By John McDonald
A new report from consulting firm McKinsey warns that three in every five players in the global banking sector risk becoming nothing more than “footnotes to history” if they do not reinvent themselves before the next economic downturn.
Report co-author Chira Barua called the current global financial environment a “do-or-die” moment, adding that “imaginative institutions are likely to come out leaders in the next cycle.”
She recommended every bank take “steps…to change their fortunes” before time runs out.
The biggest issue, according to the report, is that most of today’s global banking heavy-hitters are not designating sufficient resources to innovation and imagination.
The report indicated most banks set aside only about a third of their IT budgets for “innovation and reinventing strategies,” a move that places them far beyond more agile competitors in the fintech sector.
With those competitors already encroaching on the traditional global financial space (think: Apple, which recently entered the banking space), banks are not currently in a position to compete if the traditional financial system is upended as will likely happen during the next economic storm.
Fintech players tend to assign about 70 percent of their IT budget toward reinvention and innovation, which Kinsley analysts say will stand them in good stead if interest rates remain low or even go negative in more countries around the world.
Kinsley analysts are not the only ones sounding the alarm.
Last month, PricewaterhouseCooper (PwC) Luxembourg suggested both banks and wealth managers must embrace “Amazonization,” or the shift in power toward the consumer that has resulted from multiple competing online platforms offering nearly every type of financial and wealth management service.
John Parkhouse, a senior partner at PwCLuxembourg, explained, “More traditional players must focus and invest [in critical themes like environmental, social, and governance (ESG) innovation and development] if they want to remain competitive on a global scale.
Kinsey analysts agreed, noting that banks and institutions that find themselves incapable of this type of reinvention may well find their only option is “merging with similar banks or selling to a stronger buyer with a complementary footprint.”
In the Kinsey report, the analysts are brutally frank in their outlook, asking bluntly, “What explains the difference between the 40 percent of banks that create value and the 60 percent that destroy it?”
They concluded that although correcting issues creating this troubling chasm take time, any bank hoping to reinvent itself this late in the economic cycle must focus on risk management, productivity, and revenue growth.
Banks that succeed in carving out productive niches in these areas are more likely to survive a looming downturn.
Those banks (and investors like them) who remain mired in only the most traditional financial roles, assets, offerings, and services, will likely fall prey to the downturn and fade out of existence.