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Banks face big profit loss to digitisation – McKinsey

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By Finextra

European banks stand to lose half their profits from digital disruption trends shaking the banking industry, according to a report from McKinsey.

In a study entitled ‘A Brave New World for Global Banking’, McKinsey says banks in Europe and the United Kingdom currently have $35 billion, or 31%, of profits at risk.

“More severe digital disruption could further cut their profits from $110 billion today to $50 billion in 2020, and slice returns on equity in half to 1 to 2 percent by 2020, even after some mitigation efforts,” the report states.

The pressures of digitisation, which boosts competition and compresses margins, are being felt in the fee-paying business of banks all around the world. Some emerging-market banks are managing well, states McKinsey, offering innovative mobile services to customers. But the report finds that in the largest emerging markets, China and India, banks are losing ground to digital-commerce firms that have moved rapidly into banking.

In developed economies, non-bank competitors are being given a leg-up by regulators, shedding their natural conservatism and opening up the market to new entrants.

“Over time, huge tech companies may be able to insert themselves between banks and their customers, capturing the vital customer relationship and presenting an existential threat,” states McKinsey.

To meet the challenge, banks must reorient their business models to the customer and the new digital environment by establishing the bank as a platform for data analytics, and aggressively linking up with fintech startups, platform providers, and other banks to share costs through industry utilities. They also need to streamline their operating models and IT structure and move toward a proactive regulatory strategy.

From an organisational perspective, banks in general need to move beyond traditional restructuring and renew the bank via new technological capabilities, McKinsey states.

“Any new business model that banks design will likely require new technology and data skills, a different form of organisation to support the frenetic pace of innovation, and shared vision and values across the organisation to motivate, support, and enable this profound transformation.”

First appeared at Finextra

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