Future of Banking

A recent report from McKinsey outlines the future of banking and states that banks are at a turning point. They are witnessing their valuation being discounted by the market while their profits continue to climb up. Their margins have been going down slowly.

While banks have pushed for great improvements recently, margins are shrinking—down more than 25 percent in the past 15 years and expected to fall to 30 percent, another 20 percent decrease, in the next decade.

The report explores different ways by which banks can climb up the value chain (or sometimes down - BaaS) to become more exciting and hence command better valuation in public markets.

It lists five distinct areas where banks would have to innovate to thrive.

1. Everyday banking:?Offering everyday services that are cheap and easy, and accessible, like an e-commerce marketplace for end consumers
2. Investment advisory:?Blend human experts and personalized AI that can guide customers through a broad range of investment and protection options
3. Complex financing:?Create end-to-end seamless journeys for complex financing products like mortgages, and car loans to make them convenient, efficient, low-cost and personalized.?
4. Mass wholesale intermediation:?Serve as a marketplace for corporate-focused products like corporate finance, M&A advisory, and other traditional investment banking offerings.?
5. Banking as a service: Create highly efficient tech platforms that can be licensed to customer-facing organizations.?

Here's my take on the above:

Everyday banking is critical, but banks must not directly serve customers with discretionary spending on their daily needs, such as fashion, food, travel, etc. Banking is by definition a business of trust. Commerce is a slippery slope as it can easily gravitate towards the exploitation of customers’ impulses thereby eroding the customers’ trust.?

Instead, banks should partner with commerce entities to facilitate payments, loyalty, and lending where required. Everyday payments is almost like bread and butter. It is unwise to try and make high-margin money out of these. With payments as the hook, banks can offer value-added services such as loyalty and lending to earn better margins while also unlocking value for customers.?

The report suggests that Banking-as-a-service could also be a vehicle for long-term value creation. However, I believe that banks must go beyond renting their licenses, and find ways to contribute more to the partnership. By increasing the value they bring to the table, they can command a larger share of the pie. Else, it leads to marginalisation.?

Overall, there are interesting opportunities to be explored. It is true in the west. It is also true in India. We are still at the beginning of a revolutionary era in banking.?

#fintech #baas #banking