Banks fought for their lives during the 2007-2008 financial crisis. In the decade or so since, banks aren't necessarily facing an existential threat, but they are experiencing changing dynamics in the market. From the biggest tech firms moving in on their turf to the emergence of banking ecosystems, the world of banking is changing and the rate of the acceleration of change is increasing.
There are seven new transformative shifts afoot in US retail banking, according to research from consulting firm McKinsey.. These changes will alter the operations, economics, and efficiency of US retail banking.
The past couple of years have demonstrated big tech's interest in financial services. Facebook (Libra), Amazon (bank accounts), and Apple (credit card with Goldman Sachs) are all interested in going deeper to serve their customers. For the most part, big tech has built very strong levels of trust with their customers, a sign that customers will likely trust them as they expand into financial services.
Nearly two in three consumers would trust Amazon to handle their financial needs, and among those, one in three would likely open an Amazon checking account, according to research from McKinsey.
While customers appear primed to buy financial products from Big Tech, professionals also see big tech as serious competition in some cases.
Banks are increasingly joining ecosystems, a signal that they may be rising to the challenge of Big Tech. In fact, 44 percent of US bank executives said that in five years they expect to realize 10 percent or more of profits from non-financial products delivered through ecosystems.
Younger consumers are more likely to accept a bank as the lead in an ecosystem, according to McKinsey research. The jury is out whether banks will lead this ecosystems, but joining one that's developed by others still gives banks an opportunity to extend their reach to consumers.
The move to digital channels was primarily driven by millennial tastes but has now extended into the general population. As more customers expect good digital experiences, that's put pressure on financial institutions to roll-out more digital experiences and in some cases, they're developing end to end digital delivery.
That said, customers aren't satisfied with their options. A recent survey of banking consumers found that despite a 5 percent increase in digital banking penetration the over-70 segment, across wealth segments, more than half of consumers in that age group are unsatisfied with the digital experience. Banks continue to work on the right mix of human and digital interactions for their customers.
Banking customers have grown tired of an industry that doesn't match their own values. Today's consumer expects banks to act on relevant social issues and cooperate as responsible corporate citizens.
Reduced cost scale
New technologies like Open APIs, cloud core, and banking as a service have served to lower the overall scale costs for growth-oriented banks. By leveraging leading-edge technologies, banks stand to make substantial potential gains: cost-to-income ratios going below 25 percent, cost-to-asset ratios approaching below 50 percent, and marginal cost effectively dropping to near zero, according to McKinsey.
Historically, risk management in financial services was a field that looked inward, inside institutions and the industry, to mitigate exposure to risks like loan portfolio management and disaster planning. But today's financial institutions face an entirely different set of concerns, like hacking, phishing attacks, and social media misinformation campaigns.
Managing these new risks calls for new methods of identification and prevention, a new pool of talent, and integration across all banking activities.
Digital roles, including digital marketing, make up only 7 percent of total US bank staff. This number goes up to 15 percent at banks with more focus on digital, according to McKinsey research. Compare this to the composition of large tech companies, where a digital staff density of about 40 percent is common. Banks may not appreciate the meaning of this digital talent shortfall.
Banks, regardless of their size and breadth, should address each of the seven shifts in the market. With strategy and planning, banks can position themselves to be competitive in this new environment.