Raising Finance

Bank profits set to be battered by digital startups

3 min read

30 September 2015

Gobal banks may have made record profits, but the challenge from fintech firms is growing fast.

Banks are raking in big profits again but are facing a huge struggle to fend off competition from new digital entrants.

According to consultancy McKinsey’s latest global banking annual review, bank profits soared to a record $1trn in 2014 with revenues of $1.75tn confirming the industry’s recovery since the credit-crunch crash of 2008.

Asian, and particularly Chinese, banks did well – with US lenders also putting in a strong performance. However banks had to cut costs to protect margins battered by low interest rates.

“Many in the industry are waiting for an interest rate rise or some other structural lift to profits, but even if rates rise, that will be insufficient to fundamentally improve economics,” McKinsey said. “We expect margins to continue to fall through 2020, and the rate of decline may even accelerate.”

McKinsey warned that almost two-thirds of banks earnings are at risk over the next decade as startup fintech firms use digital technology to win over customers.

The consultancy also stated that fintech companies would slash bank profits from non-mortgage lending, including credit cards and car loans, by 60 per cent and revenues by 40 per cent by 2025.

Banks are also set to lose between ten and 35 per cent of profits and revenues as a result of digital disruption in areas such as SME lending, payments processing, wealth management and mortgages.

Read more about the fintech sector:

Philipp Härle, co-author of the report, said: “The most significant impact we see is 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. 

“Most technology companies are focused on picking off 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. They want to squeeze themselves in between the customer and the bank and skim the cream off.”

Research found banks had to fight back to retain customers by improving digital offerings, revamping brands to become more emotional, hiring more engaging employees or “learn to live” with the situation and just provide funding for loans.

McKinsey said: “The window for making this choice is narrowing. Banks must decide soon, probably within three years, or the choice will be made for them.”