The Bankwatch

Tracking the consumer evolution of financial services

“The State of Global Banking – In search of a sustainable model” | McKinsey

A new report from McKinsey paints a bleak picture for banks and supports the notion that banks need to adapt and adapt in a significant way.  Their survival is at stake.  The banking and economic crisis just brought banks deficiencies to the fore.

This extract from the intro page to the McKinsey study (emphasis mine) highlights that shifting consumer practices plays a role in the falling fortunes of banks.  The banks who choose to not redesign themselves will be relegated to utility banking, which looks more and more, certainly in Europe as involving direct government ownership.

The state of global banking—in search of a sustainable model McKinsey

On its face, 2010 was a good year for the industry. Global banking revenues reached a record $3.8 trillion, and after-tax profits jumped from $400 billion in 2009 to $712 billion—above their 2008 level, if not the 2007 peak. But this rosy picture did not necessarily imply a bright future for banks in Europe and the United States: 90 percent of the profit improvement was attributable to a reduction in provisions for loan losses, and most, if not all, of the good news came from emerging markets.

As a result, investors have been reassessing the banking industry’s long-term growth prospects and rerating the sector. The major problems include the rising cost of doing business—thanks primarily to new regulation requiring banks to hold more capital and liquidity to ensure that the industry better withstands future shocks—scarcity of capital and liquidity, changing consumer behavior as a growing number of customers move to mobile and online channels, and diverging regional growth paths.

Full report pdf (registration required)

The report obviously covers many economic aspects including higher costs of capital, regulation and sluggish markets in developed countries.  I will highlight some of the comments though on the changing consumer behaviours.

Finally, banks will have to contend with shifts in consumer behavior – none more significant than the rise of the digital consumer, accelerated by the mobile and tablet revolution. We expect branch density to fall, and average branch sizes to shrink.
Banks will have to deliver superior customer experience to a generation that has much greater choice and is likely to be more price-sensitive.

Some of the shifting behaviours:

  • the decline of household leverage in many developed markets, and with it, increased savings rates. 
  • If this shift turns out to be a long-term structural phenomenon, it could have significant implications for the growth of many banking products, including personal loans, mortgages, and credit cards. The banking industry on average will therefore be less profitable.

  • the inexorable rise of digital consumers, further accelerated by the mobile and tablet revolution. In US retailing, more than 40% of total sales are either transacted online or influenced by the online channel; “pure online” sales already exceed $170 billion annually. Similar trends are under way in online banking. In pioneering countries such as Finland, the Netherlands, and Norway, as many as 80% of customers
    already use online banking – not just for transactions, but also for account opening. In major markets such as the US, UK, Germany, and Japan, the figure is approaching 50%. Moreover, there is an extremely close correlation between overall internet usage and online banking –  this suggests that as internet
    penetration increases worldwide, customers will migrate out of bank branches and onto electronic channels.


  • Overall, we expect branch density to fall, especially in overbranched countries; even more importantly, we expect the average size of branches to decrease as many advice related and post-sales support activities
    migrate to different channels.
  • These shifts will also require banks to integrate their channels seamlessly and efficiently. New marketing activity will be necessary – banks on average spend less on marketing than other consumer-facing
    industries. We would expect particularly strong growth in digital marketing. Finally, banks will have to monitor innovations closely, particularly in the mobile arena, to avoid being leapfrogged by other industries. In the US, for example, financial institutions currently own only about 70 of the around 3,000 financial applications running on the iPad, iPhone, and Android devices

McKinsey propose improvements along three vectors … a word pick to highlight that bold changes, not incremental, are required.

  • Vector 1 is about improved capital efficiency – a particular priority in Europe. Here, banks would focus on
    making their businesses less capital intensive and moving the risks they can no longer afford elsewhere
  • Vector 2 is about completely restructuring their costs. Banks would recover their profitability through
    reinventing their cost base
  • Vector 3 is about capturing new revenue opportunities within their existing areas of operations. Banks
    would tap into new pockets of demand and revenue via smarter pricing, customer centricity, and selective new risk taking

Again I will pick one, – vector 2, which is where technology has a large part to play and banks have much room to improve.  In fact in many cases improvement is the wrong word.  It will require being willing to throw out old technology and rebuild, within the context of a probably smaller, leaner and more efficient bank.  McKinsey estimate a 6% annual cost reduction is necessary.  These are staggering changes that cannot be done incrementally.

They pick up on one of my favourites that I covered here recently.

Finally, banks could move non core operations into industry utilities – a particular opportunity in mature markets. Some countries, such as Norway and Iceland, use shared industry utilities extensively, but others very little. Although requiring potentially complex collective action, the opportunity is there to share or outsource a large part of banks’ non core operations like cash and coin handling, payments, and ATM

Relevance to Bankwatch:

In short this is no time for sentiment.  Just because you are a bank does not mean you have to manage cash, or ATM’s for example.

The McKinsey report is only 50 pages and contains detailed statistics on banking markets by country and on banks.

Written by Colin Henderson

September 19, 2011 at 22:52

Posted in Uncategorized

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