WORKING DRAFT Last Modified 4/1/2016 5:10 PM Central Europe Standard Time Printed Bank of the Future Discussion on the latest banking and digital trends and their implications April 11-12, 2016
In the next decade, we will see the emergence of a unified mobile ecosystem of 24 trn, most of the world's customers TELCO Owns the channel No emotional connection with customers DATA Data companies BANKING COMPANIES Banking Data Data Customer ownership Trust Talent pool RETAIL Difficult to monetize Regulation Data on customers’ Slow reaction buying habits and Limited emotional spending connection with customers Lack of daily customer contact | SOURCE: McKinsey McKinsey & Company 2
In the new ecosystem banks will have to fundamentally rethink their business model and they have three strategic options to go after ILLUSTRATIVE Offering Typical broad Narrow spectrum banking spectrum Broader than banking Ecosystem Primarily Niche player front end orchestrator Fully digitized Value Full chain universal bank White - label Primarily back-office back end operator | SOURCE: McKinsey McKinsey & Company 3
An option is to become an ecosystem owner bank ILLUSTRATIVE Ecosystem Niche player orchestrator Fully digitized universal bank White - label back-office operator | SOURCE: McKinsey McKinsey & Company 4
An option is to become an ecosystem owner bank ILLUSTRATIVE | SOURCE: McKinsey Panorama McKinsey & Company 5
Banks need to proactively follow innovative ideas from inside and outside banking, including ideas from thousands of FinTech startups RETAIL ASSET GATHERING Retail E2E LENDING PROCESSES C/A INNOVATIVE B2C ORGANIZATION SELF-LEARNING PAYMENTS AND CULTURE EFFICIENT CUSTOMER OPERATIONS SERVICE B2B PAYMENTS DIGITIZED ADMIN DISTRIBUTION 2-SPEED IT AND SUPPORT LENDING NEXT GENERATION MARKETING RISK AND PRICING CAPITAL MARKETS AND AM Institutional CASH MANAGEMENT | SOURCE: McKinsey Panorama McKinsey & Company 6
Banks need to proactively follow innovative ideas from inside and outside ILLUSTRATIVE banking, including ideas from thousands of FinTech startups E2E SERVIC VICE IN SOCIA IALIZ IZING G FINANCE E AND CROW OWD D INVES ESTMENT SELEC ECTED ED VERTIC ICALS USER ER GENERA RATED D CONTENT AND ADVIS ISOR ORY GAMBLIN ING G AND GAMIN ING DIGIT GITAL PRODU ODUCT AND IN-APP PP PURCH RCHASES ES ADVERT ERTISEM ISEMENTS AND DISCOUN OUNTS REIN INVENTED ED Link Like Love REMIT EMITTANCE NEXT XT PERSONAL FINANCIA IAL BIG G DATA DRIVEN IVEN GENERA RATIO ION MANAGE GEMEN ENT PAYMENTS SCOR ORIN ING G AND LENDI DING INNOV OVATIVE IVE LENDI DING G PLATFOR FORMS (P2P P AND CROWD OWDSOU SOURC RCIN ING) P2P PAYMEN ENTS E-COMMERC RCE E / E-TRA RAIL ILER ER RETAIL ASSET GATHERING E2E PROCESSES LENDING C/A INNOVATIVE B2C ORGANIZATION SELF-LEARNING PAYMENTS AND CULTURE EFFICIENT CUSTOMER OPERATIONS SERVICE B2B PAYMENTS DIGITIZED ADMIN DISTRIBUTION 2-SPEED IT AND SUPPORT LENDING NEXT GENERATION MARKETING NEXT XT GEN ENERA ERATION ION RISK AND PRICING FINANCIAL INSUR URANCE CAPITAL INCLUSION USION MARKETS AND AM CASH MANAGEMENT CLOUD OUD BASED ED MARK RKETIN ING G AND LOYALTY SERVIC VICES SOLUT UTIO IONS FOR SMEs FINANCIAL MANAGE GEMEN ENT AND LENDI DING CRYPT PTO-CURR URREN ENCY OUTSOURCE CED/ D/ SAAS SERVIC ICES ES B2B SERVIC ICE PROV OVID IDIN ING | SOURCE: McKinsey Panorama McKinsey & Company 7
Digital players in China are at the forefront of creating such ecosystems by expanding their core capabilities Alipay: 800+ million Number of registered accounts e-Commerce Sesame Credit: credit score for 300+ million O2O IM ads Ad Ant Micro Loans: SME loans payment Financial union $12+ billion services Yu’e Bao: AuM Entertainment $93+ billion Social Online Smart devices media search WeBank: Total loan credit line for Security SMEs: $300+ million WeChat: Social and mobile wallet app with 650+ million monthly active users | SOURCE: McKinsey McKinsey & Company 8
Several core elements of the new business model are visible across the value chain, but it’s not easy for banks to adapt Control the retail value chain One-stop Shop for Corporates Emerging post-trade services in CMIB Robo-advisory Self-learning e-operations Augmented reality-based servicing Big data-based real-time risk management Fully personalized and automated customer servicing | SOURCE: McKinsey McKinsey & Company 9
Fintechs have six markers of success which make them easy to achieve this transformation, well ahead of banks Advantaged modes of customer acquisition 1 Fintech attackers need to find ways to attract customers cost-effectively, e.g. via partnerships and distribution agreements, an alternative way payments POS attacker Poynt is increasing its scale Step-function reduction in the cost to serve 2 The erosion of the advantages of physical distribution make this a distinctive marker for the disruptive FinTech attackers, e.g. FinTech lenders have up to 400 bps cost advantage over banks Innovative uses of data 3 Big Data and advanced analytics allow Fintechs to experiment with new credit scoring approaches and to understand customer needs or “next best actions”, e.g. by leveraging social media data Segment specific propositions 4 Successful Fintech attackers will cherry pick from banking products and excel only in that segment, e.g. Wealthfront targets fee-averse Millenials who favor automated service over human advisors Leveraging existing infrastructure Fintech attackers embrace “co - opetition” and find ways to engage with existing ecosystem of banks, 5 e.g. Lending Club’s credit supplier is Web Bank, PayPal’s merchant acquirer is Wells Fargo Managing risk and regulatory stakeholders Regulation is a key swing factor in how Fintech disruption could play out as once these attackers 6 reach scale they will attract more regulatory attention and the ones lacking the required capabilities could easily fail | SOURCE: McKinsey McKinsey & Company 10
Financial attackers can choose from three different strategic directions Share of % fintechs 20-30 Disintermediate the customer ownership of banks 2 5-10 60-75 Compete with Cooperate and disrupt and partner the banks 3 1 with banks | SOURCE: McKinsey McKinsey & Company 11
True transformation and innovation in banking can only be achieved through banks partnering with Fintechs along three pillars NOT EXHAUSTIVE Customer acquisition and retention – banks bring large, established customer bases, while non-banks give access to ‘sticky’ and innovative products to increase involvement Refining and scaling new tech – collaboration provides an opportunity to pressure test innovations and expand to new markets or demographics Regulatory and risk management – banking players have sophisticated practices, which non-banks will likely need going forward entering the financial services option space | SOURCE: McKinsey McKinsey & Company 12
Partnerships between start-ups and banks take many different forms Access to technology – e.g., PayPal Sandbox Low allowing developers to test PayPal application components; Metro Bank agreement to use Zopa’s P2P platform to expand lending services to its clients Investment in products – e.g., Santander agreement to purchase up to 25% of Lending Club’s total origination for 3 years Degree of Alliances – e.g., Santander and Funding Circle affiliation partnership agreement to transfer leads of loans that Santander is not able to finance Funding – e.g., Credit Suisse led $165 M Series D financing for Prosper based on a $1.9 B valuation Acquisition – e.g., BBVA purchase of Simple and High Holvi | SOURCE: McKinsey McKinsey & Company 13
This business transformation heralds the largest industry transformation in history and provides a great opportunity for innovation The financial industry has a much larger profit pool than recently disrupted industries 2015 global net profits by industry, USD trillion Printing & publishing Retail sector 1 0.1 0.7 Banking and asset Communi- management cations 2 1.3 0.5 1 Excluding motor vehicles 2 Transmission of sound, images, data or other information via cables, broadcasting, relay or satellite | SOURCE: World Industry Service McKinsey & Company 14
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