation, they remain confident that their ability to maintain strong customer relationships and deliver high-quality advice will help them retain a competitive edge.

The “Retail Banking 2035” report, released in September 2024, shares insights from 33 retail banks in Switzerland on ten key areas thesis about the future of retail banking. It identifies the most important challenges and opportunities facing the industry through 2035.

Impact of technology is overestimated

The research found that Swiss retail banks expect technological innovations to intensify competition in the medium term. However, the short-term impact of cutting-edge technologies such as artificial intelligence (AI), blockchain and quantum computing are largely overestimated.

Swiss retail banks believe that for a new technology to have a significant impact, it must align with customers. However, these needs are not expected to change dramatically in the next ten to fifteen years. Employees and customers also have to want to use this new technology, the respondents said.

Taking the example of AI, the respondents said that while the technology has received a lot of hype, it is still perceived as merely a tool for increasing efficiency and improving chatbots, with applications like robo-advisors receiving mixed success.

Traditional banks’ strengths over newcomers

Despite the rise of fintech, Swiss banks believe they still maintain several advantages over competitors. These advantages, which include capital strength, brand trust, a diverse product offering and long-established customer relationships, position incumbents well against fintech companies and neobanks, whose market penetration remains limited due to smaller customer bases and challenges in scaling their business models.

The respondents argue that while Switzerland has seen a sharp increase in fintech companies, which grew from less than 200 players in 2016 to nearly 500 in 2023, the experience with these new providers has not been very dramatic so far.

Moreover, fintech companies have not been able to revolutionize the business. If anything, they are actually moving steadily in the direction of the traditional banks.

Finally, Swiss retail banks expect that the vast majority of local customers will continue to seek personal advice in the future, especially during key life events such as buying a home, saving for a pension or wills and inheritance. This means that traditional banks will maintain an edge over new market entrants.

Minimal threat from bigtechs, retailers and telcos

When it comes to bigtechs, Swiss retail banks feel that the country’s small size and peculiarities, such as its four national languages, many cantons and different cultures, represent significant challenges for the likes of Apple and Google.

Additionally, banking regulations and the high level of trust that Swiss customers place in domestic financial institutions make it difficult for bigtech companies to compete directly.

Swiss retail banks are also unconcerned about competition from domestic retailers and telecom companies. Although these players have access to vast amounts of customer data and the tools to use these data to offer financial services through open banking, they would not be able to maintain accounts or lend due to regulatory restrictions. This would limit their potential and ability to compete in the sector.

If competition from outside the banking industry is to intensify, Swiss banks believe insurers are their most likely threat. This is because insurance advisors traditionally have a closer relationship with their customers than bank advisors, giving them an edge in personal interactions and trust.

Overall, Swiss retail banks perceive their biggest competition as coming from within the industry itself. According to the respondents, this is because all of the retail banks in the country are pursuing technological upgrades, and that none of them has achieved groundbreaking results so far. For example, the introduction of digital pension solutions prompted competitors to respond with similar solutions designed to boost volumes. However, in the end, no one saw an increase in volumes.

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