Traditional banks should partner digital banks for growth

by DASHVEENJIT KAUR/ pic credit: mckinsey.com

TRADITIONAL brick-and-mortar banks in Malaysia should consider partnering with new digital banks for better growth opportunities, a global consulting firm says.

In its latest future of Asia report, McKinsey and Co said the Asian banking industry has come to a crossroads as growth slows, leaving banks with two choices: Reinvent or face possible extinction.

Consequently, to protect themselves, banks must reinvent for the digital age, dramatically redefining their value propositions and rebuilding their operating models, focusing on productivity, risk and capital optimisation. Malaysian banks are not exempted from these challenges.

McKinsey senior partner Gabriel Vigo (picture) said Malaysian banks must be prepared for the digital revolution.

“With Bank Negara Malaysia (BNM) set to issue digital banking licences, incumbents can expect to be challenged by digitally native entrants with stronger capabilities in areas such as customer experience,” he said in a report yesterday.

Vigo highlighted that the window is growing smaller for traditional banks to embrace digital and transform their core operations.

“For some, partnerships with new entrants might open exciting growth opportunities,” he added.

Vigo noted that in the new age of open banking and digital ecosystems, partnerships, and mergers and acquisitions (M&A) will be critical in helping banks to extend their footprints, deliver superior products and gain access to new customers.

It stated that in the last few years, Asia has become a major engine of growth for the global banking industry, generating pretax profits in excess of US$700 billion (RM2.9 trillion) in 2018 alone.

“Despite this, the region has started to converge with global averages, and while Asia still accounts for more than a third of global banking profit pools, this has shrunk from nearly half in 2010.

This trend is expected to continue, as margins thin and GDP growth in emerging Asian economies slow,” it added.

It added that while for most of the past decade, Asia banking has been the darling of the world, it is no longer the case, as the industry converges with global averages on margins, returns on equity, and price-to-book multiples. And things are likely to get worse for Asia’s banks before they get better.

Besides partnerships and M&A, McKinsey urged banks to deploy cutting-edge tools, technologies and capabilities across four essential pillars such as flexible technology architecture, advanced data analytics and talent management.

If banks implement this plan, McKinsey estimates they will free up between 10% and 20% of their capital and potentially generate up to US$100 billion in new revenue for Asia’s banking industry as a whole.

McKinsey’s banking and securities practice lead Jacob Dahl further said as banks reinvent themselves, they must also be clear about their “why”, emphasising their role as responsible stewards in creating a better financial future for all.

While digitisation and advanced data analytics are creating important opportunities for Asian banks, Dahl believes they also render long-standing business models obsolete, as new entrants compete aggressively to steal market share from incumbents.

“What is more, Asia is facing a tougher macroeconomic environment as growth slows, asset quality declines, and uncertainty about the macroeconomic outlook increases.

“The storm over Asia is gaining force, and banks must act quickly to counter attackers stealing market share,” he said.