There are the startups that are upstarts, and then there are the startups that are giant killers.
For the banking industry, the latter may be lurking. As The Globe and Mail reported on Tuesday (Sept. 29), citing a report from consultant McKinsey & Co., banks could see their operating margins shorn by as much as 60 percent in as little as a decade. The key is that the smaller fish eat away at the bigger whales, competing on cost and convenience.
There’s a lot of operating cash to chew on, as globally banks show profits of $1 trillion, with 12,000 startups chasing even a sliver of that.
In the latest iteration of its review of the global banking industry, which debuted on Wednesday, McKinsey said that “the changes to come over the next 10 years will be less visible than the global financial crisis or the bursting of the dot-com bubble, and yet their impact on banking’s economics and even fundamental business models will be much more substantial.”
Drilling down, the vulnerabilities span five retail lines that live within larger banks, and the upstarts can do it better and cheaper, boosting the customer experience, which is where disruption will take place. Most at risk would be consumer finance, the stalwart business of deposits and lending, which gathers 60 percent of profits and 40 percent of sales, implying that $674 billion in top line will be a bit less than $400 billion by 2025.
In its report, McKinsey posited that “consequences for banks are quite dramatic. The substantial value that banks generate from distribution may be captured by others. Margins will come under pressure, and the customer relationship, a platform from which banks sell other, higher-margin, fee-based products, will be weakened or might even disappear.”
Key culprits: Apple, of course, and Google, of course. The technology that will ferry the upstarts to victory will be mobile, with buying power via the smartphone. That would translate to a profit loss of 20 percent to 35 percent should corporate lending, wealth management and mortgages at the big banks get hit precipitously.
All is not lost for the big lenders, said McKinsey. They must swerve towards an acceptance and adoption of digital banking, especially with an eye on millennials.
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