With more than CHF 1,000 bn in mortgage loans, around 22 mn credit and debit cards issued and over 160 mn card payments as well as over 12 mn cash withdrawals every month, retail banking is a mass-market business that is of vital importance to the Swiss economy.
Products and services to meet the day-to-day financial needs of private individuals
Retail banking is the best known and most visible area of business for banks in Switzerland. Banks offer products and services to meet the day-to-day financial needs of private individuals. This area of business has a high profile thanks to their large number of branches, counters, ATMs and local staff. These days, however, customers are more likely to interact with their bank via digital infrastructures such as e-banking solutions, apps, debit and credit cards, phone calls, comparison sites and more. Changing customer needs and the increased use of digital technology are likely to bolster this trend further going forward. There are now banks in the marketplace that only offer their services virtually, with no possibility of face-to-face contact, which increases efficiency and reduces costs for their customers. At the same time, however, many customers still value personal contact, geographical proximity and linguistic and cultural familiarity, and the 239 banks in Switzerland meet this need with their nationwide branch and ATM networks.
Payment services: keeping the economy running smoothly
Every modern economy relies on an efficient payment infrastructure. Banks in Switzerland process over 100 mn domestic customer payments each month with a total volume of around CHF 1,000 bn. Payment services allow the Swiss economy to keep running smoothly. The high volume underscores the huge importance of this business. Unlike other banking services, which are tailored to customers’ needs, payment services constitute a mass-market business that is largely handled by machines. Executing a single payment is not a particularly complex procedure, but the challenges in payment services lie in managing high volumes, ensuring uninterrupted operation and complying with regulatory requirements such as those aimed at preventing money laundering, terrorist financing and fraud. The digital transformation in retail banking is clearly reflected in the way payments are made: the share of paper-based payments is steadily falling, while the importance of e-banking has been growing fast. Newer developments such as payment slips with QR codes, the spread of electronic billing and payment apps that interface with e-banking, as well as the instant payments technology that SIX will soon roll out on the Swiss Interbank Clearing (SIC) platform, are likely to fuel this trend further. That said, a large number of bank customers still prefer to use paper payment slips.
Card business: cash still a popular means of payment
Most Swiss people use payments and cash withdrawals more than any other form of banking service. The number of these transactions has increased every year since 2010. Banks in Switzerland process over 170 mn card payments and cash withdrawals each month with a total volume of more than CHF 12 bn. There are various types of cards: credit cards, the issuers of which guarantee payments to vendors; debit cards, which are linked directly to a bank account; and e-money, an electronic store of money in the form of a claim against the issuer for the purpose of making payments – often in the form of a prepaid card. According to the Swiss Payment Monitor,8 cash has once again replaced debit cards as the most popular means of payment after its use dropped off dramatically during the coronavirus pandemic. However, cash only comes in first place if card payments are differentiated by means of payment rather than settlement product. In the November 2022 Swiss Payment Monitor survey, 27.1% of all payments were made with a debit card, compared with 29.3% in cash. Mobile payment solutions, which are becoming ever more popular and are usually tied to a debit or credit card, are recorded separately. If debit card transactions via mobile payment solutions were also taken into account, cash would no longer be in the lead. In terms of the volume of payments, debit cards overtook cash some time ago. Some 26.1% of the total volume is attributable to debit cards, compared with 17.3% for cash. Credit cards account for the largest share of payment volume with 26.9%.
Private pensions constitute the third pillar of the Swiss pension system alongside state pensions (first pillar) and occupational pensions (second pillar). They allow anyone in paid employment to build up retirement capital in either tied (Pillar 3a) or free (Pillar 3b) form, with tied capital receiving preferential tax treatment. The total amount of capital saved in Pillar 3a in 2021 was CHF 142 bn, rather less than half of which (CHF 59 bn) was held in retirement savings accounts with banks. On top of this, it is estimated that a total of CHF 32 bn was held in funds and CHF 51 bn in insurance solutions. Around 34.9% of the Pillar 3a capital held with banks was thus invested in securities, far below the figure of 89.9% recorded for all assets managed in Switzerland in 2021. The comparatively low equity allocation results in relatively low returns, especially given a long-term investment horizon, but it also reduces the risk of losses on invested capital.
Mortgage business: largest asset item for banks in Switzerland
Domestic and foreign mortgage loans reached a new high of CHF 1,134.9 bn in 2021. With a share of around 31.6%, they are the largest asset item for banks in Switzerland.9 The largest proportion of mortgage loans are granted to private households for owner-occupied residential properties. Mortgages are thus a core business of retail banking. The mortgage business is still growing: banks granted new mortgages in the amount of around CHF 16 bn per quarter in 2018, but the equivalent figure rose above CHF 20 bn at times in the period to 2022. This trend is due to rising property prices and continued strong demand for residential properties. The median loan-to-value ratio for new mortgage loans since 2018 is approximately 66–68%. Around half of all new mortgages are granted to private households for their owner-occupied properties, with the rest split more or less evenly between three categories: residential properties rented out by private households, companies and others. More and more non-banks are entering the mortgage business, in particular insurers and pension funds, which are not subject to the same regulations as banks. This means that different providers are not competing with each other on a level playing field. According to Moneypark, insurers and pension funds now have a combined market share of approximately 5%.10 Moneypark points out that insurers are subject to regulatory restrictions on the mortgage market, so pension funds in particular – which are not subject to banking regulations – can be expected to show stronger growth in this area going forward.