Bank Digitization is too Little too Late as they Fall Behind and Miss Out on $7 tn in value
The sector continues to underperform as non-banks eat their lunch!
BCG lays out one of the hardest-hitting reports yet on why banks are in trouble and how to fix it. I give them credit for their candor.
One thing that is inescapable is that banks are losing their relevance and position as apex financial predators.
They are losing their share of total societal financial assets to non-banks who are simply out-competing them in lending. This is no longer banks offloading risky assets but a full-fledged assault by fintech, tech, PE, VC, and others.
BCG demands banks take RADICAL action, and I think they are right! Also there’s more in this report than I can cover, do look inside it’s a great read!
👉TAKEAWAYS
BANKS PROBLEMS:
Banks’ share of total financial assets in almost all economies has steadily declined! Threatened by non-banks and even Big Tech!
Bank valuations (above) reflect this loss of these assets to non-banks.
Banks are spending more on IT, but only a small share of the
total spending is on innovation and modernization
IT Legacies Constrain the Headroom for Bold Modernization
Banks Are Stuck Between Income Pressures and Nonscalable Cost Structures
Now is the time to act and truly embrace radical change rather than incremental improvements.
Macro Trends and the Climate Transition Will Increase Demands on Banks
Will Open Banking Intensify the Push of Big Tech Companies into Banking?
Seven Strategic Imperatives Can Unlock $7 Trillion in Value
Defend Primary Banking Relationships with a Holistic, Digital Offering
Reinforce the Role as Trusted Custodian of Customers’ Financial Well-Being
Turn Risk and Compliance and Social Responsibility into a Competitive Advantage
Boldly Embrace the Climate Transition Challenge
Capture Network Effects and Increase Scale Through Partnerships
Navigate Strategic Choices in Embedded Finance and Embedded Commerce
Retain a Hold on Highly Profitable Areas of the Banking Stack
👊STRAIGHT TALK👊
BCG makes it clear that if banks don’t make bold moves now, they may never recover from losses to non-banks! BCG is right, and it’s time for banks to step up!
The chart above shows the predicament banks are in. They are spending more on IT than ever, but much of this is simply maintaining legacy systems, with roughly 25% of the IT budget going into innovation.
In short, banks still aren’t innovating despite ample talk of huge IT budgets and innovation theater.
BCG shows how bad it is for banks when examining their embedded commerce offerings. Emedded commerce is key because it is “a prerequisite for banks to have their own strong digital proposition.”
BCG showed that 75% of banks do not have a solid offering in even the most simple form of embedded finance, and 90% have no solid offerings in two other more complex varieties.
Banks’ response has been to do nothing and pretend everything will be OK. It won’t.
They’re in trouble and many simply won’t acknowledge it.
Thoughts?
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"with roughly 25% of the IT budget going into innovation"
I think this is an overestimate, at least for European banks. I once took part in an IT strategy session for one of the largest European banks (with a $2b+ IT budget) and 90% of the spending was on keeping the lights on (BCG say 65% - is this a global average?) with pretty much all of the rest swallowed up by regulatory change.