Germany: Shake-up in retail banking amid strong economy

As the largest economy in Europe, Germany is widely renowned for the strength and stability of its domestic economy. The country’s economic robustness appears set to continue, with the Ifo Institute for Economic Research forecasting the economy will grow by 2.6% in 2018. Many sectors of the economy are flourishing, but it is growing household spending that will drive this stronger growth, as in April 2018 spending unexpectedly increased as consumers grew more upbeat about their income.

Unemployment levels continue to decrease, falling to 2.5 million people in March 2018, 19,000 less than the previous month. This is expected to place an upward pressure on wages, which along with increased job security and low borrowing costs have caused a consumer-led upswing.

With Germany’s economy on course for further expansion, there are significant shifts happening in the retail banking landscape, which are expected to transform the way in which consumers are managing their finances and decide the future of many providers in the market.

The structure of the country’s retail banking sector has stark differences to many of its European peers. Housing around 1,700 independent lenders, of which four-fifths are regional savings and cooperative banks, Germany’s retail banking market is much more fragmented. For decades these smaller institutions have dominated over half of the market, with the five largest banks controlling less than half of the market (compared to, for instance, 85% of the market in France).

Yet the banking landscape is now transforming as banks are shedding their branches en masse as the FinTech revolution in the country gets off the ground. The question now remains whether these numerous lenders can adapt, and how they can do so.

Disruption of the status-quo

In the past, Germany’s banking sector generally functioned according to the myth that retail banking was unprofitable for larger institutions. The biggest banks traditionally perceived retail banking as much less ‘glamorous’ than corporate and investment banking, believing that smaller lenders were much more suited to the retail landscape.

This notion is now being eroded, which is expected to have considerable consequences for both financial institutions and their customers. For instance, Germany’s largest financial institution Deutsche Bank this month appointed a retail specialist as its new CEO after almost thirty years of investment bankers taking the top position.  This will likely mean a greater focus on retail and commercial banking in the bank’s home market and a deliberate shift away from its previous strategy of seeking profit growth through prioritising investment banking operations.

Meanwhile, coping with low-interest rates and a rising regulatory burden has put a substantial strain on the profitability of smaller institutions. With the additional pressure of growing competition from FinTechs and foreign banks, the result is that too many financial institutions are competing for a largely static pool of business within Germany. It has been estimated that the smallest banks holding less than €2 billion in assets will struggle to survive as independent institutions, and Oliver Wyman, a management consultancy, predicts as few as 150 - 300 of the country’s numerous institutions will survive the next few decades.

The demise of branches

Branch closures are already in full swing, with almost a quarter having been lost since 2000, according to banking group KfW, and roughly half of the country’s branches in operation today are expected to close by 2035. Digital, branchless services are certainly on the rise in Germany, driven by a surge in start-ups as well as an increased innovation amongst established providers.

In fact, 2017 was a record year for FinTech investment in the country, as investment rose 88% from the previous year to €4.3 billion. While larger banks have the funds and capabilities necessary to invest heavily in digital services, this has naturally proven much harder for smaller savings and cooperative banks.


Buoyant consumer sentiment, strong exports and budget surpluses, low unemployment and a growth in birth rate underpin the economic growth Germany has experienced in recent years and are a cause for optimism moving forward. Germany has been also catching up with the likes of London as a magnet for investors in the financial technology sector.

Changes in the market, including the increased regulatory pressure, low-interest rates, and the need to innovate in the face of emerging FinTechs and changing consumer preferences, are now causing the reallocation of the power smaller banks had held for many years. Arguably, this provides a once in a generation opportunity for Germany’s big banks to take the lead in retail banking.

Many now predict that a large proportion of the smaller providers might disappear over the next few decades and a consolidation of banks is likely in some cases, while larger banks will need to adapt to the increasingly innovative banking environment and changing consumer preferences.

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