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Forget fintechs, banks need to worry about Alibaba and Amazon

26 October 2017  |  26553 views  |  8 chess

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."

Comments: (8)

Bradley Howard
Bradley Howard - Endava - London | 26 October, 2017, 09:25

And this is before you even consider how PSD2 will help retailers and affect the banks.

Banks should capitalise on their customer base, brand trust and security by offering trusted online identity, e.g. a single sign-on that is trusted by consumers and retailers.

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Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune | 26 October, 2017, 11:00

Henry Kissinger once said "The nice thing about being a celebrity is that, if you bore people, they think it's their fault". Paraphrasing that line, "The nice thing about being McKinsey is that, if you don't understand what it says, you think it's your fault".

At the risk of being publicly faulted, I fail to understand how "distribution" can have its own margins and growth divorced from "manufacturing" in a regulated industry like banking where the manufacturer and / or regulator play a vital role in deciding the distribution margins and supply volumes?

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Dharmesh Mistry
Dharmesh Mistry - Temenos - Reading | 27 October, 2017, 06:55

Did Expedia, Travelocity or SkyScanner kill travel industry? Has Amazon killed Retail? However the fate of banks as dumb pipes is more likely if they fail to really change business model or fundamentally redesign customer journeys...

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Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune | 27 October, 2017, 11:53

@DharmeshMistry: 

According to popular opinion, Amazon has indeed killed Retail:) The real question is, has Amazon killed FMCG/CPG/etc., who are the "Manufacturers" in this context. Obviously, the answer is NO. Amazon wouldn't even try that - that'd be as suicidal as chopping off the branch on which one is sitting.

I've been using a bank's eTrading portal satisfactorily for all stock market activities for nearly 15 years. While I've a lot of cribs about the friction in all my banks' Internet Banking portals for a similar period, I still use them satisfactorily - more importantly, I don't crave to access my banking from a third-party Distributor portal.

Whereas, when it comes to products / services in many other sectors, I wouldn't gone digital if digital Distributors hadn't come up. I can't dream of buying my favorite laptop from the laptop brand's website; I can't dream of buying groceries from the website of my favorite brick-and-mortar retailer; ditto for apparels or telecom or insurance. In all those cases, if I go digital, it's always via the Distributor's portal e.g Amazon, PayTM, etc.

Contrary to popular opinion spread by finsurgents, I think Banking has done a far better job at enabling digital Distribution than many other sectors. 

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Dharmesh Mistry
Dharmesh Mistry - Temenos - Reading | 27 October, 2017, 12:00

@KetharamanSwaminathan

I do think things are changing and slightly different, which I allude to in this post: https://www.finextra.com/blogposting/14604/mobile-banking-is-dead

I think as elsewhere there will be a mix of models and a layering of new...

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Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune | 27 October, 2017, 12:44

@DharmeshMistry:

As I've just commented on your post, I think Amazon and Alibaba will have as much problem in catering to the new experience paradigm as a mobile banking app.

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James Piggot
James Piggot - Finastra - London | 30 October, 2017, 13:10

Amazon have already started offering loans to the SMEs who sell via their marketplace, and they have done 1B USD in the last year. They have data in terms of turnover and sales already to hand so can make quick decisions.

That means they have customer data, financial data, can automate the credit decision and they have mountains of cash.

While 1B USD is comparitively small beer to large banks, Amazon could scale this up very quickly if they wanted to do so.The question is whether they want to get into this business in a big way or not?

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Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune | 30 October, 2017, 14:54

Actually, Amazon does not have mountains of cash at all.

I remember reading once that Amazon is perpetually running on a cashflow treadmill and remains afloat because of the float between its collections from customers on Day One and payments to suppliers after 90-120 days. According to YCHARTS, AMZN's Quarterly FCF has ranged between a high of $8.646B and low of -$3.582B (average: only $1.157B).

The way I see it, the only way AMZN can get into marketplace lending business in a big way is by borrowing from banks, in which case it'd simply become a reseller of banks.  

Also, in recent times, traditional banks have cut back on loans to sellers on leading ecommerce platforms in India, so if AMZN wants in on this business, it's really only bottom-feeding on the rejects of traditional banks. 

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