Consumer ‘battle’ to define decade of banking

Up to 40 per cent of revenues across five key banking businesses could be at risk by 2025 as digital companies challenge the establishment, according to the firm’s latest sector review.

This could wipe out up to two-thirds of profits in the next 10 years.

Consumer finance is the most vulnerable service area, McKinsey said. While the market gains of challenger firms are likely to be small, the added competition is likely to push down prices and hit banks’ profits through squeezed margins.

The sector is now facing a “sea change” in its economics, the report said.

“New technology and regulation threaten the linchpin of banks’ economics: the customer relationship,” it said.

“Historically the banking industry has provided three main services: financing, investments and transactions.

“These businesses have varying levels of profitability, with cross-subsidies supporting the weaker ones. The customer relationship holds this web of activities together.”

While customer relationships are essential to the success of a bank, they are often weak and can be the result of inertia and high costs associated with swapping banks, the consultancy said.

Technology and regulation are “tearing at that web”.

FinTech start-ups, more established technology companies and “shadow banks” all threaten to undermine the customer connection to mainstream banking.

Banks must now decide whether to battle for the customer, or to focus on the “basic business of financing”, the report said.

“The window for making this choice is narrowing; banks must decide soon, probably within three years, or the choice will be made for them,” it added.