Mckinsey review finds digitization will significantly lower profits for the global banking industry over the next three years
A Mckinsey global banking review has found that developed market banks will be most impacted by a trio of incoming weak economic activity, digitization, and regulation, with $90 billion, or 25 percent, of profits at risk. Out of the major developed markets, Mckinsey found the United States banking industry best positioned to face the challenges ahead. Together with Japanese banks, the US banking sector is set to have between $1 billion and $45 billion in profits at risk by 2020, depending on the extent of digital disruption, the study finds.
European banks face a more volatile outlook in the coming years. According to Mckinsey, banks in Europe and the United Kingdom have $35 billion of profits at risk, however things could get much worse.
“more severe digital disruption could further cut their profits from $110 billion today to $50 billion in 2020, and slice returns on equity (ROEs) in half to 1 to 2 percent by 2020, even after some mitigation efforts”, the Mckinsey review said.
Banks in developed markets are seeing unprecedented disruption from new tech savvy entrants helped by government regulators looking to open up financial services to competition. Disruptive non-traditional players and industry digitization are causing reduced margins in a variety of fee-based banking businesses like payments and wealth management.
“Over time, huge tech companies may be able to insert themselves between banks and their customers, capturing the vital customer relationship and presenting an existential threat,” states McKinsey.
The review suggests banks will need to make profound changes to fight against the trio of looming forces.
“Tinkering around the edges, as many banks have done for years, is not adequate to the scale of the task and will only exacerbate the sense of fatigue that comes from years of one-off restructurings.”
“From an organisational perspective, banks in general need to move beyond traditional restructuring and renew the bank via new technological capabilities.”
Read more about Mckinsey’s 2016 global banking review ‘A Brave New World for Global Banking’ here