'Digital culture' key to banking success
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McKinsey expects banks to face business overhaul
By Kim Jae-kyoung
SINGAPORE ― Rapid technological progress has disrupted many aspects of our lives and how we conduct business.
With new technologies, businesses are doubling their efforts to meet human needs in more efficient and cost- effective ways.
Even the banking industry, which has historically been highly resistant to disruption by technology, is no exception. Many banks are combining their services with technologies to stay competitive against startups introducing innovations in digital payments and data management.
In other words, banks are now trying to revamp their business models by streamlining operations with financial technology, known as fintech, which is a concept describing a business based on software to offer more efficient financial services.
In brief, ongoing technological progress is bringing two major changes to the banking industry ― digitization and emergence of new players.
Most functions of a bank currently done by staff are being replaced with technology, while non-traditional players, such as retailers and mobile carriers, are posing a threat to traditional banks.
In a report released in February, McKinsey & Company said that the ubiquity of mobile devices has begun to undercut the advantages of physical distribution previously enjoyed by banks.
Smartphones enable new payment options as well as fully personalized customer services. In addition, there has been a massive increase in the availability of widely accessible, globally transparent data, coupled with the decreasing costs of computing power.
Joydeep Sengupta, director of McKinsey’s Singapore Office, said that it is important for banks to come up with a digital strategy in a timely manner to meet customer needs and survive in the new world of banking.
“The challenge for many bank CEOs will be getting the timing right. As a result we could see players who move too quickly and lose steam, or others who simply are too late,” he said.
“A prudent move is to invest wisely in building strong digital culture and capabilities within the organization, undertaking a customer-experience-driven digitization of core banking processes and embracing fintechs as collaborators.”
The global consultancy estimates that the number of fintech startups today is greater than 2,000, compared with 800 in April 2015. Globally, nearly $23 billion worth of venture capital and growth equity has been deployed to fintechs over the past five years.
He pointed out that digitization has the potential to fundamentally disrupt the existing structure of banking, expecting that universal banks could move in one of two extreme directions.
According to the veteran consultant, the first direction will be a retreat to a position as scale providers of balance sheets and funding.
“They will strengthen their core competence in balance sheets and risk management, drive costs down aggressively and rapidly scale up to ensure reasonable profits. Increasingly they will resemble large-scale utilities,” he said.
The second direction in Sengupta’s view will be to rapidly embrace digital technologies and broaden their scope of business to meet the needs of their customers beyond banking.
“They will do so through smart partnerships and by orchestrating a large ecosystem of providers. They will increasingly look very different from the banks of today,” he said.
He forecasts that between these two extreme positions, many banks will struggle to make the transition from their current business models to the next.
“Indeed a large number will be unsuccessful in doing so, and many will either merge with one of the two archetypes above or retreat into narrower business models,” he said.
Sengupta, who leads the consulting firm’s Asia-Pacific banking practice, pointed out that preparing for a world where data is king will also be critical.
“Successful banks of the future will be those that have access to proprietary data, manage and use structured and unstructured data to develop insights, and own analytical resources and capabilities. Combining this with a strong risk culture will be an important factor for future success.”
Pivot to Asia; blurring of boundaries
To form proper strategies and ensure business sustainability, banks need to be aware of several major forces that will reshape global banking in the coming decade.
According to McKinsey, the first force is the overwhelming shift of banking profit and revenue pools to Asia. Between 2005 and 2015, the portion of Asia’s revenue in global pools has risen to over 40 percent.
Driven by demographics and increasing wealth accumulation, the consulting company expects this to increase to over 60 percent by 2025.
The firm said that the second force is the battle for customers.
“Major technological changes, the rapid growth of digital consumers, combined with a growing number of fintech players, plus a consumer-friendly regulatory environment, these trends will likely lead to the unbundling of traditional forms of banking services,” Sengupta said.
The third force is the rapid advancement of big data, which will result in far more sophisticated forms of marketing and credit analytics that will open up new markets and opportunities, such as the unbanked segments ― those without a bank account.
“More fundamentally, we see the rapid blurring of boundaries between banks and non-banks in the offering of banking services, resulting in the emergence of bigger and more customer-centric ecosystems,” he said.
These shifts are presenting significant implications for banks.
First, banks should brace themselves for new opportunities in Asia.
McKinsey said that it is clear that the largest source of value creation will occur in Asia, which means that it will be critical for them to be relevant in the most important markets and cities in the region.
It also said the changes in technology and the unbundling of banks will likely lead to a significant fall in margins across the industry, by up to 40 percent in some consumer products and segments.
This implies a large number of existing banks will become economically unviable in their current shape and form.
It added that data and analytics will provide banks with far greater insight of their customers, enable them to manage risks better, and open up new opportunities in less-banked segments, which will enable them to participate in a broader arena than just banking.
Sengupta stressed that to capitalize on the new wave of changes, banks should prepare themselves on multiple fronts.
“First, they need to get much leaner and aim for a target cost/income ratio in about the 30 range, down from over 50, which the average bank operates in,” he said. “Second, they need to embrace digital ― not just developing new digital products and services, but truly develop a mindset and culture of rapid innovation and change.
“Finally they need to significantly leverage new sources of insight and information, to truly strengthen their risk management capabilities.”