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Banks Must Make Digital Push as Rivals Gain: McKinsey

Banks must increase efforts to offer digital services and automate back-office functions to improve returns, satisfy regulators and ward off new competitors, according to McKinsey & Co.

Some banks need to think of themselves as data companies and may need to spin off back-office units that perform tasks such as collateral management and price verification, the New York-based consulting firm said in an annual review of the banking industry. The move toward digitization “accelerated markedly” in the past year, McKinsey said.

While banks globally have almost reached their long-term average of 10 percent return on equity, most have valuations showing investors aren’t optimistic about their prospects for growth, according to the report. Customers will increasingly use mobile services as more than 12,000 startups are focused on banking businesses, McKinsey said.

“A number of things are tipping the balance toward action here,” Fritz Nauck, a McKinsey director and a co-author of the report, said yesterday in an interview. “Consumer behavior, regulatory efforts, outside innovation and cost efficiency all point toward action.”

Banks can earn more from digital-related cost savings than from a boost in revenue, according to the report. Some electronic functions can cut expenses by as much as 50 percent, McKinsey said.

Large Opportunity

“When we look at large universal banks, they have 400 to 500 core activities or processes,” Nauck said. “Over two-thirds don’t touch the client at all. While not all that stuff can be digitized or automated overnight, a lot of those steps certainly can be, so we think there is a large opportunity to get more productive.”

Pressure is coming from “FinTech” startups, whose focus has moved beyond processing transactions to areas such as personal investments and lending, the authors wrote. The six largest of these non-bank “attackers” have more combined revenue than the 20th-largest global retail bank, according to the report.

“While the number of FinTechs is large, most provide more of an opportunity than a threat to global banks, which can build on their ideas, set up joint ventures, and sometimes acquire these firms to deepen or broaden their offerings and capabilities,” McKinsey wrote in the report.

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