Banks should act to defend their leading position: report

The traditional leading position of banks in the financial intermediation system is now under threat due to technological and data innovation as well as shifting regulations. They will need to take action to make strategic transformations, McKinsey&Company said in its latest global banking review report.

A decade after the financial crisis, the global banking industry has achieved steady improvements in its level of safety. Traditional measures of risk have improved, largely in response to regulatory efforts to make the banking system stronger in the face of downturns or crises, the report noted.

For example, the global Tier 1 capital ratio — one measure of banking system safety — has risen from 9.8 percent in 2007 to 13.2 percent in 2017.

However, McKinsey said that lenders are now struck in neutral performance, which can be shown in the sector’s low valuation and investors’ doubts about their ability to sustain the leading position in the financial intermediation system.

At their heart, banks are financial intermediaries and they have for a long time sat at the center of a vast, complex system that matches sources of funds with those who are in need of them.

McKinsey estimated that in 2017, revenue from financial intermediation stood at roughly US$5 trillion, with the vast majority being captured by banks.

Nonetheless, the global consulting firm warns that banks’ position in this system is now under threat, as competitors from both inside and outside financial services have the system in their sights.

Advances in technology and data, in concert with shifts in regulation, are triggering far-reaching changes to the market, and new entrants, including other large financial institutions, specialist finance providers and technology firms, are all eyeing business.

Consequently, the current complex and interlocking system of financial intermediation will be streamlined by the forces of technology and regulation into a simpler system, McKinsey noted.

To prepare for an era of disruption, a bank must examine its core sources of competitive advantage, and understand exactly what differentiates it from competitors, both current and potential.

The leadership teams at banking institutions must pinpoint their strengths across a range of capabilities: financing and risk, technology and analytical capabilities, brand and distribution models, the report explained.

For instance, some banks can seek to build ecosystems on a more realistic scale, placing themselves at the center of their customers’ journeys in an effort to "own" the relationships and the associated data, while others can pursue expanding their scope to become one-stop shops for all banking-related products and services, focusing primarily on “distribution.”

Looking ahead, McKinsey said it believes the rewards will be disproportionate for those firms that are clear about their true competitive edge and then make — and follow through on — definitive strategic choices.

(SHINE)