McKinsey Global Banking Annual Review 2021: The great divergence
Mckinsey & Company
COVID-19 pandemic has been a watershed for the corporate world. The disruptions caused by the pandemic and the pace of digitization have changed the way businesses used to operate. Banking is one of such major sectors that is witnessing some major transformations fuelled by the pandemic. The current edition of ‘the hub’ brings an insightful report on the 2021 annual review of global banking system by Mckinsey.
The study shows that the global economy is recovering and has fared better than the expectations on almost all dimensions (GDP, industrial production, private consumption). Financial markets have now moved above the 2019 level across the regions. This has been largely attributed to generous economic stimuli in various forms announced by the governments which comes to around 29% of the GDP and supported by quick development and rollout of vaccines.
Impact of the pandemic on the banking sector has been mild compared to the 2008 financial crisis. Banking profitability in Europe and Latin America almost halved during the pandemic while other regions were affected moderately. The pandemic accelerated digital banking, fall in cash usage and expansion is savings. It has also brought sustainability and environmental issues into the agendas of boards and other discussion platforms.
The outlook for banking industry for 2022-25 looks decent, if not attractive and would be at par with the performance of the sector during the time period of 2010-20. The recovery will be dependent on three major exogenous factors; inflation and resulting interest rates, government support in economic recovery, and liquidity.The study shows wealth is shifting to Gen X and Millennials from the baby boomers and their expectations also differs. Banks also need to shift their strategies as per the expectations of these new customers.
There have been major digital disruptions in the financial sector. Many fintechs have come up that have achieved similar or higher valuation than banks. Companies like Amazon, Apple, Facebook, and Google have entered into the banking space and offering services that were earlier offered only by banks. More than capturing the revenue share of the banks, which is around 3-5 percent, they are redefining the expectations of the customers in banking services. Future success of the sector would depend not only on the conventional factors like consolidation of main markets (geography), scale and customer base but most importantly on the business model on how the banking services are designed and delivered. Customer should be the focus in a future-proof business model for the banks.
We duly acknowledge McKinsey & Company for this note on their study with the same title.
