Depending on whom one wants to listen to, the banks are either doing well or face a degree of extinction. Consultancy firm McKinsey & Co is not too convinced most banks will remain alive for much longer. In fact, they claim the vast majority of financial institutions are no longer economically viable at this time.
The Banks Suffer From Issues
Given all of the financial turmoil taking place all over the world, it is not too surprising to learn banks are the main reason why all of this is happening. Over the past few years, it has become significantly more difficult for financial institutions to create positive cash flow. Even in 2019, the operational costs for most banks remain incredibly high, whereas their return on equity continues to dwindle. It creates a very worrisome situation that seemingly goes unnoticed.
The new report by McKinsey & Co is rather condemning in this regard. They go as far as claiming how “the majority of banks globally may not be economically viable” at this time. That is a very worrisome and grim outlook if true. Banks have tried to save costs by cutting down on active personnel serving customers in the bank, as well as by closing branches altogether. It now seems even those measures might not be sufficient to create a viable situation from a financial point of view.
What can be Done?
Creating money out of thin air is a strategy central banks are often criticized for. As far as commercial banks are concerned, the situation is very different. Rather than raising costs for customers, they should look into developing new technologies and services as much as possible. That is easier said than done, as these options also have rather high costs associated with them. Another option is to bulk up through mergers with other commercial banks. That is a trend visible all over the world, as very few banks retain their name for more than a few years.
Other cost-cutting measures come in the form of farming out operations. Finding low-cost labor solutions for operations that do not need to be completed in-house is always an option. It is also a measure most technology firms engage in these days, for rather obvious reasons. Any bank failing to make a bold move will, according to McKinsey, fail to compete with other entities in the near future. No bank can rest on their laurels under the current market conditions, which won’t improve anytime soon either.
The Footnote Label
To close its report, McKinsey claims banks are on the verge of becoming footnotes to history as they simply cannot compete with new entrants. Any attempt by a bank to boost its overall efficiency hasn’t yielded spectacular results. Instead, it is a “business-as-usual_ approach first and foremost, according to the agency. The big question is how many financial institutions will take these warnings to heart.
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