Over a third of the world’s banks lag on technology and scale, and are unprepared for an economic downturn, according to global consultancy firm McKinsey and Co, via InvestorDaily.
The firm used its annual banking review to warn banks that they risked “becoming footnotes to history” if they did not scale up and embrace technological change.
“About 35 percent of banks globally are both subscale and suffer from operating in unfavorable markets,” the report reads.
“Their business models are flawed, and the sense of urgency is acute.”
According to the report, banks need to merge with or acquire more companies and forge new partnerships in order to build scale and weather the financial storm.
They also need to be prepared for an “arms race on technology”.
“Both banks and fintechs today spend approximately 7 percent of their revenues on IT; but while fintechs devote more than 70 percent of their budget to launching and scaling up innovative solutions, banks end up spending just 35 percent of their budget on innovation with the rest spent on legacy architecture,” the report reads.
The report noted the efforts of Amazon in the US, which offers businesses traditional banking services while connecting them to the Amazon “ecosystem” of non-financial products and services, and pointed to blockchain and artificially intelligent systems as some of the advances banks need to embrace in order to survive.
Banks could also outsource some “non-differentiating” activities – activities that do not differentiate the bank from its competitors, such as “know your customer” and anti-money laundering compliance, which can represent as much as 7 per cent and 12 per cent of costs.
However, some factors – like geography – were outside of bank control.
The report noted that North American banks hit a ROTE of 16 per cent in 2018, while European banks barely managed half of this, with implications for their performance in the event of downturn.
The report also warned of the potential impact of a downturn on public perception of banks.
“Because of the special role they play in society, they, perhaps more than other industries, benefit from society in areas such as deposit protection and regulation as a means of constraining supply,” the postscript to the report reads.
“In return, they are particularly accountable in an era of rising inequality and falling faith in historically trusted institutions; beyond shareholders to society and the sustainability of the environment in which they and their clients operate.”
