Banks must act now or risk becoming a 'footnote': McKinsey

NEW YORK • More than half of the world’s banks are already in a weak position before any downturn that may be coming, according to a report from consultancy McKinsey & Co.

A majority of banks globally may not be economically viable because their returns on equity are not keeping pace with costs, said McKinsey in its annual review of the industry released on Monday.

It urged firms to take steps, such as developing technology, farming out operations and bulking up through mergers, ahead of a potential economic slowdown.

"We believe we are in the late economic cycle and banks need to make bold moves now because they are not in great shape," said McKinsey senior partner Kausik Rajgopal. "In the late cycle, nobody can afford to rest on their laurels."

The decade since the global financial crisis has seen a wave of innovation in financial services, bringing new competitors from fintech start-ups to giants such as Apple and Alphabet's Google. Banks have pondered whether to compete with, partner with or acquire some of these newcomers.

McKinsey, whose clients are some of the biggest corporations in the world, consults on topics ranging from strategy and technology to mergers and acquisitions.

The firm said banks risk "becoming footnotes to history" as new entrants change consumer behaviour. Most recent attempts by banks to boost efficiency have been "business as usual", it said.

Banks allocate just 35 per cent of their information technology budgets to innovation, while fintechs spend more than 70 per cent, said McKinsey.

Combined with regulatory factors lowering the barrier to entry, such as open banking and looser requirements for start-ups, the environment is increasingly conducive for newer firms to take share from banks.

The report points to Amazon.com in the United States and Ping An in China as examples of technology firms that are capturing financial services customers.

To make matters worse for the old guard, the new players tend to go after the business areas that create the highest returns at banks - credit cards, for example.

Lenders can cut costs and find funds for technology by outsourcing what McKinsey calls "non-differentiating activities", including some trading and compliance functions. Banks "need to get much more comfortable with external partnerships and being able to leverage talent externally", said Mr Rajgopal.

Another way to free up money: get bigger. The report said: "Going forward, scale will likely matter even more as banks head into an arms race on technology."

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Correction note: This article has been edited for clarity.

A version of this article appeared in the print edition of The Straits Times on October 23, 2019, with the headline 'Poll: Half of world's banks can't survive downturn'. Print Edition | Subscribe