Global retail banking: A particular breed heading for extinction

When HSBC and Citigroup were expanding, they were offering best-in-class consumer banking. As technology improved, local rivals have overtaken them

Despite a multitude of existential threats, traditional deposit-taking banks with brick-and-mortar branches look set to survive a while longer. But there’s one particular breed of this type of lender that’s headed for extinction: The global retail bank. While some consumers will still fancy popping into their local bank, why would anyone need an international corporation to provide this service?

Since the financial crisis, pressure from regulatory demands and the squeeze on margins from declining interest rates has forced lenders to concentrate on what they excel at — be it commercial, retail or investment banking. For those big lenders still clinging on to their overseas consumer businesses, the pandemic has made retreat inevitable.

HSBC Holdings is going to “stop trying to be everything to everyone,” Chief Executive Officer 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-return businesses in wealth management and Asia.

It’s not alone in reversing a decades-old retail strategy. Citigroup Inc is reportedly considering cutting back its sprawling Asia-Pacific consumer operations. Last year Spain’s Banco Bilbao Vizcaya Argentaria sold most of its US lending business.

Few banks have succeeded in being truly global, especially on the consumer side. Customer habits vary greatly between countries, reducing potential economies of scale. And the cost of misunderstanding local lending risk can be disastrous: HSBC’s US purchase of Household, a subprime loan provider, cost it billions of dollars in writedowns.

The international giants’ original proposition of providing a premium service no longer cuts it. When HSBC and Citigroup were expanding outside their home markets, they were offering best-in-class consumer banking. As technology improved and got cheaper, local rivals have overtaken them. Domestic lenders can now offer decent access to international markets, too.

For customers there’s no glamour now to doing business with an international bank. And for the lenders themselves, being subscale in any market is expensive because you still have to comply with ever-changing regulatory demands for better compliance and risk controls — especially money-laundering checks.

The pandemic has made things worse. Digital banking needs heavy investment and it’s making many branches redundant. Lending income has taken a beaten as interest rates have declined. At HSBC, net interest income in its consumer and wealth management activities dropped 13 per cent in 2020 to about $15 billion. At Citi, revenue in its international consumer operations fell 10 per cent to $10.8 billion.

With no end in sight to the pressure on rates, it makes sense for both firms to pivot toward managing wealth. It’s a way to increase fees to offset the decline in lending income. Wealthy clients often look to spread their money across domestic and international lenders.

Citigroup’s and HSBC’s retail retreats are unlikely to cause much of a stir, or leave consumers worse off. There may be some smaller companies that find it harder to move money around if they’re not taken on by the banks’ corporate banking units. 

The biggest regret may be that Citi and HSBC held out too long. The UK bank said it may have to sell its French business at a loss. Citi is reportedly weighing up whether it would be able to find a willing buyer for each international unit.

The time of global consumer banks is probably over. And with politics and regulation playing a bigger role in the post-pandemic economy, it will be a while before a giant fintech can take their place on the global stage.