More nimble, higher-tech rivals are making the economics of garden-variety retail banking "unsustainable" for traditional financial services companies, driving them to focus on specialized digital services for more profitable customers, according to a new study from the consulting firm McKinsey & Co.
McKinsey's financial services practice found that banks in 2020 spent an average of $550 per U.S. consumer account on everything from customer service to IT systems. That cost is far higher than the $190 in average revenue generated by routine services such as opening new accounts and applying for credit cards or personal loans.
Banks that deliver such services are experiencing "diminishing returns on their cost-reduction programs" and reaching "the limits of their core-technology platforms and branch-network configurations," the report said.
As banks reconsider operational improvements amid a worsening economy, they're repositioning digital investments to target more lucrative businesses. Banks can get more bang for their buck from complex lending products including mortgages and auto loans ($2,750 per account) and wealth management and related services ($1,710 per account), according to the report.
Ashwin Adarkar, senior partner in McKinsey's Global Retail Banking Practice and one of the report's lead authors, said retail bankers face uncertainty as consumer revenue continues to be "siphoned away" by upstarts.
The competition, poor returns on traditional services, and interest in branchless expansion into new geographic markets are encouraging U.S. banks to seek new income streams from the digital platforms they've paid billions to develop.
Fintechs and other technology companies generate 45% of the payments services market revenues, according to the firm's report, while U.S.-based nonbanks originate 56% of point-of-sale financing balances.
"Digital attackers are taking bites out of attractive profit pools," Adarkar said during an interview, adding that "product-focused players have been able to cherry-pick customers" from banks by launching sleek, relatively cheap and efficient new online platforms.
"Banks need to figure out how to better mine relationships to leverage other businesses and drive down the costs of operating basic banking initiatives," Adarkar said.
There is said to be plenty of upside in wealth management. McKinsey reported that digital investment apps handle only a quarter of assets in the mass-affluent market for accounts holding between $250,000 and $2 million.
Bank of America is one of the early movers to focus on new online consumer initiatives, reporting during third-quarter earnings last week that 80% of wealth and investment management clients are digitally active. Thirty percent of new Merrill Lynch accounts are now opened online, the $3.1 trillion-asset bank said last week.
"Meaningfully lower" customer-acquisition costs led Goldman Sachs CEO David Solomon to announce a
"It's very, very different to have those capabilities and be able to use them on our broad wealth platform versus directly marketing them to independent consumers en masse," Solomon told analysts last week.
And last week, before the bank's third-quarter earnings,
As consumer willingness to engage with digital banking increases across a bank's business groups, McKinsey's Adarkar said traditional lenders can stay ahead of competition by expanding online services beyond everyday retail banking.
"There's a window of opportunity for banks to be an aggregator of digital services," he said. "I don't think fintechs will displace banks. Ultimately, I think banks will displace slower-moving banks."
Among other factors, access to wide swaths of consumer data is what convinces Adarkar that banks will figure out how to structure new business models for retail banking in the digital era.
"Using data to help customers more effectively is what has created value over the last 10 years," he said. "And I think we'll see that play out again in banking over the next 10 years."
