According to the annual banking review of McKinsey, the global banking industry is not able to respond to a developing digital threat, that could also be utilised to ramp up profits.
And it is not coming from the familiar suspects of developing fintech firms, but the likes of Jeff Bezos’ Amazon, the e-commerce giant.
The report said that by tapping into the prospect of the cloud and apps, new technology and robotic process automation, and developing “platform capabilities,” banks could obtain an additional $350bn (£264bn) of profit over the coming three to five years.
The productivity boost from digitising their businesses would enable banks to counter the foreseen threat from the likes of Amazon, which has a small business lending arm, and other “platform companies” like Tencent and Alibaba. Those are expected to prove the main digital threat to banks, instead of the rise of fintechs.
McKinsey said: “while we noted the presence of the platform companies lurking in the shadows in 2015, we thought that fintechs would provide the chief digital threat.
“Instead, banks have been able to parry many of the fintechs’ moves and have joined forces with them in several cases – while the platform companies are emerging as a formidable force.”
Also, “staking a claim to banks’ customers”, McKinsey said that these tech giants were also moving in on the revenues and profits of banks.
And notwithstanding signs of improved health with regard to liquidity, costs, and capitalisation, the performance of the global banking industry “continues to be lacklustre.”
As of August this year, bank shares had fallen and were 10 percent below their peak in June 2015, while major stock markets surged.
The report warned that should the increasing digital threat from new competitors, and the general adoption of customers to digital banking continue to be “unchecked,” it could reduce the return on equity of the industry to 5.2 percent by 2025.
To get a hold on the digital threat, McKinsey said that banks need to initially utilise the digital tools that are available to them in order to industrialise their operations to improve capital usage, increase revenue, and in particular, decrease costs.
According to the consulting firm, banks still have the chance to take the reins, as customers trust them and they hold huge amounts of data.
The report stated: “Our previous research identified two major effects from new digital entrants: the loss of the customer relationship and margin erosion across retail segments.
“We see new evidence of those trends – and they are happening faster than we expected. Margins continue to fall worldwide.”
The report said that banks need to improve platform capabilities in their drive for sustained success, and contemplate on partnering with platform firms.
The report gathered insight from the database of McKinsey comprising of banking markets in over 90 countries, along with its fintech database.