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The Digital Transformation of Global Banking

Digital Transformation of Global BankingMcKinsey just released its annual review on the global banking industry, and the findings and projections within it are less than spectacular. In fact, one could say they are downright depressing. The three major factors contributing to banking’s phase of stagnant growth are low interest rates, digitization and regulation, which have been popular topics of discussion for quite some time. The review segmented banks according to geographic and economic environments, with the conditions of those within developed markets varying from those in emerging ones. And while McKinsey’s report analyzed the negative short and long-term effects of those prior-mentioned headwinds, it also outlined three themes for addressing the transformation needs of institutions: resilience, reorientation and renewal.

Some eyebrow-raising figures surrounding the impacts of low rates and digitization between now and 2020 are:

  • Developed-market banks are at risk of losing roughly $90 billion (25 percent) in profits to both factors
  • Emerging-market banks are more vulnerable to the credit cycle, thus a potential drop in profits within Brazil, Russia and China could total $50B
  • Due to digitization alone, profits in Europe and the United Kingdom could fall from $110 billion to about $50 billion
    • U.S. and Japanese profits could drop 18 percent
  • In terms of return on equity (ROE) minus cost of equity (COE), U.S. banks could see a 2 point gap while European and UK banks an 8 or 9 point one
  • In 2015 the global industry’s return on equity ticked up slightly to 9.6 percent, roughly returning the cost of capital

McKinsey’s position on tackling this adversity and, to an extent, malaise requires that banks commit to no less than a holistic reinvention, a complete reimagining and reengineering of operational processes, customer strategies and organizational structures. The consultancy sees the role of technology substantially increasing within firms embarking on this transformation, with content automation via a high degree of IT infrastructure investment as a method for reducing costs.

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Amplifying and expanding the digital customer journey is also an avenue that McKinsey sees as necessary to achieve scale, reduce costs and improve service delivery. Better service leads to stronger customer satisfaction, and according to the report’s research, a 10-percentage-point rise in customer satisfaction can increase revenues by 2 to 3 percent.

Finally, creating a culture of change and innovation is critical to developing and employing the digital skills customers want. Bank leaders must collectively emphasize the importance of values and vision in order to foster a cross-functional, and sometimes unconventional, organizational construct.

The specific themes and associated initiatives outlined by McKinsey are as follows, with the first already the focus of many developed-market banks and the next two present among industry leaders only.

Resilience to ensure short-term viability of business: protect revenues through repricing and greater intermediation; downsize and reduce short-term costs; manage capital and risk; safeguard the customer franchise as well as human capital

Reorientation to fundamentally rethink the business model of the future: redefine the customer experience; rethink the operating model; meet the spirit of regulation; find pockets of growth

Renewal to develop fundamental skills: create a motivating culture of change, with shared vision and values; develop new organizational constructs; develop the digital skills needed to compete

As 2017 approaches, the pulse of global banking is slow, steady, but slow. McKinsey sees the future two ways, and immediately mitigating the impact of market headwinds to avoid continued stagnation and eventual extinction is the only manner by which long-term success can be sustained. There may be no better New Year’s resolution for an industry that’s been operating the same way for decades.