WORKING DRAFT Last Modified 4/1/2016 5:10 PM Central Europe Standard Time Printed Bank of the Future Discussion on the latest banking and digital trends and their implications April 11-12, 2016
Banking In the next decade, we will see the emergence of a unified mobile ecosystem of 24 trn, most of the world's customers TELCO Owns the channel BANKING Data Trust RETAIL Regulation Data on customers buying Slow reaction habits and spending Data companies No emotional connection with customers DATA COMPANIES Data Customer ownership Talent pool Difficult to monetize Limited emotional connection with customers Lack of daily customer contact McKinsey & Company 2
In the new ecosystem banks will have to fundamentally rethink their business model and they have three strategic options to go after Narrow spectrum Offering Typical broad banking spectrum Broader than banking ILLUSTRATIVE Primarily front end Niche player Ecosystem orchestrator Value chain Full Fully digitized universal bank Primarily back end White-label back-office operator McKinsey & Company 3
An option is to become an ecosystem owner bank ILLUSTRATIVE Niche player Ecosystem orchestrator Fully digitized universal bank White-label back-office operator McKinsey & Company 4
An option is to become an ecosystem owner bank ILLUSTRATIVE Panorama McKinsey & Company 5
Banks need to proactively follow innovative ideas from inside and outside banking, including ideas from thousands of FinTech startups Retail RETAIL ASSET GATHERING C/A E2E PROCESSES LENDING B2C PAYMENTS SELF-LEARNING EFFICIENT OPERATIONS INNOVATIVE ORGANIZATION AND CULTURE CUSTOMER SERVICE B2B PAYMENTS 2-SPEED IT DIGITIZED ADMIN AND SUPPORT DISTRIBUTION LENDING NEXT GENERATION RISK AND PRICING MARKETING CAPITAL MARKETS AND AM Institutional CASH MANAGEMENT Panorama McKinsey & Company 6
Banks need to proactively follow innovative ideas from inside and outside banking, including ideas from thousands of FinTech startups E2E SERVICE IN SELECTED VERTICALS CROWD INVESTMENT AND ADVISORY SOCIALIZING FINANCE AND USER GENERATED CONTENT ILLUSTRATIVE DIGITAL PRODUCT AND IN-APP PURCHASES GAMBLING AND GAMING ADVERTISEMENTS AND DISCOUNTS Link Like Love P2P PAYMENTS NEXT GENERATION PAYMENTS REINVENTED REMITTANCE PERSONAL FINANCIAL MANAGEMENT INNOVATIVE LENDING PLATFORMS (P2P AND CROWDSOURCING) BIG DATA DRIVEN SCORING AND LENDING E-COMMERCE / E-TRAILER RETAIL ASSET GATHERING C/A E2E PROCESSES LENDING B2C PAYMENTS SELF-LEARNING EFFICIENT OPERATIONS INNOVATIVE ORGANIZATION AND CULTURE CUSTOMER SERVICE B2B PAYMENTS 2-SPEED IT DIGITIZED ADMIN AND SUPPORT DISTRIBUTION MARKETING AND LOYALTY SOLUTIONS FOR SMEs FINANCIAL INCLUSION LENDING NEXT GENERATION RISK AND PRICING CASH MANAGEMENT MARKETING CAPITAL MARKETS AND AM NEXT GENERATION INSURANCE CLOUD BASED SERVICES FINANCIAL MANAGEMENT AND LENDING CRYPTO-CURRENCY B2B SERVICE PROVIDING OUTSOURCED/ SAAS SERVICES Panorama McKinsey & Company 7
Digital players in China are at the forefront of creating such ecosystems by expanding their core capabilities Ad union Online search e-commerce O2O ads Financial services Entertainment Smart devices Security IM payment Social media Alipay: 800+ million Number of registered accounts Sesame Credit: credit score for 300+ million Ant Micro Loans: SME loans $12+ billion Yu e Bao: AuM $93+ billion WeBank: Total loan credit line for SMEs: $300+ million WeChat: Social and mobile wallet app with 650+ million monthly active users McKinsey & Company 8
Several core elements of the new business model are visible across the value chain, but it s not easy for banks to adapt Control the retail value chain One-stop Shop for Corporates Emerging post-trade services in CMIB Robo-advisory Self-learning e-operations Augmented reality-based servicing Big data-based real-time risk management Fully personalized and automated customer servicing McKinsey & Company 9
Fintechs have six markers of success which make them easy to achieve this transformation, well ahead of banks 1 Advantaged modes of customer acquisition Fintech attackers need to find ways to attract customers cost-effectively, e.g. via partnerships and distribution agreements, an alternative way payments POS attacker Poynt is increasing its scale 2 Step-function reduction in the cost to serve The erosion of the advantages of physical distribution make this a distinctive marker for the disruptive FinTech attackers, e.g. FinTech lenders have up to 400 bps cost advantage over banks 3 Innovative uses of data Big Data and advanced analytics allow Fintechs to experiment with new credit scoring approaches and to understand customer needs or next best actions, e.g. by leveraging social media data 4 Segment specific propositions Successful Fintech attackers will cherry pick from banking products and excel only in that segment, e.g. Wealthfront targets fee-averse Millenials who favor automated service over human advisors 5 Leveraging existing infrastructure Fintech attackers embrace co-opetition and find ways to engage with existing ecosystem of banks, e.g. Lending Club s credit supplier is Web Bank, PayPal s merchant acquirer is Wells Fargo 6 Managing risk and regulatory stakeholders Regulation is a key swing factor in how Fintech disruption could play out as once these attackers reach scale they will attract more regulatory attention and the ones lacking the required capabilities could easily fail McKinsey & Company 10
Financial attackers can choose from three different strategic directions % Share of fintechs 20-30 Disintermediate the customer ownership of banks 5-10 Compete with and disrupt the banks 1 3 2 60-75 Cooperate and partner with banks McKinsey & Company 11
True transformation and innovation in banking can only be achieved through banks partnering with Fintechs along three pillars NOT EXHAUSTIVE Customer acquisition and retention banks bring large, established customer bases, while non-banks give access to sticky and innovative products to increase involvement Refining and scaling new tech collaboration provides an opportunity to pressure test innovations and expand to new markets or demographics Regulatory and risk management banking players have sophisticated practices, which non-banks will likely need going forward entering the financial services option space McKinsey & Company 12
Partnerships between start-ups and banks take many different forms Low Access to technology e.g., PayPal Sandbox allowing developers to test PayPal application components; Metro Bank agreement to use Zopa s P2P platform to expand lending services to its clients Investment in products e.g., Santander agreement to purchase up to 25% of Lending Club s total origination for 3 years Degree of affiliation Alliances e.g., Santander and Funding Circle partnership agreement to transfer leads of loans that Santander is not able to finance Funding e.g., Credit Suisse led $165 M Series D financing for Prosper based on a $1.9 B valuation High Acquisition e.g., BBVA purchase of Simple and Holvi McKinsey & Company 13
This business transformation heralds the largest industry transformation in history and provides a great opportunity for innovation The financial industry has a much larger profit pool than recently disrupted industries 2015 global net profits by industry, USD trillion Printing & publishing 0.1 Retail sector 1 0.7 Banking and asset management 1.3 Communications 2 0.5 1 Excluding motor vehicles 2 Transmission of sound, images, data or other information via cables, broadcasting, relay or satellite SOURCE: World Industry Service McKinsey & Company 14