Technological development will transform the way banks do business in Spain. First and foremost, besides conducting their brick and mortar business, banks will have to increasingly interact with clients through digital channels, ensure they deliver high-quality customer experiences, and keep pace with ongoing innovation. This implies undertaking significant investments and pursue transformation plans that will extend over several years.

Spanish banks, however, do have some time to adjust. While the new generation of digitally native customers will eventually become the majority, the bulk of Spanish bank customers today are still traditional (that is, not technologically upskilled), favor face-to-face interactions, and do not strongly push banks to accelerate the change. The still-capillary branch networks of Spanish banks allow proximity to customers and will remain, in our view, key in banks' omnichannel commercial strategies, even if transactional duties move to digital channels.

Risk of business erosion from the emergence of fintechs is limited, in our view. Nevertheless, we see these new entrants playing a role in pushing banks to transform themselves, heightening price competition in the industry and potentially leading to the commoditization of some banking products. While large in numbers, fintechs are very small in size. They focus on very specific niches, are in the early stages of development, are not particularly favored by the existing regulatory framework, and (more importantly) lack the investment they would need to become true challengers for incumbent banks. Neobanks or tech behemoths, if they truly penetrate the market, could be more of a threat.

The Spanish banking system, in turn, is well rooted, with five institutions controlling over 70% of the market. Furthermore, as a result of client-focused--rather than product-focused--strategies, banks have built up deep relationship with customers. Spaniards tend to concentrate their financial relationships with a limited number of banks, and are fairly loyal, which gives resilience to banks' franchises.

Spanish banks are coping with tech disruption by increasing their IT infrastructure and teams, adding digital banking, developing their digital brands or investing in fintechs, and ultimately collaborating in bigger high-tech sector and regulatory projects. S&P Global Ratings, however, sees Spanish banks digitalizing at two different speeds, with large banks taking the lead in embracing technological innovation and smaller players lagging. With mostly regional franchises, smaller scales and facing higher earnings pressure amid a very low interest rate environment, the capacity of small to midsize players to cope with demanding digital investments is somewhat constrained. This issue deserves monitoring as under-investment could weigh on the value and stability of these banks' business franchises. In that sense, further consolidation of these industry players could facilitate their undertaking of required investments.

We base our current view of tech disruption risks for Spanish banks on our four-factor analysis of the Spanish banking system's technology, regulation, industry, and preferences (TRIP; see chart 1). We believe there are relatively limited disruption risks for incumbent Spanish banks in the short-to-medium term.

Chart 1

Industry: Disruption Risk | Moderate

Banks are well equipped to preserve their businesses for as long as they can provide services for clients digitally

Business disruption in the Spanish banking system from the emergence of fintechs is negligible so far. Regulatory barriers to enter are high, the Spanish banking sector is relatively consolidated and efficient compared with other European countries, and it has deep-rooted relationships with customers. At the same time, banks have kept pace with digital transformation, while fintechs continue to lack sufficient investment to let them emerge as powerful competitors. Therefore, incumbent banks should keep controlling the market, although losing revenues as pricing becomes more competitive and having to provide a better service.

Five players with omnichannel distribution strategies--Santander, BBVA, Caixabank, Bankia and Sabadell--which together have more than 70% of the market in customer loans (see chart 2), dominate the Spanish banking market.

Chart 2

The Spanish banking sector has proven its ability to adapt to changing conditions. The consolidation process that followed the financial crisis--whereby the number of institutions shrunk by 40%-- led to more resilient business players. For example, banks have significantly reduced operating infrastructure, branches, and employees, which helped them preserve efficiency despite declining revenues. At year-end 2018, Spanish banks reported a better cost-to-income ratio (53%) compared with European peers' (64%) (see chart 3). This places them well to cope with the challenge to adapt their business models to the new digital needs, which undoubtedly will require important investment.

Chart 3

Incumbent banks are investing in transforming their business models to the new-digital standards. Most banks have multiyear digital agendas to integrate new technology into existing systems, becoming more agile and dedicated to the customer. Usually, the scope and depth of technology investment is directly associated with the size and investment capacity of each bank. Larger banks are leading the change. BBVA, in particular, was the first to prioritize digitalization in its agenda, ahead of other players. But overall, we observe three digital strategies:

• Some of them have launched their own digital banks or brands--such as Openbank by Santander or Imagine by Caixabank--or have acquired digital-only banks (as it was the case of EVO, acquired by Bankinter in 2018) and will most likely incorporate learnings form their digital-only banks to their existing traditional bank structures.
• To cope with developments, other banks have followed the investment model, as with Banco de Sabadell, through its corporate venture Innocells; BBVA, through Sinnovation Ventures and Holvi; and Bankia, through its start-up accelerator Bankia Fintech by Insomnia.
• A third strategy involves establishing alliances with fintechs, as with Ripple and Banco Santander, to offer global payment solutions using blockchain technology.

We have also observed some digital partnerships among large and medium banks, sharing infrastructure in order to create major barriers to entry for potential disruptors. One example has been the mobile payment system Bizum, launched in 2016 and owned by 27 Spanish banks. The app has gained over 6 million customers, executed over 70 million transactions, and transferred over €3 billion across bank accounts.

While the Spanish fintech industry continues its emergence, we think that it does not represent a real risk for incumbents. The market is quite fragmented, with close to 500 fintechs (including wealth-techs) at year-end 2019 according to Finnovating (a Spanish-based innovation platform analyzing the fintech sector and providing advisory to accelerate its development). Fintech players largely specialize in niche segments, such as payments, investments, currencies, personal finance and wealth management, or lending (see chart 4).

Chart 4

Most fintech companies are still at an early stage, they lack critical mass, and their growth potential is constrained by the lack of investment compared with jurisdictions such as the U.K or the Nordic countries. As of Sept. 30, 2019, only about 3% of the total capital invested year-to-date in European fintechs was into Spanish ones (see chart 5). The lack of long-term resources to take the business a step further usually leads fintechs to seek to collaborate with banks to ensure their business continuity and gain critical mass.

Chart 5

A few players, however, are conquering certain market segments. In particular, we view neobanks--rather than single-product fintechs--as potentially more disruptive for incumbents, because they offer a wider range of financial products, like traditional banks. Examples are Spain-based Bnext or the teenage focused-Rebellion, but also foreign players such as German-based N26, U.K.-based Revolut, or Dutch-based bunq, which are gradually expanding abroad, including in Spain. Competitive advantages for these banks include their user-friendly applications, light-simple business structures, effective use of client data to provide personalized customer experiences and attractive prices. While these players are rapidly increasing customer numbers, their earnings profiles are weak, suggesting that they do not represent a threat to incumbents for now.

Of all new entrants, big tech companies could represent more of a threat for incumbent banks, although their entry into the banking market is still unclear. They have accumulated significant data on clients and established global brands that would favor customers' trust, so have the potential to achieve scale easily. Regulatory barriers, however, might prevent these firms from pushing into traditional lending and deposit taking.

So far, some tech giants have attempted to enter the market via payment solutions or offering financial services in areas linked to their supply-demand chains, but in partnerships with local banks and nonbanks. In September 2019, for instance, Amazon launched in Spain its consumer-lending service in partnership with the French financing firm Cofidis. We wouldn't be surprised to see big techs developing working capital financing to merchants on their e-commerce marketplace, or traditional debit and credit cards, as we've seen in Germany or the U.S. (for more information, see "The Future Of Banking: How Much Of A Threat Are Tech Titans To Global Banks?," published Jan. 15, 2018, on RatingsDirect).

While overall, we see an increased risk of commoditizing banking products and intensified pressure on banking revenues due to the competition brought by new entrants, we think that Spanish banks have big opportunities to maintain client relationships for as long as they offer a competitive digital channel to service clients. Certainly, banks are preparing themselves for that. Several of them offer instant consumer loans, investment products, and insurance products digitally, as well as in-house e-wallet and Apple Pay services. Many also offer the chance to aggregate customer accounts from different financial institutions.

Logically, smaller, regional banks may face higher disruption risks, owing to their smaller scale and lack of resources to invest sufficiently and remain competitive, particularly in the current context of low-for-longer interest rates which is putting pressure on their efficiency and core profitability (see chart 6). Because human capital density is relatively similar across the sector, additional efficiency is more likely to be obtained through technological diffusion, which not all of them might be able to afford. In that sense, sector consolidation among Spanish midsize players could help tackling some of these structural disadvantages. However, given their clientele is usually more rural, elderly, and less technologically savvy, this group of banks still has time to adapt before the digitally native generation becomes the main end-customer.

Chart 6

Preferences: Disruption Risk | Moderate

Traditional clientele provides banks with time to gradually adjust digital offerings

Contrary to customer dynamics in northern European countries, we view Spanish banking customers as largely traditional, loyal to their banks and culturally inclined to interact face-to-face. Therefore, we do not see customer demands putting high pressure on banks to accelerate the digitalization process.

Despite the number of branches having halved over the past decade, Spanish banks' branch networks are some of the densest in the world, and provide strong proximity to clients, which is what Spaniards like. At year-end 2018, there were on average 56 branches per 100,000 adults in Spain, which is significantly above the average of 34 branches in the EU (see chart 7). While banks will continue reducing the size of its branch network in the years to come and transforming some of them into bigger flagship stores, we believe that the branch network will remain a key reference point for Spaniards to do banking, though more focused on providing value added products than transactional business.

The use of cash in Spain is also still significant compared with other European countries, partially because many small businesses (particularly outside metropolitan areas) only accept cash, but also owing to customer preferences. According to a study published by PWC in October 2019, 49% of Spaniards prefer cash payments over any other card or electronic method. This compares with 20% for Sweden, 29% for the U.K, and 26% for the Netherlands. That said, we observe an increasing trend in the use of card payments--particularly at point of sale--driven by lower fees charged to merchants.

Another factor protecting incumbents from a sharp disruption is Spaniards' relatively low digital knowledge and financial literacy compared with those of other Europeans. The Spanish population ranks below the EU average in terms of their digital skill levels, according to the EU's Digital Economy and Society Index 2019. In particular, about half of the people in Spain lack basic digital skills, and Information and Communication Technology specialists represent a lower percentage of the workforce (2.9%) compared to the EU (3.7%). According to S&P Global Financial Literacy Survey, Spain ranks behind other European countries such as Germany, Netherlands, Norway, Sweden, and the U.K., is similar to France, and is ahead of Italy and Portugal. These trends partially explain why internet banking penetration in Spain is still below that of other European countries (see chart 8).

Chart 7

Chart 8

Moreover, the role of financial intermediaries or brokers in Spain is not as developed as in other countries such as the Anglo-Saxon ones. In Spain, relationships between customers and their retail banks tend to be sticky and deep. First, banks concentrate not only on the traditional savings and lending products but also on all para-banking activities (mutual funds, pension funds, insurance, and renting). And second, incumbents have traditionally pursued client- rather than product-focused strategies, which gives resilience to their franchises. This partially explains why, according to the Financial Innovation Barometer 2019 elaborated by Funcas and Finnovating, only 14% of Spaniards transact with more than two bank providers.

Open banking is in early development. Banks are developing their APIs and exploring the potential business opportunities of PSD2. Although, on paper, its progress could shift the role of incumbents--with fintechs emerging as financial intermediaries--we do not see a high disruption risk for incumbents in the short to medium-term. This is because the first step in the process needs to come from the end-customer, who needs to authorize banks and fintechs the use of its financial data. We believe that the Spanish clientele won´t be so eager to do so, also because of its lower technological skills compared with other European countries.

That said, as customer preferences shift due to the natural growth of the digitally native population and technology evolves, there are specific segments of the banking business that could be more vulnerable to the entrance of new competitors. Unsurprisingly, fintechs are challenging retail banking segments that offer higher returns and where there is room for price competition. This includes areas such as payments or lending to consumer and small and midsize enterprise (SME) segments. Other segments where we see visible technological developments are those related to wealth-tech, thanks to the application of robo-advisory and artificial intelligence that can ultimately help customers with their investment decision making process (see table 1).

Table 1

Regardless of the degree of vulnerability in any given banking sector, the digitally savvy will one day become the main consumers of banking products. Conscious of that, banks are planning and investing today to get prepared. Embracing the technological change will allow them to be able to service the more sophisticated demands of their clients in the years to come, as well as an opportunity to preserve efficiency, reducing headcount and overall costs.

Regulation: Disruption Risk | Moderate

Regulatory initiatives could support the development of fintechs and incumbents, but are not at a tipping point yet

We consider policymakers and regulators' stance a neutral digital disruption risk for Spanish retail banks. They do not protect incumbents, as evidenced by the introduction of PSD2 in 2019 to establish a more egalitarian playing field with open banking, supporting higher supervision and security standards, greater transparency and control of customer data, and fraud prevention more efficiently (for more information, see "European Banks Face Risks In Race To Implement PSD2," published May 16, 2019).

On the other hand, regulators do not have a clearly proactive approach to foster fintechs' developments, as in other geographies like the U.K., for example (for more information, see "Tech Disruption In Retail Banking: U.K. Banks Embrace The Tech Race," published Nov. 14, 2019). In fact, we believe the lack of financial support to fintechs (which most likely will constrain their capacity to emerge as real competitors to incumbents) is partly linked to a regulatory framework that does not particularly favor investments. According to Eurostat, Spain's expenditure in research and development has consistently lagged the EU average for the past 10 years. And tax-incentives on the personal income tax to support start-up investments are also far below those in peer countries (see chart 9).

Chart 9

That said, a relevant initiative is underway to promote a regulatory sandbox in Spain, a testing laboratory for fintechs to launch and test their businesses while being supervised by the local regulator. In February 2019, the government approved a preliminary bill, but the final parliamentary approval is still pending, with a new government having formed only in January 2020. This initiative would allow entrants to test new products, services, and business models under a controlled testing environment with voluntary clients. It would also foster investment and employment while enhancing regulatory customer protection.

The sandbox has already been adopted in the U.K., Lithuania, Denmark, Poland, and the Netherlands. For those countries where a regulatory sandbox exist, the fintech industry has evolved exponentially in the years thereafter. Given how effective it has proven in other jurisdictions, its approval in Spain could lead to innovative developments for the fintech industry. The Spanish Banking Association also supports the sandbox approach, because it would allow higher innovation in the banking system under an increasingly regulated environment. Due to its linkages with Iberoamerican Spanish speaking countries, the approval of a sandbox could support the development of fintechs' business models that could be exported to Latin America.

Nevertheless, Spanish fintechs remain largely unregulated, mainly because their business models (such as tech companies) do not call for regulation. Depending on the business niche, Spanish fintechs might require different types of licenses--ranging from crowd-lending or electronic money (e-money), to a fully-fledged banking license. However, getting a license in Spain is a lengthy and demanding process compared with other jurisdictions, such as the U.K, Lithuania, or Estonia. There are, for example, only seven approved e-money licensed firms in Spain, compared with 64 in Lithuania and over 150 in the U.K. This discourages many players from pursuing it or (more concerning) leads to fintechs getting their licenses from a friendlier EU jurisdiction, something that will probably deserve some scrutiny. For example, Rebellion recently obtained an e-money license from the Lithuanian regulator, allowing the firm to conduct its services across the EU (see table 2).

Table 2

Technology: Disruption Risk | Moderate

Adapting legacy systems to new technology will require large IT investments and time

Fast-evolving technology forces incumbent banks to adapt current systems to survive. Contrary to fintechs, which benefit from new light IT structures, banks need to incorporate technological developments into their legacy structures. This implies external advisory, complex planning, costly investments, and extensive time to execute. Most Spanish banks are rethinking the structure of their core systems and processes, and we are observing multiyear plans in which banks are gradually optimizing their back-end processes, reducing reliance on their core systems and gradually migrating to cloud services. Banks will increasingly rely on fintechs and big techs to leverage the use of new technologies and speed up their transformation. There are two speeds of implementation: The largest banks are investing heavily to adapt, while smaller, regional banks usually rely on industry alliances to withstand the burden of investment.

Spanish banks have plans to gradually migrate part of its business from traditional servers into the cloud, using in many instances a third-party provider. For instance, Microsoft provides cloud services to Santander and Ibercaja, and Google cloud to Liberbank. These public clouds allow banks to scale down their IT and headcount costs, strengthen their ability to store and process vast amounts of information by leveraging big-data analysis, and become more agile as they reduce reliance on core/legacy systems and speed up time-to-market. However, the dependence on few and unregulated cloud servicing providers adds risks, including increased vulnerability to cyberattacks. As a result, some Spanish banks are adopting hybrid cloud solutions, which offer the flexibility and benefits of the public cloud while better addressing data security, governance and compliance through privately in-house created clouds. For example, Banco Santander uses a hybrid cloud for its ecosystem of fintech partners. These include PayKey (an app to make payments through social media) and Kabbage (which provides quick loans to SMEs and retail consumers).

Moreover, as technology keeps evolving, incumbent banks will have to incorporate other developments into their operating models (such as artificial intelligence [AI], blockchain, and open banking). Spanish banks are starting to test the use of AI, which has the power of driving businesses and eventually reducing human cost. The largest players have started to leverage the use of chatbox in the front office, know-your-customer and anti-money laundering processes in the middle and back-office areas. Some of the large banks are also testing the use AI in credit scoring and more specifically in tailored offer of financial products. On the contrary, smaller players are likely to co-share third-party solutions, such as the recently launched platform "inpulsa" by Cecabank.

Table 3

The development of open banking is in its early stages, but in theory could also become something transformational for the business, encouraging competition. With customers gaining control over their financial data, new banking business opportunities for incumbents could appear. Banks could choose to become producers of third party products and improve its knowledge on customer needs. While BBVA and Santander started to operate API platforms in 2017 and 2018 respectively, before PSD2 came into force, we understand that most Spanish banks have only set up those APIs that are mandatory post PSD2 entry into force and that greater developments are still on an initial phase.

Distributed ledger technology (DLT)/blockchain among Spanish banks is still marginal, although larger banks tend to have internal dedicated teams. Regional or smaller banks rely on third parties to develop joint solutions. This is the case of Cecabank and Grant Thornton, which are working on DLT development for Abanca, Ibercaja, Kutxabank, Liberbank and Unicaja. Moreover, some banks, large companies, and fintechs have joined forces in a number of European and global blockchain consortia. Once it becomes more widely used, DLT will allow banks to transact more securely and efficiently, and provide services to the end-customer. For the time being, Spanish banks are focusing on cross-border payments (such as One Pay, the foreign exchange payment service offered by Santander) and wholesale lending (such as when BBVA negotiated various corporate loans with customers using this technology. Santander also recently tested the market with a $20 million bond using this technology end-to-end).

It is clear that technology brings a wide range of opportunities for the financial industry and accelerates the pace of business transformation. However, this also comes with higher risks of cyberattacks and mismanagement of customer data, which might undermine banks' reputation and customers' trust. Therefore, it is key that banks' reinforce their operational and cyber-risk resilience and maintain open dialogs with the regulator and wider industry.

Tech Disruption Is Not An Immediate Trigger For Rating Actions On Spanish Banks

In the short term, digital disruption is unlikely to trigger rating actions on Spanish banks. Customer demands for digital banking will evolve only gradually, giving banks time to adjust. Banks, particularly the large ones, are proactively preparing for it. We will see further price competition and a trend towards higher product commoditization, which will pose pressure on banks' profitability. However, overall, we expect banks to preserve their core business franchises, even if in some niches (like consumer lending, payments, or wealth tech), part of the business goes to newcomers.

Eventually, smaller, regional banks that prove slow to adapt or cannot cope with costly IT investments and transformation costs could be more vulnerable to rating downgrades if the latter compromises their business franchises, stability or financials. These trends are not unique to Spain; for the Italian banking system--more fragmented and less efficient--the tech race could also put some pressure on smaller lagging players (for more information, see "Tech Disruption In Retail Banking: Italian Banks Not Adapting To The Digital World Quickly Will Be Left Behind," published Feb. 17, 2020).

Related Research

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• Tech Disruption In Retail Banking: Better Late Than Never For Japanese Fintech, Feb. 6, 2020
• Tech Disruption In Retail Banking: Nordic Techies Make Mobile Banking Easy, Feb. 4, 2020
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• Tech Disruption In Retail Banking: Austrian Banks' Bricks And Clicks Model Still Does The Trick, Jan. 29, 2020
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• Tech Disruption In Retail Banking: U.K. Banks Embrace The Tech Race, Nov. 14, 2019
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• European Banks Face Risks In Race To Implement PSD2, May 16, 2019
• The Future Of Banking: Will Retail Banks Trip Over Tech Disruption? May 14, 2019
• Tech Disruption In Retail Banking: German Banks Have Little Time For Digital Catch-Up, May 14, 2019
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• The Future Of Banking: How Much Of A Threat Are Tech Titans To Global Banks?, Jan. 15, 2018
• The Future Of Banking: Is PSD2 Yet Another Threat To Revenues In Europe? May 16, 2017