Banks in the changing world of financial intermediationaab.al/wp-content/uploads/2019/05/S1.5_McKinsey_Milan... · 2019-05-20 · CHINESE PAYMENTS - Technology giants, such as AliPay

Banks in the changing world of financial

intermediation

AAB CONFERENCE

CONFIDENTIAL AND PROPRIETARY

Any use of this material without specific permission

of McKinsey & Company is strictly prohibited

May 14th, 2019

2SOURCE: SNL; Thomson Reuters; McKinsey Panorama

10

14

13

11

12

0

13.0

20142012 201720102008

12.6

12.1

2006

9.5

13.2

2016

9.8

10.8

11.111.3 11.4

12.1 12.2

+2% p.a.

The Tier-1 capital ratio has risen consistently over the last years, increasing the level

of safety and stability of the banking system

Tier-1 capital ratios1, %

1 Based on a sample of ~1,000 largest banks globally in terms of assets

Global, 2006-17 2017

Emerging markets

North America 12.6 13.1

Western Europe 13.0 15.9

Emerging Asia 11.6 13.2

EEMEA 14.4 14.2

China 10.2 10.8

Other Developed 11.0 12.4

Latin America 10.5 12.9

Developed world

2012

ESTIMATE

3

Global ROE & Tier 1 Ratio1, %

Banking returns on equity have remained stable despite a steady increase in the Tier-1 ratio

12

092006 07 13 1510 11 12 14

18

20170

6

16

8

10

16

14

08

12.6

9.5

15.2

9.8

17.4

11.1

4.9

6.5

9.4

11.3

8.4

10.8

8.4

12.1

9.4

12.1

9.6

12.2

9.5

11.4

13.0

9.0

13.2

ROE

Tier 1 Ratio

8.4

SOURCE: SNL; Thomson Reuters; McKinsey Panorama

1 Based on a sample of ~1,000 largest banks globally in terms of assets

4SOURCE: SNL, McKinsey Panorama

1 Based on a sample of ~1,000 largest banks globally in terms of assets.

Global banking ROE tree, 2012-2017

Global banking ROE has hovered in a narrow range between 8 and 9 percent since 2012

Return on Equity1 (after tax), % Fines and others, %

Risk cost, %

Net Operating income/Assets, %

Return on Assets (after tax), %

Leverage

Margin, %

Cost efficiency, %

Taxes, %

2012 0.5

2017 0.6

CAGR

5%

2012 17.1

2017 14

CAGR

-3%

2012 1.1

2017 1.2

CAGR

2%

2012 0.4

2017 0.3

CAGR

-7%

2012 0.05

2017 0.04

CAGR

-5%

2012 0.17

2017 0.22

CAGR

7%

2012 2.7

2017 2.6

CAGR

-1%

2012 1.6

2017 1.3

CAGR

-4%

CAGR

1.4%2012 8.4

2017 9.0

5

Global banking margins are declining in most geographies, but cost efficiency is rising

SOURCE: SNL, McKinsey Panorama

1 Based on a sample of ~1,000 largest banks in terms of assets 2 Australia, Hong Kong, New Zealand, Singapore, South Korea, Israel & Taiwan.

3 Operating Income/Assets 4 Impairments/Assets 5 Operating Cost/Assets 6 Income tax expenses/Assets 7 Includes regulator fines, customer redress, impairment of goodwill, gains/losses from discontinued operations and

restructuring charges 8. Numbers may not add up due to rounding

Change in lever increases ROE

Change in lever decreases ROE

Levers impacting ROE, 2012–171,

Percentage points

Decreasing

margins and

improved cost

efficiency

consistent

across

geographies

Western Europe

North America

Other developed2

China

Emerging Asia

Latin America

Global

EEMEA

Margin3

-6.5

-3.5

-6.9

-10.3

-1.8

2.5

-3.3

Cost

efficiency5

4.6

5.0

3.7

7.4

0.4

0.6

4.7

7.2-10.2

6

0.3 (9%)

0.7 (14%)

1.4 (36%)

0.5 (12%)

Payments

1.1 (29%)

0.1 (2%)

2007

0.6 (13%)

1.4 (31%)

1.6 (36%)

0.1 (3%)

2012

0.7 (13%)

0.5 (12%)

Corporate &

Commercial Banking

0.3 (5%)

Retail Banking

1.5 (30%)

~ 5.0

1.7 (35%)

0.1 (3%)

2017

Wealth &

Asset Management

Investment Banking

Market Infrastructure

0.5 (11%)

0.3 (6%)~ 3.9

~ 4.53% p.a.

2% p.a.

Global revenue growth rate slowed to 2% in the last 5 years

SOURCE: McKinsey Panorama - Global Banking Pools, McKinsey Capital Markets Infrastructure Providers & Securities Services practice

Global Industry Revenues, USD trillion

CAGR 2012-17

(%)

CAGR 2007-12

(%)

53

0.4-5

45

31

14

25

ESTIMATES

7

The current financial intermediation system remains highly complex and generates ~$5 trillion

of revenue, equivalent to ~190 bps

SOURCE: McKinsey Panorama - Global Banking Pools

1 Sovereign wealth funds, and public pension funds; 2 Endowments and foundations, corporate investments, etc.; 3 Real estate, commodities, private capital investments, derivatives, etc.; 4 Includes exchanges, inter dealer brokers (IDBs), and

alternative venues (e.g., ATS and MTF), but excludes dark pools; 5 Custody, fund administration, corporate trust, security lending, net interest income, collateral management, and ancillary services provided by custodians

Uses of funds: USD trillion

Total annual revenue of financial intermediation is ~$5tn 44

47

36

46

54

22

13

262

SWFs & PPFs1

Corporate &

public deposits

Other

institutional AuM2

Retail AuM

Insurance &

pension

funds AuM

Personal deposits

Banks’ bonds,

other liabilities &

equity9

42

31

46

11

11

41

46

25 Other investments3

Corporate &

public loans

Equity securities

Government bonds

Retail loans

Corporate bonds

Securitized loans

Securities held

on balance sheet

Other assets

262

Share of total revenue in 2017, % XX%Annual revenue in 2017, USD billion

Sources of funds: USD trillion

Sales & Trading (including Prime Services)

M&A advisory

Origination (ECM,

DCM)

Retail asset

management

Private Capital (PE,

PD)

Institutional asset

management

Retail

brokerage

Wealth mgmt

Bancassurance

Investment banking

40

25

210

Wealth and asset management

175

45

150

150

100

40

13%

Listing & trade

execution venues4

Clearing &

settlement

Securities

services5

Market infrastructure

30

15

80

3%

5%

Payments

Business-to-businessBusiness-to-consumer270 445

14%

Corporate and commercial banking

Corporate & public lending965Corporate & public deposits

560

Mortgage

Consumer finance

470

730Retail deposits 545

Retail banking Tre

asury 3

0%

35%

Off banking BSOn banking BS

8

Banks perform most of activities in the financial intermediation system today


Share of total revenue in 2017, % XX%Annual revenue in 2017, USD billionCore activity for banks





47

36

46

54

22

13SWFs & PPFs1

Retail AuM

Insurance &

pension

funds AuM

Other

institutional AuM2

262

Corporate &

public deposits

Personal deposits

Banks’ bonds,

other liabilities &

equity9

42

31

46

11

11

41

46

25

Equity securities

Other investments3

Securities held

on balance sheet

Retail loans

Government bonds

Corporate &

public loans

Corporate bonds

Securitized loans

Other assets

262


Sales & Trading (including Prime Services)

M&A advisory

Origination (ECM,

DCM)

Retail asset

management


PD)

Institutional asset

management

Retail

brokerage

Wealth mgmt

Bancassurance

Investment banking

40

25

210


175

45

150

150

100

40

13%

Listing & trade

execution venues4

Clearing &

settlement

Securities

services5


30

15

80

3%

5%

Payments

Corporate paymentsRetail payments270 445

14%



560

Mortgage

Consumer finance

470

730Retail deposits 545

Retail banking Tre

asury 3

0%

35%

Off banking BSOn banking BS

9

Technology and data advancements and shift in regulatory environment are the two driving

forces of change in the financial industry

SOURCE: McKinsey analysis

▪ Higher transparency on fees,

trading book, open access to

customer data

▪ Greater competition leveling

playfield between incumbent

banks and other firms

Creating pathways for new entrants

▪ Democratization of information and expanded

accessibility of technology

▪ New entrants can proactively avoid areas with

costly regulation or take advantage of lower

capital requirements tied to specific activities

Regulation

Technology

and data

▪ Radical increase in data

availability

▪ Technological

advancements to store and

process data

▪ Declining cost of data storage

Reinforcing the scale impact

▪ Increased difficulty of differentiation for individual

players

▪ Reduced differentiation generating increased cost

pressure environment

▪ Incumbents have rapidly grown their size, creating

barriers to entry for smaller newcomers

ImpactKey driving forces

10


Annual revenue in 2017, USD billion

Sales & Trading

(including Prime

Services)

M&A advisory

Origination (ECM,

DCM)

Retail asset

management


PD)

Institutional asset

management

Retail

brokerage

Wealth mgmt

Bancassurance

Investment banking

40

25

210


175

45

150

150

100

40

13%

Listing & trade

execution venues4

Clearing &

settlement

Securities

services5


30

15

80

3%

5%

14%


560

Mortgage 470

Retail deposits 545

Retail banking Tre

asury 3

0%

35%

2 example case studies to highlight the impact that these two forces are

having on the financial intermediation ecosystem




Off

ban

kin

g b

ala

nce s

heet

On

ban

kin

g b

ala

nce s

heet



47

36

46

54

22

13

Retail AuM

Insurance &

pension

funds AuM

SWFs & PPFs1

Personal deposits

Other

institutional AuM2

Corporate &

public deposits

Banks’ bonds,

other liabilities &

equity

262

9

42

31

46

11

11

41

46

25

Securitized loans

Equity securities

Corporate bonds

Other investments3

Government bonds

Securities held

on balance sheet

Corporate &

public loans

Retail loans

Other assets

262


Payments

Consumer Finance 730

Retail Payments 270 Corporate payments 445

Consumer finance 7301 Swedish

Consumer

Finance

Corporate paymentsRetail payments270 445

Payments2Chinese

payments

11

SWEDISH CONSUMER FINANCE - Specialist finance providers have captured a significant

share of Sweden's consumer finance market

SOURCE: National statistics and company filling; McKinsey analysis

NOTE: Incumbent banks include direct consumer finance activities of traditional retail banks, and consumer finance divisions of universal banks. Specialist finance providers and others include independent consumer finance specialists, captives, pan-

European consumer finance monoliners, balance aggregators, online credit providers as well as peer-to-peer lenders.

Market share by firm type, % of total outstanding consumer finance volumes

2003

Incumbent

banks

2008 2017

Specialist finance

provides and others

2017

77 67 40

23 33 60

40 ~55

60 ~45

~55

~45

~65

~35

1

12

15.3

2017E

5.0

2012

0.63.0

4.8

9.6

6.9

2.1

13.4

33.9

Cash/

Cheques

Technology

Entrants2

Transfer/

Direct Debits4

Cards3

SOURCE: McKinsey Global Payments Map, iResearch, PBOC

1 All retail transactions done by domestic Chinese customers, by domestically issued cards and domestic bank accounts across all sectors and use cases

2 Includes pure pass-through wallets and pass-through and staged wallets

3 Includes only transactions done locally by locally issued credit cards

4 3PP transaction volume includes both consumption-related and non-consumption related

23

CHINESE PAYMENTS - Technology giants, such as AliPay and WePay, now

account for nearly 50% of domestic retail payments volume in China

2

DOMESTIC ONLY – 20% OF TOTAL

China Retail Payments1,

$ Trillions

12-17

CAGR, %

2017 value,

% of total

2012 value,

% of total

94% 45%4%

26% 29%22%

7% 20%36%

-16% 6%37%

▪ Almost half

the domestic

payments

flow via 3rd

party

platforms

▪ Alipay and

WeChat Pay

have ~75%

share

13

A faster, smarter, and lower-cost, set of layers will likely replace the current complex system

as a conduit for global funds

SOURCE: McKinsey

10 year + endgame scenario

So

urc

es o

f

fun

ds

Us

es

of

fun

ds

Goal Key Tech Enabler

Low-touch B2B

Relationships and

insights

Everyday

commerce

and transactions

Heavily automated and efficient

technology infrastructure, with low

costs and tight spreads

▪ Distributed ledger

technology (DLT)

▪ AI/Machine Learning

Perfectly personalized digital advice

(Al and human, seamlessly

integrated) leveraging all digital

footprint

▪ Al

▪ Voice/AR/VR

Seamless transactions embedded

into everyday digital life of E2E

ecosystem journeys

▪ BOTS

▪ Face recognition

▪ Zero track payments

So

urc

es o

f fu

nd

s

Sourc

es o

f fu

nds

Uses o

f fu

nd

s

Layer

14McKinsey & CompanySOURCE: McKinsey analysis

Each bank must assess how the coming transformation will impact its businesses in specific segments and geographies, its particular

strengths and vulnerabilities, and the nature of competition it will face in future—and then make choices about its core offer and other aspects of

its strategy

Become an end-

to-end ecosystem

orchestrator

Focus more

narrowly on

specific business

segments

Fully optimize &

digitize as a

traditional player

Become a low-

cost

“manufacturer”

The question that matters most: how should banks respond to this disruption?

▪ At the center of customer’s

journey

▪ One-stop shop for all

banking-related products and

move beyond traditional

banking

▪ Offer open platforms to allow

for third party plug in

▪ Create a low-cost

“manufacturing” engine

separated from distribution

▪ Unbundle capabilities and

offer those to new entrants

▪ Partner with fintechs

▪ Become high-touch,

relationship-driven specialists

▪ Focus on niches that require

bespoke approaches

▪ Concentrate on a certain client

segment or narrower set of

products/ specialized

capabilities

▪ Remain a traditional bank,

optimize costs by digitizing

and automating process and

max potential of technology to

boost revenues

▪ Become seamlessly end to

end digital player

▪ Leverage robust core

strengths

15

The three “MUST DOs” for banks to compete in the new world of financial intermediation

Reinforce Trust Reset Cost Base Renew Talent

▪ Make a visible commitment to

create value for both

shareholders and other

stakeholders

– Take an expansive view of

relationship with customers

– Be mindful of the social and

environmental impact

▪ Accelerate end-to-end

digitization

– Migrating transactions and

sales from physical to digital

channels

– Make services seamlessly

available on digital channels

▪ Improve front-line productivity

– Leveraging analytics and data

– Specialists to support front-

line staff in selling more

sophisticated products

– Reducing the number of

branches (and tellers)

▪ Transform how to acquire,

manage, and deploy talent

▪ Harness the full power of

women’s participation

Documents

Banks in the changing world of financial intermediationaab.al/wp-content/uploads/2019/05/S1.5_McKinsey_Milan... · 2019-05-20 · CHINESE PAYMENTS - Technology giants, such as AliPay