More than half of senior retail banking executives consider nontraditional financial-service providers a threat to traditional banks, while 31 percent believe they present innovative partnership opportunities.

The findings are in a report on the retail banking outlook for 2020 that was released by PricewaterhouseCoopers in Beijing on Tuesday.

An increasing number of new players are joining the retail banking industry in recent years, and they have a flair for innovation and a deep appreciation for the value of data analytics. Many such capabilities are missing from traditional banks, and whether banks can transform themselves to compete with this threat remains uncertain, the report said.

James Chang, managing partner of PwC China Financial Service Consulting, said retail banks in China are facing several clear challenges.

"The liberalization of interest rates and a rudimentary operating model that needs updating have increased overall costs for China's retail banks during the past few years," Chang said.

Banks' interest margins will soon contract by 1 percentage point from nearly 3 percent now, which will put huge pressure on the banking industry and lead to mergers and the acquisition of small banks, he said.

"With a growing trend for mega-asset management and in the face of various demands from a huge population across wide geographical areas, it is crucial for retail banks to increase the number of different products owned by a single customer, improve customer loyalty and enhance customer value," he said.

To handle the challenges, retail banks should develop a customer-centric business model, optimize distribution, simplify their business and operating models, obtain an information advantage by mining data from all available sources, foster innovation, and manage risks and fund proactively, the report said.

Based on a survey of 560 financial service executives from leading financial institutions in 17 countries, the report found that demographics are changing the priorities of retail banks and presenting opportunities for growth.

As the middle-class population is expected to increase by 20 percent between 2013 and 2020, wealth management will become a basic service for retail banks, in addition to a traditional savings service.

In China, the urban working population will increase by about 100 million by 2020, which will generate a huge demand for retail banking services.

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