Despite a host of existential threats, traditional deposit banks with physical branches appear poised to survive a little longer. But there is one particular breed of this type of lender that is on the verge of extinction: global retail banking. While some consumers will still want to go to their local bank, why would anyone need an international company to provide this service?
Since the financial crisis, pressure from regulatory requirements and squeezing margins due to falling interest rates have forced lenders to focus on their areas of excellence, be it commercial, retail or banking banking. investment. For large lenders who still cling to their overseas consumer activities, the pandemic has made the pullout inevitable.
HSBC Holdings Plc will “stop trying to be everything for everyone,” CEO Noel Quinn said on Tuesday, a familiar refrain in the industry. The UK-Hong Kong bank will explore strategic options for its US retail network and is in talks to sell its French consumer unit, redirecting capital to higher-yielding companies in wealth management and Asia.
She’s not the only one to reverse a decades-old retail strategy. Citigroup Inc. is reportedly considering scaling back its sprawling consumer operations in Asia-Pacific. Last year, Spanish bank Banco Bilbao Vizcaya Argentaria SA sold most of its lending business in the United States.
Few banks have managed to be truly global, especially on the consumer side. Customer habits vary widely from country to country, reducing potential economies of scale. And the cost of misunderstanding local credit risk can be disastrous: HSBC’s US purchase of Household, a subprime loan provider, cost it billions of dollars in write-downs.
The original proposal of the international giants to provide a premium service is no longer up to par. When HSBC and Citigroup were expanding outside of their home markets, they provided top-notch consumer banking services. As technology improved and became cheaper, local rivals overtook them. Domestic lenders can now also offer decent access to international markets.
For clients, there is no longer any glamor in doing business with an international bank. And for the lenders themselves, being undersized in any market is expensive, as you still have to comply with ever-changing regulatory requirements for better compliance and risk controls, especially money laundering controls. ‘silver.
The pandemic has made matters worse. Digital banking requires heavy investment and makes many branches redundant. Loan income has taken a hit as interest rates have fallen. At HSBC, net interest income from its consumer and wealth management businesses fell 13% in 2020 to around $ 15 billion. At Citi, revenue from its global consumer operations fell 10% to $ 10.8 billion.
As the pressure on rates is not in sight, it is logical that the two companies are moving towards wealth management. This is a way to increase fees to compensate for the decline in credit income. High net worth clients often seek to split their money between domestic and international lenders.
Retail withdrawals from Citigroup and HSBC are unlikely to cause a stir or make matters worse for consumers. Some small businesses may have a harder time moving money if they are not supported by banks’ business banking services. Some jet set customers will have to reorganize their banking operations while on the go.
Unlike trading and investment banking, there is too much competition in consumer banking services in many parts of the world. In addition, unlike the Spanish Banco Santander SA, which dominates in many countries in South America and Europe, many of the retail businesses of Citi and HSBC are not market leaders.
Perhaps the biggest regret is that Citi and HSBC have held up too long. The British bank has said it may have to sell its French operations at a loss. Citi would question whether it would be able to find a willing buyer for each international unit.
The days of global consumer banks are probably over. And with politics and regulation playing a bigger role in the post-pandemic economy, it will be some time before a giant fintech can take its place on the global stage.
This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.
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James boxell at [email protected]