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Large Financial institution Exits and Fintech Upstarts: Eire's banking panorama is altering dramatically

A woman walks past the Bank of Ireland ATMs in Dublin city center.

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DUBLIN – The look of Irish banking has changed dramatically.

Within a few weeks, NatWest-owned Ulster Bank announced it would cease operations, while KBC Ireland opened talks to sell its loan book and exit.

The moves could eventually result in only three banks in the Irish market – the two main players, the Bank of Ireland and AIB and the permanent TSB – ringing alarm bells about the state of banking competition in the country.

Meanwhile, fintech (financial technology), which is well-positioned with venture capital financings like Revolut and N26, has gained momentum in the market. Revolut has around 1.3 million users in Ireland while N26 has around 200,000 users.

Adrienne Gormley, Chief Operating Officer of the German N26, which is itself a fully regulated bank, is aware of the drastically changed market.

"Number one, we see it as an opportunity. While the Ulster Bank news was probably on the agenda for some time, the KBC announcement surprised people," she told CNBC.

It may offer opportunities, but it also begs the question of what challenges and problems are so prevalent in the Irish market that two big banks would wash their hands and leave.

"While we are assessing what is happening and why others are leaving, we still need to look at our customers with very clear eyes and focus on customer needs in the market. Of course we need to look well and see why others are leaving? Is it because they have to hold too much capital? "

The emergence and popularity of digital banking have been instrumental in changing this landscape. Earlier this year, the Bank of Ireland announced plans to close 103 branches in the country. CEO Francesca McDonagh said the move to online services was a key driver of this decision.

Digital banking and the arrival of fintech competitors have changed the dynamics of the Irish banking market, but serious questions remain about the state of competition and what this means for consumers.

Banks in sync

Fintech operators or neo-banks have taken the baton for instant payments, leaving many of the incumbents behind to regain market share.

A consortium of Irish banks – at least AIB, Bank of Ireland, Permanent TSB and KBC – are trying to win back some of this customer base with their own app.

The app, tentatively titled Synch, enables instant payments between accounts at any bank.

The banks involved were excited about the project, but Michael Dowling, a professor of finance at Dublin City University, told CNBC that the prospect raises some warnings about the competition.

According to Dowling, the Synch app looks like a closed shop where the banks want to "set up a system in which they can essentially exclude others from this payment network".

He added that mechanisms such as SEPA Instant are already in place for banks in Europe to make instant payments.

The banks' synchronization proposal is currently with the Irish Watchdog, the Competition and Consumer Protection Commission. An initial submission by the banks was rejected by the supervisory authority due to missing details. A second registration took place shortly afterwards.

The Banking & Payments Federation Ireland, an industry group that coordinates synchronization efforts with banks, declined to comment, citing the CCPC process.

Future of competition

Instant payments may be one thing that has cornered fintech companies, but question marks still hover over the future of long-term loans and mortgages in the country.

N26 is committed to lending in other markets but has not brought these services to Ireland.

"We are a fully licensed bank so it is obviously interesting for us to understand what suite of products in this area could work in the Irish market," said Gormley.

"Given the news from Ulster Bank and KBC and the very dramatic shift in Irish banking, we obviously need to consider how and what we would offer to the Irish market."

Dowling said the outlook for competition in the Irish banking sector is bleak amid the dwindling number of banks – but Starling Bank, another relative newcomer to the fintech scene, has long promised to enter the market and is aiming for its banking license the Central Bank to Bank of Ireland.

"I don't think there's a real possibility that another bank is popping up right now," Dowling said, adding that other European banks are unlikely to be drawn to the market.

He added that regulation was needed to prevent monopoly behavior by the remaining banks.

"It's this longer-term borrowing that we're stuck with, there is no competition. There are three banks and it really is. This is where regulation needs to be put in place and we need to think creatively about how to fix this," he said.

"This is the change we need because there won't be an outside savior. Maybe some of the fintech firms will develop in due course, but we really need forced competition."

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