Bank­ing in­dus­try urged to in­no­vate

China Daily (Canada) - - SHANGHAI - By YU RAN in Shang­hai


The Chi­nese and global bank­ing in­dus­try need to be dig­i­tal­ized and cus­tomer-ori­ented if they want to re­gain the trust of their cus­tomers, re­vealed new re­ports by McKin­sey.

By com­pre­hen­sively an­a­lyz­ing the chal­lenges and op­por­tu­ni­ties fac­ing the global bank­ing in­dus­try, the two re­ports — one de­tailed the Chi­nese per­spec­tive and the other fea­tured a global view­point — each com­prised in-depth anal­y­sis on how the bank­ing in­dus­try will de­velop in the future.

Ac­cord­ing to the Global Bank­ing Annual Re­port 2016, the global bank­ing in­dus­try con­tin­ued to wit­ness slow re­cov­ery of re­turn on eq­uity (ROE) since the on­set of the 2008 fi­nan­cial cri­sis, with ROE sta­bi­liz­ing at 9.5 per­cent in 2014. How­ever, the in­dus­try’s gross prof­its had still dipped.

In 2013 and 2014, the gross profit mar­gins that cov­ered bank in­ter­est mar­gins and gross profit mar­gins un­der ser­vice fees dragged ROE down by 185 ba­sis points, pres­sur­ing banks to dras­ti­cally cut their costs.

Al­though most banks be­lieve that the grad­ual pickup of bank in­ter­est mar­gins will shore up their prof­its, such a cycli­cal bounce reveals the most fun­da­men­tal chal­lenge that the in­dus­try is fac­ing to­day — banks are los­ing cus­tomers they usu­ally de­pend on for sur­vival in this dig­i­tal era.

“Banks need to strengthen dig­i­ti­za­tion in mul­ti­ple ways, like re­de­vel­op­ing the end-toend process, build­ing an ag­ile or­ga­ni­za­tion and set­ting up an ecosys­tem for fi­nan­cial tech­nol­ogy start-ups to win cus­tomers back,” said Qu Xiangjun, se­nior part­ner at McKin­sey.

The re­port also pro­vides three sug­ges­tions to how banks should em­brace dig­i­ti­za­tion in the future — fo­cus on cus­tomers, build up dig­i­tal ca­pa­bil­i­ties and set up an or­ga­ni­za­tional struc­ture to sup­port in­no­va­tion and dig­i­tal trans­for­ma­tion.

The re­port that fea­tured a China per­spec­tive, ti­tled What is the Future of China’s Bank­ing In­dus­try — Dou­ble-track Strat­egy, points out that the coun­try’s bank­ing sec­tor has be­come the core driver of value cre­ation in the global bank­ing scene in the past decade, with prof­its ris­ing from 5 per­cent in 2005 to 25 per­cent in 2014.

How­ever, the in­dus­try’s growth rate had slowed down sig­nif­i­cantly be­tween 2012 and 2014 to just 8 per­cent, a stark con­trast to the 30 per­cent com­pound annual growth rate ex­pe­ri­enced from 2005 to 2012.

In ad­di­tion to the ef­fects of the economic slow­down and the es­ca­la­tion of as­set risks, in­ter­est rate mar­ke­ti­za­tion and In­ter­net finance are rapidly squeez­ing the rev­enues of China’s bank­ing in­dus­try. The re­port stated that the in­dus­try’s ROE dropped from 21 per­cent in the first quar­ter of 2013 to 15.16 per­cent in the sec­ond quar­ter of 2016.

Nev­er­the­less, op­por­tu­ni­ties and chal­lenges of­ten co­ex­ist. The fast growth of new fi­nan­cial tech­nol­ogy such as big data, cloud com­put­ing, blockchain and ar­ti­fi­cial in­tel­li­gence of­fer a strong boost to strength­en­ing dig­i­tal busi­ness ca­pa­bil­ity and cus­tomer ex­pe­ri­ence, the re­port said.

Qu pointed out that since China’s macro-econ­omy and fi­nan­cial in­dus­try are cur­rently un­der­go­ing a trans­for­ma­tion, the coun­try’s bank­ing in­dus­try could con­sider the fol­low­ing: op­ti­miz­ing bal­ance sheets, ex­pand­ing cor­po­rate busi­ness, strength­en­ing fi­nan­cial mar­ket busi­ness, de­vel­op­ing re­tail bank­ing, en­hanc­ing In­ter­net finance, strength­en­ing as­set man­age­ment and con­duct­ing M&As at a proper tim­ing.

With re­gard to the de­vel­op­ment cases of more than 30 global lead­ing banks, the re­port pro­poses a dou­ble-track strat­egy of trans­for­ma­tion and in­no­va­tion based on mar­ket trends and in­dus­try de­vel­op­ments in China — on one hand, ef­forts should be made for cus­tomer-cen­tric trans­for­ma­tion of tra­di­tional busi­ness, and on the other hand, the op­er­a­tion of dig­i­tal busi­ness should be strongly driven by tech­nol­ogy and data.

“The dig­i­tal era for China’s bank­ing in­dus­try has ar­rived,” said Han Feng, as­so­ciate part­ner at McKin­sey. “We be­lieve that the future win­ners will be those who take ac­tion quickly and are per­sis­tent in push­ing ahead with the trans­for­ma­tion of tra­di­tional busi­nesses.”

The dig­i­tal era for China’s bank­ing in­dus­try has ar­rived.”

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