The Fight for the Customer

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The Fight for the Customer: McKinsey Global Banking Annual Review 2015
banking activities have proved impregnable.
Start-ups have captured tiny market
shares in lending, deposit-taking and
other businesses. But they are growing
quickly. The question is: Can they reach
sufficient scale to materially affect banks’
revenues and profits?
Estimating the potential
In our opinion, the answer is yes. Attackers
are targeting origination and sales, the customer-facing
side of the bank. Even a partial
loss of direct customer relationships will
have a significant impact. Looking at five
retail banking businesses – consumer finance,
mortgages, SME lending, payments
and wealth management, McKinsey found
that the risks are widespread. In consumer
finance, up to 40 percent of revenues and
up to 60 percent of profits are at risk of
loss by 2025 (Exhibit 10, page 25). That is
equivalent to about 6 percentage points of
that business’s ROE, which we estimate to
be about 10 to 12 percent currently. In payments,
30 percent of revenues and 35 percent
of profits are at risk. Other businesses
have smaller but still material revenues and
profits at risk. These estimates assume that
banks continue to cut operating costs on
their current trajectory, but do not assume
any action on their part to boost volumes,
alter prices, or cut other costs.
Naturally, these forward-looking projections
require many other assumptions and will
vary from country to country. To understand
more about the approach we used,
see “A look at our methodology” below.
A look at our methodology
In each business we studied, we assessed characteristics like
the presence of network effects, scalability, barriers to entry,
and so on. We used this to define four expected patterns of
disruption – an S-curve of explosive growth, for example, or a
straight-line steady shift – like those seen in other industries
and technologies. We then made estimates of the forces at
work in the given business. For example, in wealth management
services for the mass affluent, we estimated that falling
prices would erode the industry’s margins by one-fourth by
2025. The estimate was based on an analysis of price competition
as a result of tech attackers in insurance and observations
from recent fee reductions by incumbent wealth managers.
We also estimated the revenues that attackers would capture
from banks. To do this, we started with point revenue estimates
of a sample of 11 “robo advisors,” complemented by specialist
research from three major investment banks and
research firms. We projected a period of continued strong
growth, followed by a period of slower growth. For 2014-2019,
we estimated annual growth in AUM of ~137 percent, based on
recent growth trends of the robo advisors. Note that the estimate
reflects the current small size of attackers’ AUM. For
2020 – 2025, we projected growth in AUM at 30 percent.
Finally we validated the findings with experts from McKinsey
and the industry.