Banks may have seen off the challenge from fintech startups but they now face the far bigger threat of platform giants such as Amazon and Alibaba eating into their margins, warns a new report from consultancy McKinsey.
The spate of alliances between retail banks and fintech upstarts over the last couple of years "has helped solidify the notion that the land grab is over," argues McKinsey in its annual banking report.
However, platform companies around the world, from Rakuten Ichiba in Japan to Amazon and Google in the US, are spreading their tentacles ever deeper into the profitable "distribution" side of banking.
Making the most of its massive customer base and superior service, Alibaba is now not just an enormous e-commerce firm, it is an asset manager, lender and payments company, while Rakuten issues credit cards to tens of millions of customers.
"The manufacturing end of many businesses is fading from view, as the platform companies increasingly dominate the distribution end of multiple businesses, providing a wide range of products and services from a single platform," says McKinsey.
According to the report, manufacturing — the core businesses of financing and lending that pivot off the bank’s balance sheet - generates 53% of industry revenues, but only 35% of profits, with an return on equity of 4.4%. In contrast, distribution - the origination and sales side of banking - produces 47% of revenues and 65% of profits, with an ROE of 20%.
If banks fail to act in the face of the platform threat, the new rivals could slash ROE in the industry from 8.6% last year to just 5.2% by 2025, predicts the report.
So, how should banks react? McKinsey says the industry has some important advantages, notably consumer trust and exclusive access - for now - to valuable customer data, giving them the opportunity to take on the platforms at their own game.
"Banks that successfully orchestrate a basic ecosystem strategy, by building partnerships and monetizing data, could raise their ROE to about 9% to 10%. Banks that can go further and create their own platforms might capture a small share of some nonbanking markets, which would elevate their ROE to about 14% — far above the current industry average."