The future of banks: A $20 trillion breakup opportunity

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The banking sector is facing a pivotal moment. Banks are historically undervalued compared to other industries, with their value now being less than one-third of others. This isn’t just about current profits but worries over future earnings. Despite recent efforts to improve, banks’ profit margins have decreased significantly in the last 15 years and are predicted to drop even further in the next 10 years. Regulation and cross-sector competition are concerns, but the major threat to banks comes from innovative challengers, often from other industries. These challengers use successful cross-industry platforms, like those of Amazon, Google, and others, with much better economic strategies. The market thinks banks lack a sustainable plan for the future.

In the upcoming era, banks have the chance to restructure and compete in new areas based on specific customer needs, extending beyond traditional financial services. While these areas will see competition from tech giants, startups, and other non-banks, this reorganization could bring banks higher profits, new revenue, and better valuations. For banks to thrive, they need to adopt future platforms and make bold strategic decisions. The universal bank model is outdated due to economic and technological changes. Investors now favor specialized entities over the traditional one-stop shop. The future involves splitting into four specialized platforms, which will offer structural advantages.

Big banks used to rely on synergies, scale, and large capital pools for growth. They currently manage around $370 trillion globally, with this number expected to rise to $500-$550 trillion within a decade. However, despite their growth, many banks haven’t updated their services to match the tech advancements seen in other sectors. Traditional banking products often lack differentiation, causing customer frustrations.  To stay competitive, banks must adopt cross-industrial platforms that break down barriers between industries, reshaping how consumers interact and creating ecosystems that cater to evolving needs. Tech giants like Google and Tencent have integrated banking services into their platforms, and the landscape is seeing exponential growth of new competitors. Technological progress has leveled the playing field. Since 2015, around 200 digital banks and other financial platforms have emerged.

Traditional banks, however, are struggling. The average global banking ROE was 9.5% in 2021, recovering from 6% in 2020 but down from 15% before the 2008 crisis. By 2030, it’s expected to dip below 7.2%. Falling profits have led to dwindling stock market valuations for banks. In 2022, banking stocks traded at a 70% discount compared to other sectors, up from a 15% discount in 2000, signaling global investors’ lack of confidence in the traditional banking business model’s future prospects.

Analysis

Banks are at a critical point. Despite their strong history, they’re now undervalued compared to other industries. Their profits have dropped over the past 15 years, and there are concerns about their future earnings. This decline is due to regulations, internal competition, and threats from innovative companies from different sectors, supported by tech giants like Amazon and Google.

There’s a chance for banks to transform. They can expand beyond just banking to meet customers’ specific needs. This means moving away from the old “universal bank” model and adopting specialized platforms to keep up with technology and market changes.

In the past, banks had the advantage of scale and large capital, but they’ve struggled to update their services as technology advanced. This has left customers wanting more. The emergence of tech giants in finance and around 200 new digital banks since 2015 shows a changing competitive field, offering better customer experiences and tech solutions.

Traditional banks are struggling. Their profitability has decreased since the 2008 crisis, expected to drop even further by 2030. Investors are losing faith, as seen by the significant drop in banking stock values in 2022, revealing doubts about the traditional banking model’s future.


Czímer, Balázs, et al. “The Future of Banks: A $20 Trillion Breakup Opportunity.” The Future of Banks: A $20 Trillion Breakup Opportunity, McKinsey & Company, 20 Dec. 2022, www.mckinsey.com/industries/financial-services/our-insights/the-future-of-banks-a-20-trillion-dollar-breakup-opportunity.