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European banks hampered by ‘1970s’ tech: Deloitte

Europe's banks are under siege from digital disruption, and must make huge IT investments to remain competitive, according to a report out on Monday.

Deloitte wrote that established retail banks would have to cut costs, as deposit guarantees and new technology lowered barriers for new-style entrants into the industry.

Patrick T. Fallon | Bloomberg | Getty Images

Two years ago, Royal Bank of Scotland suffered a computer crash that strung on for days, meaning customers could not deposit or make payments. And earlier this year, NatWest suffered a breakdown in its mobile banking service.

"Banks' core competitive advantages over new entrants are being eroded by technology and regulation," said Zahir Bokhari, lead banking partner at the professional services firm, in the report.

"As competition from alternative sources of funding intensifies, banks will need to re-invent their technology infrastructure. It is not credible to anticipate healthy returns while operating inflexible IT systems based on 1970s technology."

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Since the 2007-08 financial crisis, regulatory policy has shifted in favor of competition for established banks. Plus, off-the-shelf software means a small bank can cost under £10 million ($17 million) to establish and just £5 million a year to run, according to Deloitte.

Banks are also under threat from electronic payment providers like PayPal, which provide convenience to customers as the use of cash diminishes. Cash-rich internet players, such as Google and Apple, are also demonstrating an interest in this space.

Meanwhile, new technology has enabled non-bank financing on a far smaller level, via peer-to-peer (P2P) lenders like the U.K.'s Funding Circle.

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The U.K. alternative funding market—which includes crowdfunding, P2P and peer-to-business lending and invoice trading—will raise £1.6 billion in 2014 and provide £840 million worth of business finance, according to a report by charity Nesta.

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