Europe's financial services sector must reinvent itself in order to survive disruption and remain competitive, according to a new joint report from PwC Luxembourg and development agency Luxembourg for Finance.
The report published Monday urges Europe's banks and wealth managers, along with payment service providers and insurers, to proactively embrace "Amazonization" and the shift in power to consumers driven by online platforms.
The European financial sector has lost significant ground to U.S. and Chinese counterparts over the last decade. Since 2007, China's banking sector has grown its share of global tier one capital from almost nothing to around 53%, while Europe's market share has tumbled from 73% to 18%, the report outlines.
Tier one capital is a core measure of a bank's financial strength, from a regulator's perspective. It refers to the bank's "core capital" which is comprised of equity capital, held in common stocks, and disclosed reserves.
European banks are currently experiencing will documented profitability struggles and PwC researchers suggested that upcoming regulations would increase their already stringent lending requirements.
'Amazonization'
The report highlights that new online platforms will become the dominant customer interface with the continent's financial services industry, offering similar bespoke search, purchase and management capabilities to Amazon. This will offer a new level of transparency, comparability and convenience which will directly impact the four main sectors of financial services.
Bank of America Merrill Lynch is one example of a Wall Street competitor seeking to achieve this monopoly. In October 2018, the megabank introduced a seamless transition mechanism via its app between retail banking and investment management brokerage capabilities.
Banks will need to become whole solution one-stop shops for clients' specific financial needs, aggregating their own products alongside innovation available through third parties.
The research mirrors a report released last week from management consultancy Bain & Company. Following its release, partner Mike Kuehnel emphasized the need for tech investment and partnerships if European banks are to catch Wall Street peers.
"I see many banks that are more tactical and opportunistic about their changes they are embarking upon across products and clients, and also their technology investment," Kuehnel told CNBC's "Squawk Box Europe".
"Let's take J.P. Morgan as an example — they are spending nearly $11 billion on a yearly basis into technology, and they have a very dedicated change agenda behind that. They understood that this is less about maintaining their legacy system, but more about investing into new technologies, so driving innovation."
The mainstreaming of sustainable finance, underpinned by millennial preferences, and the multi-polarization of Europe's financial hubs post-Brexit, will also force the sector to adapt.
John Parkhouse, senior partner at PwC Luxembourg, said: "With Europe's financial industry facing up to Amazonization and the critical themes like ESG (environmental, social and governance) innovation and technology that accompany it, more traditional players must focus and invest, if they want to remain competitive on a global scale."
"We recommend firms disrupt themselves to become cost effective, nimble and competent, prioritizing the efficient use of data and new technology."
Parkhouse also called for a "deepening of cross border services" and fresh emphasis placed on innovation and digitalization, which he said can be achieved by completing the EU's banking and capital markets union (CMU), as well as alignment at the national level.
EU action
Luxembourg Finance Minister Pierre Gramegna said that the completion of the CMU should be a priority, as it will help speed up the further completion of the single market and increase access to a wider source of cross-border financing and investment opportunities.
"Paradoxically, Brexit has not only increased pro-EU sentiment in the remaining EU member states but has also underscored the benefits for companies, be it in finance or in other industries, of having unfettered access to the world's largest economy and trading block," Gramegna said.
In particular, the report argues that the loss of the City of London from the EU will dent competitiveness with global hubs like New York and Singapore in the short term, but will eventually strengthen other European financial centers such as Frankfurt, Paris, Amsterdam, Dublin and Luxembourg.