Up to a third of the world’s banks are not equipped to survive an economic downturn and must re-invent their business models to compete in a digital age, according to a report by consultancy McKinsey.
With 60% of banks currently making returns below their cost of equity, the industry is in a fragile position, McKinsey’s consultants believe, lacking the financial strength to compete effectively in a market characterised by prolonged low interest rates.
“Nearly 35% of banks globally are both sub-scale and suffer from operating in unfavourable markets,” the report says. “Their business models are flawed, and the sense of urgency is acute. To survive a downturn, merging with similar banks may be the only option if a full reinvention is not feasible.”
Banks are entering the the last pit stop in this current economic cycle, the report states: “Imaginative institutions are likely to come out leaders in the next cycle. Others risk becoming footnotes to history.”
To survive, banks should invest in machine learning tools and artificial intelligence to drive down costs and improve front-facing customer services to beat off threats from new market entrants in Big Tech and fintech.
Astute investments in M&A will be a pre-requisite in the search for new revenue and in preparation for further digital disruption in the coming years, the report concludes.