A new report from global consultancy firm McKinsey and Co said banks have been warned that they risk “becoming footnotes to history” if they do not scale up and embrace technology.
“About 35 per cent of banks globally are both subscale and suffer from operating in unfavourable markets,” the report stated.
“Their business models are flawed – needing a radical rethink – and the sense of urgency is particularly acute given their weak earnings and capital position,” it further outlined.
The consultancy firm said banks need to merge with more companies or acquire them, and forge new partnerships in order to build scale and weather the potential of financial storms.
“To that end, exploring opportunities to merge with banks in a similar position would be the shortest path to achieving that goal.”
The report also considered that banks need to be prepared for an “arms race on technology”.
“Both banks and fintechs today spend approximately 7 per cent of their revenues on IT, but while fintechs devote more than 70 percent of their budget to launching and scaling up innovative solutions, banks end up spending just 35 percent of their budget on innovation, with the rest spent on legacy architecture,” it outlined.
Noting the decade since the global financial crisis has brought with it a wave of innovation in financial services – bringing new competition from tech giants including Apple and Alphabet – the report highlighted how the banks are still pondering whether they should compete with, partner or acquire some of the newcomers.
Finally, the consultancy warned of the potential impact of a downturn on public perception of the banks.
“Because of the special role they play in society, they, perhaps more than other industries, benefit from society in areas such as deposit protection and regulation as a means of constraining supply.”
In return, the report indicated banks as “particularly accountable in an era of rising inequality and falling faith in historically trusted institutions, beyond shareholders to society and the sustainability of the environment in which they and their clients operate”.
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