As the world's most affluent consumers make the switch to digital, the financial landscape is set to change. And banks that are not nimble enough to adapt are at risk of losing out.
The mass affluent are starting to go digital. In terms of adoption speed, this group is behind the young and the very wealthy – the two groups that have gone digital first. But, as a group, the mass affluent aged 50 to 70 account for 50% of banking revenues and are more valuable than the early adopters. Or at least this is the case in the US, and it presents banks with two challenges.
One is how to keep hold of the mass affluent and not lose them to fintech companies with attractive digital offerings. Second, there could be a loss of revenue anyway if the mass affluent forsake traditional high-margin products for lower margin online products. Banks need to have a cost-effective IT strategy in place to compensate for this.
Can banks from the developed countries, encumbered as they are by legacy IT systems, make this transition? Unsurprisingly, banks in emerging countries, such as China, Kenya, Poland and Turkey are getting there faster. They have fewer legacy and regulatory issues, and can leapfrog stages of technology.
These are some of the findings in the Global Banking Annual Review 2014 by global consultancy McKinsey, which was released today (December 16). “Digital tends to be taken up first by the young and wealthy. However, increasingly middle-income and middle-aged consumers are adopting digital channels. These new groups taking up digital are banks’ bread-and-butter clients, where most banking revenue is generated, and in light of potentially lower margins with digitally oriented products, revenue growth could be challenged,” says the report.
At the same time, the hard reality of these clients moving to digital-only banks and other fintech projects is become harder to ignore. McKinsey estimates there are now 12,000 banking start-ups and that the composite revenue of six of the largest digital attackers would place 20th in a ranking of global retail banks. The digital attackers are also moving into new areas of banking. They began with transactions but are now moving into lending using social media data for credit scoring purposes.
Faced with this onslaught traditional banks need to either respond with their own digital versions fast, joint venture with the new players or buy them out. Anything less and the traditional banks in developed countries at least will find themselves even further in retreat.
Brian Caplen is the editor of The Banker.
