
McKinsey warns banks face wipeout in some financial services - jeo1234
http://www.ft.com/intl/cms/s/0/a5cafe92-66bf-11e5-97d0-1456a776a4f5.html
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grandalf
_“Most of the attackers do not want to become a bank,” said Mr Härle. “They
want to squeeze themselves in between the customer and the bank and skim the
cream off.”_

I'd argue that most of the new entrants would happily become banks if the
regulations were more startup friendly.

So while the article paints banks as the victims of tech firms cutting into
profits, the reality is that tech firms have been forced to the periphery of
banking because few have the appetite or budget to even remotely consider
becoming an actual bank.

This creates a lower bound on the fee Stripe can consider charging, for
example, and is why bill.com's ACH payments take a week to clear.

Because of the cozy relationship between too-big-to-fail banks and their self-
created bureaucracy, the business is out of reach to startups which are forced
to compete on the margin.

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princeb
>cozy relationship between too-big-to-fail banks and their self-created
bureaucracy

don't know who is cozy but almost everyone in the sell side is being saddled
with endless amounts of compliance requirements and unless you enjoy staying
into the middle of the night reccing books 500 ways and tagging customer forms
and tickets the life has become less and less enjoyable.

i am pretty sure i am right when i say the life was good when the regulators
were more laissez faire in the early 2000s.

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grandalf
When there was market discipline causing firms to avoid bad underwriting
practices, many of those regulations were not necessary.

But now nearly everything but the actual incentives has been blamed for why
the market crashed.

Now, when it crashes again, it will of course have been totally unexpected and
impossible to predict, so of course a bailout will be necessary, etc.

My overly simplistic take is that the finance industry effectively practices
"risk laundering"...

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henryw
Google redirect for those who can't see it:
[https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&c...](https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&ved=0CB8QqQIwAGoVChMIwsCEqfmfyAIVgiiUCh0ULQHG&url=http%3A%2F%2Fwww.ft.com%2Fcms%2Fs%2F0%2Fa5cafe92-66bf-11e5-97d0-1456a776a4f5.html&usg=AFQjCNGENRJZuY3Tx0AD8gk2AZhLoF0Zpw&sig2=D23PEYblinU14gO9_PFgYg)

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fuzzieozzie
Thank you

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quanticle
I agree with McKinsey's analysis of the strengths of technology companies in
driving down margins. However, I disagree with their conclusions. Time and
again (at least in the US), banks have proven to be masters of legislation and
regulation, putting up legislative and administrative roadblocks that prevent
technology companies from competing with them head-on. This is why the
payments space is such a difficult one for startups to compete in - the amount
of reporting work necessary to ensure regulatory compliance is absurd. Combine
that with the fact that the regulation oftentimes limits you to the same
technologies that the banks themselves are using, and I don't see existing
banks losing their profit margins any time soon.

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nugget
Bank of America wants to pay me 15 basis points APR on my savings deposits.
It's so low the bank managers can hardly explain it with a straight face. Ally
Bank offers me 100 basis points. Who do you think is earning my brand loyalty?
Mobile check deposit eliminated the last need I felt to be near a physical
branch and for the first time I can foresee a future where I move all my
banking needs to Ally or one of their competitors.

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PhantomGremlin
_Ally Bank offers me 100 basis points ..._ _Who do you think is earning my
brand loyalty?_

Ah yes, the company that made billions of dollars in subprime loans to
deadbeats. The company that required a $16 billion bailout from the US
Treasury. The company that had a fun time robo-signing foreclosures.[1]

But it's OK. They changed their name, so we can all forget that they were a
major contributor to the financial crisis. They're no better and no worse than
BofA. None of those companies will get any "brand loyalty" from me.

[1]
[https://en.wikipedia.org/wiki/Ally_Financial](https://en.wikipedia.org/wiki/Ally_Financial)

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7Figures2Commas
As it relates to lending, banks absolutely have a lot to worry about. But so
too do many of the alternative lenders that are stealing their business.

Many of these lenders are products of the 2008 economic crash and they have
thrived because of the interest rate environment coupled with a period of
historically low defaults. When the next downturn arrives, we'll see how the
portfolios of the balance sheet lenders fare.

The alternative lenders in the business of securitizing loans avoid the
biggest risks balance sheet lenders have to deal with, but to generate
revenue, they have a never-ending need to originate more loans that they can
package and sell to investors. When interest rates rise, or the economy sours,
that could get more difficult. A lot more difficult.

Alternative lenders are here to stay, but a "wipeout" for banks would take a
long time to occur, if it occurs at all. The alternative lenders are going to
have their own problems to deal with soon enough.

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pbreit
The only catch is that the new lenders don't seem very good at lending. For
example, I can get a 7% loan at a credit union and 10% at a bank but
Vouch/Affirm/Avant/Prosper/LendingClub/etc want 20-30%.

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ac29
You must have terrible credit. As someone who has taken part in the lending
side of P2P companies, 20+% APR is the lowest grade of credit and represents a
substantial default risk (real returns are <10%).

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pbreit
Well, I definitely have an inordinate ability to repay. But the newer lenders,
unlike the older lenders, aren't acknowledging that for whatever reason. Maybe
they only want the high rate business?

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gatsby
Full article (because it's behind a paywall, then a survey):

The digital revolution sweeping through the banking sector is set to wipe out
almost two-thirds of earnings on some financial products as new technology
companies drive down prices and erode lenders’ profit margins.

This is one of the main predictions by the consultancy McKinsey in its global
banking annual review to be published on Wednesday, portraying banks as facing
“a high-stakes struggle” to defend their business model against digital
disruption.

McKinsey said technological competition would reduce profits from non-mortgage
retail lending, such as credit cards and car loans, by 60 per cent and
revenues by 40 per cent over the next decade.

It predicted a smaller, but still significant, chunk of profits and revenues
would be lost from payments processing, small and medium-sized enterprise
lending, wealth management and mortgages. These would decline between 35 and
10 per cent, McKinsey said.

Philipp Härle, co-author of the report, said: “The most significant impact we
see in price erosion, as technology companies allow delivery of financial
services at a fraction of the cost, and this will mostly be transferred to the
customer in lower prices.”

He said most technology companies were focused on picking off the most
lucrative parts of banks’ relationships with their customers, leaving them as
“dumb” providers of balance sheet capacity.

“Most of the attackers do not want to become a bank,” said Mr Härle. “They
want to squeeze themselves in between the customer and the bank and skim the
cream off.”

McKinsey said banks last year made $1.75tn of revenues from origination and
sales activities, on which they earned a 22 per cent return on equity, while
they made $2.1tn of revenue from balance-sheet provision at a return on equity
of only 6 per cent.

The consultancy said the industry had two choices. “Either banks fight for the
customer relationship, or they learn to live without it and become a lean
provider of white-labelled balance sheet capacity,” it said. While predicting
upheaval in the future, McKinsey said there was no evidence that digital
disruption had started to eat into banks’ market share yet. Banks’ share of
global credit provision has been constant over the past 15 years.

Mr Härle said one factor that could slow down the erosion of banks’ market
share was if regulators decided to clamp down on the disrupters by imposing
similar capital and compliance rules as those faced by banks.

McKinsey calculated that profits from all banks reached a record of $1tn last
year, helped by rapid growth in Asia and particularly in China and as US
lenders rebounded from the financial crisis. The average return on equity was
stable at 9.5 per cent, as cost-cutting offset falling margins in the low
interest rate climate.

Almost two-thirds of developed market banks and a third of those in emerging
markets earned a return on equity below their cost of equity and were valued
below their book value. “Many in the industry are waiting for an interest rate
rise or some other structural lift to profits, but even if rates rise, that
will be insufficient to fundamentally improve economics,” McKinsey said. “We
expect margins to continue to fall through 2020, and the rate of decline may
even accelerate.”

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kuschku
Let me get this straight, banks complain about returns of only 6 per cent?

This is ridiculous. Stop complaining, you still make more than inflation.

