By Miklos Dietz and Hans Martin Stockmeier, Senior Partners, McKinsey & Company, share their views
editor's pickSaturday 17, November 2018
Banks have traditionally acted as financial intermediaries, dominating a system that stores, transfers, lends, invests, and manages risk for roughly $260 trillion in funds globally. Technological innovation and shifts in the regulatory and broader socio-political environment are opening this financial intermediation system to new entrants, including other large financial institutions, specialist finance providers, and large technology firms.
At stake is the revenue pool associated with intermediation—the vast majority of which is captured by banks—which stood at some $5 trillion in 2017. As the banking industry in the Middle East consolidates, many institutions will be considering how best to navigate these dual forces of technological and regulatory change. Armed with a robust assessment of their current and future sources of competitive advantage, banks have four strategic choices when it comes to how to play in this new landscape:
The innovative, end-to-end ecosystem orchestrator.
While few banks can compete with the likes of Tencent and Amazon to become the full owner of multi-trillion-dollar mega-ecosystems, some have real opportunities to become critical shapers of their ecosystems. They would place themselves at the centre of their customers’ journeys and aim to own the relationships with those customers—and the associated data. Such banks would expand their scope to become one-stop shops for all banking-related products and services, focusing primarily on ‘distribution’ and in some cases also ‘manufacturing’ activities.
They would deliberately move beyond the traditional banking value proposition and address broader parts of the customer journey, such as housing and home financing. Their open platforms would allow third parties to plug in via application programming interfaces (APIs) and provide additional value-added services for customers. A bank might choose to orchestrate one of several different kinds of ecosystem—from a large-scale national ecosystem to a local one. Likewise, a bank might choose to aggregate a wide variety of services and players in its ecosystem or could focus on a niche segment ecosystem.
The low-cost ‘manufacturer’ (and potentially partner).
For some banks, the right approach in the face of disruption might be: If you can’t beat them, join them. These banks would unbundle their capabilities in areas such as market making and liquidity (in capital markets) and access to capital (in mortgages)—and offer those capabilities to new firms seeking to enter and expand in these markets. In other product areas, these banks would continue to compete with new entrants.
The core of this approach would be to create a low-cost ‘manufacturing’ engine separated from distribution. Banking institutions become low-cost, highly efficient white-label manufacturing engines by consolidating volumes, mastering operational efficiency, and fully digitising and automating processes. Banks’ partners would include fintechs that have strong customer affiliation and operations in distribution. Banks choosing to become ‘manufacturers’ could also offer platforms to other banks. Banks with strong balance sheets, deep access to low-cost funds, and strong financing abilities will have the advantage here.
The bank focused on specific business segments.
A third strategic direction would see banks defend against competition from new entrants by refocusing their priorities. Such banks would become high-touch, relationshipdriven specialists competing in narrow business segments. They would focus on niches where highly variable and specific customer needs require bespoke approaches and highly experienced talent, with the key value proposition centred on relationships, trust, reputation, and experience. This approach might play out in several ways. A bank might concentrate on a narrower set of products, such as corporate loans. It could focus on a limited set of clients, such as providing retail banking for ultra-highnet- worth individuals. Or it could hone a specialised set of capabilities, such as a wholesale bank focusing on client-facing activities such as investor relations and pre-trade.
The traditional bank, but fully optimised and digitised.
An alternative approach is to remain a traditional bank but become fully digitised. Banks adopting this direction could aspire to become seamlessly digital local banks, or global-scale corporate or wholesale banks. They would continue to offer their traditional set of products, such as payments or retail banking, but would optimise cost by fully digitising and automating processes. Moreover, they would make full use of technology to boost revenues where possible.
The banks that succeed with this approach will have robust core strengths, including capabilities in areas such as customer acquisition, underwriting, financing, and servicing. But they will need to build on those strengths and fundamentally optimise their operating models, including through end-to-end digitisation. The heightened M&A activity in the Middle East is already making the banking industry stronger. Future prospects depend at least in part on banks maintaining their dominance of the financial intermediation system. There is no single strategy for success; what is certain though is that rewards will be disproportionate for those firms that are clear about their true competitive advantage and then make— and follow through on—definitive strategic choices.