More than half of the world’s banks are too weak to survive a recession, according to a new survey published by McKinsey & Company.
The consulting firm said in its latest global banking review that more than a decade after the financial crisis, banks still have not regained the profitability they enjoyed in 2007. Plus, more than 60 percent of banks don’t generate their cost of equity, 10 years after the recession, the study found.
“A prolonged economic slowdown with low or even negative interest rates could wreak further havoc,” the report found.
A majority of banks are struggling as a result of “geography, scale, differentiation and business model,” McKinsey said.
For instance, American banks see returns that are 10 percentage points higher than those of their European counterparts, which are bogged down by sluggish home markets, the firm said. The importance of geography comes in the midst of drastically different monetary, fiscal and trade policies across the developed world.
One way for banks to improve profitability is to get bigger: The report found that banks increasing their size across a country, region or a client segment via a new acquisition or partnership can play a significant role in their business model.
“Going forward, scale will likely matter even more as banks head into an arms race on technology,” the report said.
If banks don’t change their behavior in order to meet new consumer behavior, they risk becoming a “footnote to history,” the American firm wrote.
It suggested that banks expanding their offerings, pointing to Amazon in the U.S. and Ping An in China, as examples of technology firms that are meeting customers' needs by engaging user interfaces.
"For instance, in China, Ping An has built an ecosystem that includes healthcare, automotive, entertainment, and tourism services, while in the U.S., Amazon offers businesses the traditional banking suite (that is, current accounts, credit cards, unsecured loans), while connecting them to the Amazon ecosystem, which includes non-financial products and services,” McKinsey said.
Too often though, banks fail to recognize an emerging trend, losing their ability to remain competitive. Although more clients are trusting huge tech companies like Google (58 percent) and Amazon (65 percent) to handle their finances, banks only spend 35 percent of their budget on innovation (compared to fintechs, which devote more than 70 percent of their budget on it).