European financial companies losing edge to China, US; need to refocus as London’s star dims, report says

Chad Bray

European financial services companies are losing their competitive edge globally and could lose out to more nimble players in China and the United States if they do not use technology and partnerships to reinvent themselves, according to a new report by Luxembourg for Finance.

Financial services companies in Europe will need to provide services and third-party products through one-stop digital platforms, increase their sustainable investment offerings and prepare for a new financial landscape as London plays a smaller role as a global financial centre following the United Kingdom’s expected exit from the European Union, according to the report, which was prepared in conjunction with consulting and accounting firm PwC.

“Where China really is starting to emerge, not only as a big player and trend setter, is in the area of payments,” according to Nicolas Mackel, the chief executive of Luxembourg for Finance, a public-private partnership for economic development.

Ant Financial’s Alipay, Tencent’s WeChat Pay and other Chinese mobile payment platforms “are becoming examples of where the industry will be going worldwide in terms of how to mix e-commerce activities with financial services activities”, he said. Ant Financial is an affiliate of Alibaba Group Holding, the parent company of the South China Morning Post.

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Following the global financial crisis, European financial institutions have struggled to digest the increased burden and costs of compliance and risk management regulation, while counterparts in Asia and US have “been able to forge a stronger position for itself in the global marketplace”, according to the report.

Meanwhile, their Chinese banking counterparts have gone from having no banks among the 10 largest globally to accounting for more than half of tier 1 capital among the world’s biggest lenders, according to the report. The profits of China’s 10 largest banks also now dwarf Europe’s biggest lenders, accounting for US$1.89 trillion in 2017.

“China’s strong economic growth naturally contributed to booming bank business in the Asian region and local support from the government continues to be a strong driver of bank growth,” the report found.

The report comes as growth in Europe has slowed in recent years and low and negative interest rates have eaten into bank profits.

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Fitch said on Monday that it expects gross domestic product in Eurozone countries to grow at 1.1 per cent this year and next year, but warned growth could be “materially lower” if the UK exits the EU without an agreement.

UK Prime Minister Boris Johnson has pledged the country would leave the EU “do or die” at the end of October with or without a deal, but Parliament voted to block a no deal Brexit this week and rejected his efforts to force a snap election.

The uncertainty of Brexit has forced financial companies with London bases to shift staff and seek new licences on the continent in France, Germany, Ireland and other countries to guarantee they can continue to serve European clients.

“We recommend firms disrupt themselves to become cost effective, nimble and competent, prioritising the efficient use of data and new technology,” John Parkhouse, senior partner at PwC Luxembourg, said.

China has a distinct advantage over the US and Europe in terms of mobile payments, but Europe’s payments sector is in a “strong position” to deal with the changing industry, according to the report.

“Across the globe, we have already seen a number of countries adopt real-time payments, with many more in the beginning phase of implementation,” the report found. “The redesign and upgrading of payments infrastructure is allowing for innovation to take place in markets around the world. Clients are demanding seamless payments and players in this space are well on their way to providing it.”

By 2025, the US and China will have an advantage over Europe in venture capital financing, “which could mean that the competitiveness gap of European companies with North American and Asian ones may widen due to insufficient private financing”, the report found.

“Should European [asset and wealth managers] become more active in this space, we believe this growth could expand faster than expected,” according to the report.

At the same time, Europe has embraced sustainable investing and is “strongly positioned to capitalise on this opportunity and gain an advantage over its regional rivals”.

But, China is “catching up very fast”, Mackel said.

“If look at what is happening in the China green market, they are catching up very fast. They have an enormous growth rate in terms of greening their financial products in order to finance environmental projects, renewable energy projects and so on,” Mackel said. “We have been very active in connecting Europe with China on that.”

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