McKinsey: Banks Need to Reinvent Themselves or They Will Eventually Disappear

McKinsey: Banks Need to Reinvent Themselves or They Will Eventually Disappear

by February 26, 2020

In Asia, consumers’ tech-savviness, the rise of fintech, and advances in technology are requiring banks to reinvent themselves, according to a new report by McKinsey.

In a paper titled Future of Asia Banking: How Asia is reinvesting banking for the digital age, McKinsey explores the current status of Asia’s banking industry and shares recommendations for banks in the digital age.


Asia’s changing banking landscape

According to the paper, Asia has been the world’s largest regional banking market for a decade, but is now preparing for consolidation with revenue growth already slowing and margins thinning.

In addition to these headwinds, other challenges including open banking and fintech attackers gaining market share, are putting pressure on incumbents, forcing them to “either reinvent to stay relevant or lag behind and eventually disappear,” the report says.

In this changing landscape, banks must leverage new tools, technologies, and capabilities, including digitization, advanced data analytics, robotics, and artificial intelligence (AI), to achieve improvements in performance, it says.

In particular, they must develop these capabilities to further grow four key business areas: wealth management, consumer and SME lending, and transaction banking. Together, these businesses have the potential for US$100 billion in new revenue for Asia’s banks each year, the report says.

Moving forward, banks will increasingly acquire new customers and interact with current customers through digital ecosystems, a trend that will require new approaches to branding and relationship management, as well as changes in business model and technology architecture, it says.

For risk management, banks will turn to machine learning algorithms for credit profiling and lending decision. By leveraging these technologies, banks will be able to reduce loan losses all the while allowing a broader population to qualify for loans, the paper says.


Digital banking in Asia

Delving into digital banking in Asia, the report says that the region has proven to be a fertile ground for the development of fintech and digital finance, and has witnessed numerous tech companies transitioning to become digital banks over the past couple of years.

It cites the examples of Tencent’s WeBank in China, Kakao’s Kakao Bank in South Korea, and Rakuten’s expansion into credit cards, digital banking, investments and insurance in Japan.

In parallel, Asian banks have launched stand-alone digital banks to keep up with the changing landscape. The State Bank of India has YONO; in Indonesia, BTPN offers a mobile banking solution called Jenius; and in India and Indonesia, Singapore’s DBS Bank has been providing a digital banking offering called DBS digibank.

Another key trend the report points out is increasing collaboration between fintechs and banks in the region.

For example, in Thailand, Kasikornbank have partnered with Singaporean super app Grab to launch mobile wallet GrabPay by KBank. In Indonesia, Bank Rakyat Indonesia (BRI) has teamed up with China’s Alipay to expand point-of-sale (POS) acceptance of mobile payments for Chinese tourists visiting Indonesia.

Asia’s banking landscape is set to undergo even more disruption as jurisdictions including Singapore, Hong Kong, and Malaysia have recently passed new rules to open up the market to digital players.

In Singapore, Grab, Ant Financial, Sea and ByteDance are amongst the contenders for a digital banking license. In Hong Kong, eight entities were granted a virtual banking license and Zhong An’s ZA Bank officially became the city’s first virtual bank to kick off operations in December 2019.

Meanwhile, Bank Negara Malaysia, the country’s central bank, is planning to issue up to five digital banking licenses to qualified applicants.