Banking through the crisis, and beyond,” said that the banking industry, globally, traded at a 50% discount to the broader economy.
The consulting firm said banks globally were questioning their business models largely on account of the prevalence of low or negative interest rates, as well as FinTechs encroaching the core banking business. McKinsey said these events added three key agenda’s, which included planning to operate in a low interest regime, creating new income sources and adapting to the threat posed by FinTechs.Operating in a low or zero interest rate environment
“In the long run, zero and negative rates can have a devastating impact on bank economics. That impact is not immediate; it starts to bite as new loans originated at lower rates replace loans coming to term and as some of the back book gets progressively repriced,” said McKinsey in its assessment, whilst however adding that lower interest rates increased consumer ability to pay, and thereby also reducing NPAs.
McKinsey advised a three-plan approach, which included identification of relevant riss, optimising the risk framework for funds and also rewiring the funds-transfer pricing for both Treasurers and Asset-liability Management teams. “Our experience and analysis suggest that through a combination of these moves, banks may be able to mitigate a significant part of the forecast depletion of net-interest margins,” said the consulting firm.
Newer Income StreamsDepleting income streams would also lead banks to create new revenue streams to go and thrive, said McKinsey in its review, adding that the loss of Interest income would serve as a motive for lenders to expand elsewhere.
“Despite some growth in noninterest income over the last decade, particularly in China, interest income still makes up 50 to 75 percent of total income, depending on region,” noted McKinsey, adding “Existing fee pools aren’t sufficient; banks will need to innovate with service-related income and new products that move away from the dependence on interest.”
Lenders can in their quest to build fee income develop a “fine-grained” understand of customers, whilst also developing deeper insights into the needs of a particular segment. “For retail customers, that might mean a subscription model for services, which could redefine where the customer’s relationship with the bank begins and ends,” suggested the consultancy to lenders, echoing “What was previously a single unsecured lending product could become a holistic offering that includes, yes, a loan but also other services that provide tangible value.”
Commercial lenders could further expand their offerings to include products that were tailored towards an industry vertical, added McKinsey, as an alternate to having clients at lower rates. “Banks need to widen the aperture and consider other services and coordination that would ease them, sometimes even partnering with others to form an ecosystem,” noted McKinsey.
McKinsey also noted the rising success in banks hiving off separate entities, run to build digital capabilities. The consultancy highlighted the example of State Bank of India (SBI)’s YONO application, which has crossed 26 million users within a span of two years whilst also achieving profitability within 18 months.
“Creating such a separate entity often allows it to be launched faster, with fewer constraints related to legacy technology, and it allows banks to test concepts at lower risk before attempting to transform their entire business,” adding “Over time, the
bank can move parts of the legacy business to the new system,” McKinsey & Company highlighted lower costs to serve and acquiring customers as one of the advantages towards transitioning customer segments digitally.