Garnet Capital Advisors Blog

Excerpt: Banks need to completely transform their institutions into digital companies to improve profitability over the next five years, rather than focusing on partial digital moves in primarily consumer-facing areas. A more than 40% rise in profits can stem from improving revenues and declining costs as complete digital transformation occurs. 

Banks can increase their profits by more than 40% over the next five years by engaging in digital transformation, according to management consulting firm McKinsey & Co. The profit advance will be driven by enhanced revenues, but, perhaps even more importantly, 20%-25% will be driven by decreased costs. 

Banks can raise their profitability via digital transformation.

These kinds of figures – impressive potential top-line growth and even more impressive cost reductions — make going digital all but mandatory for banks that want to survive and thrive.

The resultant potential climb in profits is what banks are looking at when their heads announce, as BBVA chair Francisco Gonzalez did recently at MoneyConf in Madrid, that a successful bank must become a “new digital company” rather than simply moving partially into the digital world by, for example, making more use of platforms.

Transition Necessary for Profit Realization

It’s striking how much the statements of Gonzalez and the conclusions of McKinsey agree. Both state that banks must forego partial digital moves, such as increased provision of mobile apps, for wholesale commitments to becoming digital companies, back to front. 

Corporate and back office transformation is as important as consumer-facing changes.

The consumer-facing parts are important: digital platforms and mobile apps, especially for consumer functions such as personal loans and bill payments, are expected to only increase. But for the rise in revenues and especially the drop in costs to be realized, every area of a bank must become digital, from data collection to processing of payments.

This means a wave of new investments, especially for European banks. Currently, on average, European banks only have 20%-40% of their processes digitized. Ninety percent of European banks’ digital expenditures are less than 0.5% of the total expenditures each makes.

European banking consumers, on the other hand, are very comfortable with the digital world. McKinsey estimates that within the next half a decade, more than 66% will be firmly in the digital world whenever goods and services are provided. 

Without customer resistance providing a drag, why haven’t banks moved more to the fore in digital transformation? Both sources cite an emphasis on consumer-facing changes like online applications rather than the more macro changes needed. 

In addition, many banks cite security concerns. McKinsey, however, points out that industries like travel, with similar or even larger security concerns, have transitioned to digital methods seamlessly.

Smaller Transformations Can Effect Larger Change

McKinsey stresses, however, that banks don’t need to enact massive upheaval to transform digitally. In fact, the consulting group suggests that banks focus on smaller targeted investments, such as ensuring that electronic forms are available and universal throughout a system. 

As time goes on, banks can ensure the success of small focused expenditures and then move on to the next focus. Over a decade or so, transformation will move forward and enable a bank to capture increased revenue and decrease costs. 

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