In its October 2017 report titled Remaking the bank for an ecosystem world, McKinsey considers how traditional banks should respond to the rise of non-banking platform companies targeting the most profitable parts of the banking value chain.
The report highlighted Alibaba, Amazon and Tencent as examples of platform companies that are staking a claim to bank customers and the revenues and profits they represent.
“In the 2015 global banking annual review, we estimated the impact of the digital threat,” the report said. “Today, we update the estimate to account for a faster pace than anticipated. As interest rates recover and other tailwinds come into play, the banking industry’s ROE could reach 9.3 per cent in 2025. But if retail and corporate customers switch their banking to digital companies at the same rate that people have adopted new technologies in the past, the industry’s ROE, absent any mitigating actions, could fall by roughly 4.0 points to an unsustainable 5.2 per cent by 2025.”
McKinsey calculated the value at stake for global banking should platform companies successfully split banking in two. The group found that manufacturing — the core businesses of financing and lending that pivot off the bank’s balance sheet — generated 53.0 per cent of industry revenues, but only 35.0 per cent of profits, with an ROE of 4.4 per cent.
On the other hand, distribution — the origination and sales side of banking — produced 47 per cent of revenues and 65 per cent of profits, with an ROE of 20 per cent.
“As platform companies extend their tentacles into banking, it is the rich returns of the distribution business they are targeting. And in many cases, they are better positioned for distribution than banks are,” the report said.
McKinsey argues that banks “cannot afford to wait any longer” to extract the potential of digital to industrialise their operations.
“As an essential first step, those that have not yet fully digitised must explore the new tools at their disposal and build the skills in digital marketing and analytics that they need in order to compete effectively,” the report said.
“If most of the industry were to do this, and not compete too much of it away, we estimate that banks would add about $350 billion to their collective bottom line.”
[Related: ANZ to embrace ‘barrier-breaking technology’]