“Why US Banks need a new business model” | McKinsey
A nice summary from McKinsey of the fundamental problem facing banks in any country, that reflects the zero appreciation in bank stock value over the last 20 years. McKinsey state that banks need a new model.
Many commentators blame Europe’s sovereign-debt crisis and fears of a double-dip recession. But three additional factors also weigh heavily on investors: the new bank capital requirements introduced under the Basel III international-banking regulations, the impact of new US banking regulations responding to the financial crisis, the Dodd–Frank Act, and the unwinding of consumer debt. All three undermine banking’s traditional business model.
This is an obvious point despite investors lack of appreciation of it.
This next point is my favourite.
By business model, we mean how banks actually operate—how work is done, the degree of automation, the pricing and design of products, and underlying compensation systems. In the market’s view, the threats are so strong that it won’t be enough to trim the sails, refocus investment, or cut costs a bit here and there.
There has been an unfortunate mixing of what I would call banking, that is accepting deposits and making loans; mixing with investment banking that is far removed from traditional banking. But that is a self made problem so no excuse.
Lets break this down using the McKinsey model approach:
- how work is done,
- the degree of automation,
- the pricing and design of products, and
- underlying compensation systems
1. How work is done:
Banks approach the market with a sales force that generally speaking has no idea about products or technology. I don’t mean this to sound as harsh as it does but it is not the fault of the front line.
The technology and product people (I am generalising here) are generally not allowed to speak directly to customers. The model is designed to provide features and benefits descriptions to front line staff. This is a good design for selling but a bad design for quality service and answering questions.
2. The degree of automation:
If you ask a bank technologist they will describe an amazing amount of automation, with incredible sophistication of system integration. However the very statement is evidence of the degree of internal focus required to make the systems work together at all. This in contrast to what customers need.
3. The pricing and design of products:
Pricing and product design for banks generally follows the telco and airline models by creating complexity with a host of extra fees embedded in that complexity. There are some standouts such as ING who try to break through that but not a lot of innovation here.
5. Underlying compensation systems
Not much to be said here. Many bank employees have made a lot of money, yet the value to shareholders over the last 20 or 30 years for the average bank is zero.