Study predicts digital disruptors to slice bank earnings

A newly-published report by McKinsey suggests that the digital revolution transforming the banking sector will cut earnings on some financial products by almost two-thirds, says the Financial Times.

The consultancy makes the prediction in its global banking annual review, which states that banks face “a high-stakes struggle” to defend their business model as digital disruption from new technology competitors drives down prices and erodes lenders’ profit margins.

The FT says that McKinsey expects technological competition to reduce profits from non-mortgage retail lending, such as credit cards and car loans, by 60% and revenues by 40% over the next decade.

The review predicts that a smaller, but still significant, chunk of profits and revenues of between 10% and 35% to be lost from payments processing, small and medium-sized enterprise lending, wealth management and mortgages.

“The most significant impact we see in price erosion, as technology companies allow delivery of financial services at a fraction of the cost, and this will mostly be transferred to the customer in lower prices,” Philipp Härle, co-author of the report, told the FT.

He added that most technology companies honed in on the most lucrative parts of banks’ relationships with their customers, leaving them as “dumb” providers of balance sheet capacity. “Most of the attackers do not want to become a bank,” he said. “They want to squeeze themselves in between the customer and the bank and skim the cream off.”

The industry is seen as having two options. “Either banks fight for the customer relationship, or they learn to live without it and become a lean provider of white-labelled balance sheet capacity.”


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