McKinsey Quarterly

Learning from digital threats

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There’s no silver bullet for fighting back against tough, new digital players. Bankers are finding that they can join forces with emerging fintechs to strengthen soft spots along their value chains. Beauty players are copying the digital offerings of upstarts—or acquiring them. Among equipment manufacturers, a reservoir of customer goodwill provides an opening for new innovative products. Better visibility across the digital landscape is key.

Why banks are welcoming the disruptors

By Jay Datesh, Miklós Dietz, and Miklós Radnai

Partnerships with fintech companies are getting broader as start-ups offer new digital capabilities and competitive business models.

As digital competition intensifies among financial institutions, banks are finding that the start-ups they once considered threats can be valuable strategic and operational allies. Many are moving aggressively to widen collaboration with fintech companies rather than develop solutions in-house, gaining access to innovative technologies and business models that are more efficient and offer customers greater convenience. Other advantages associated with such partnerships include new customers, lower costs, and, perhaps more critically, exposure to an innovative culture that might help banks reinvent themselves.

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Our latest research finds that approximately four out of every five of the top 100 banks by assets (and other digitally advanced banks) have now partnered with at least one fintech company (exhibit), up from 55 percent just two years ago. On average, each bank has forged four such tie-ups.1 Deals range from basic buyer–supplier transactions to complex, exclusive partnerships.

In pursuit of digital transformation, banks are partnering with fintechs rather than considering them as threats.

In related moves, we found banks are also stepping up their business-accelerator programs. These programs typically involve them providing early-stage financial businesses with management expertise, funding, and office space, often as a prelude to deeper collaboration.

Formal partnerships span a spectrum of activities, with payments—including real-time payments and cross-border, blockchain-based transactions—being especially fertile ground (37 percent of all partnerships). In operations (18 percent of partnerships), example activities include anti-money-laundering technology and video-based identification methods. In lending, fintech companies drive new customer referrals, while their robust digital platforms, from customer interfaces to back-end loan processing, can sharpen bank offerings. Other collaborations have spawned the creation of highly personalized financial-management apps, fraud-detection systems based on advanced-analytics expertise, and improved conversational customer-service automation.

There are remaining rough patches with partnerships, such as the misalignment of incentives and capability gaps in banks’ own arsenals. Banks also need to improve their execution game and speed up decisions to avoid having fintechs turn away in frustration after an initial period of collaboration. But as banks strive to stay ahead of peers that are digitizing, and ahead of the big digital natives that are entering banking markets, we expect the partnership landscape only to become strategically more important.

About the authors

Jay Datesh is a specialist in McKinsey’s Budapest office, Miklós Dietz is a senior partner in the Vancouver office, and Miklós Radnai is an associate partner in the London office.

The authors wish to thank Gergely Bacso for his contributions to this article.

How OEMs can beat back digital challengers

By Kevin Laczkowski, Niranjana Rajagopal, and Paolo Sandrone

Loyal customers such as farms and contractors are looking to equipment suppliers for help with advanced technologies.

Original-equipment manufacturers (OEMs) face a host of challenges as the machinery industry reaches a tech tipping point.

Value is shifting from hardware to software, making OEMs’ central role in hardware product development less attractive. Online channels for aftermarket parts are becoming more prominent, putting pressure on traditional dealer channels. And high-tech companies are emerging as strong competitors in this space, as they are viewed by customers as trusted suppliers, raising the stakes for OEMs.

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Despite these threats, our recent survey of contractors and farmers found that OEMs still have strong cards to play.1 Respondents in both sectors are enthusiastic about many new technology use cases, particularly those that can be integrated into existing operations. And they have high levels of confidence in OEMs to help them navigate through this new era (exhibit).

Contractors and farmers find new technologies that are easily integrated into existing operations more attractive than those that require an entire redesign.

Contractors most favorably viewed predictive maintenance and remote monitoring, connectivity to project-management software, digital aftermarket sales, and operator-guidance systems.

For farmers, GPS autosteering topped the list of compelling uses for new technologies. Farmers also liked variable application of inputs, such as determining the right mix of seeds, water, fertilizer, and other soil enhancements, as well as predictive maintenance.

Yet customers are also becoming more demanding: they value data privacy, data access,2 and connectivity between their equipment.3 To navigate industry disruptions successfully, OEMs must better understand both their customers’ decision journeys and their changing preferences. OEMs will need to stay on their toes to fund these new offerings through productivity improvements. And they should start thinking ahead by bolstering their position in emerging technology ecosystems, improving their talent base, and revamping R&D processes.

Our research shows that many construction and agriculture OEMs in the United States ought to be able to generate value from these new technologies that is four to six times their current profits. The opportunity is there for those who can seize it.

For more, see “How OEMs can seize the high-tech future in agriculture and construction.”

About the authors

Kevin Laczkowski is a senior partner in McKinsey’s Chicago office, where Niranjana Rajagopal is a consultant and Paolo Sandrone is a partner.

The authors wish to thank Asutosh Padhi for his contributions to this article.

Lessons from the beauty upstarts

By Sara Hudson, Aimee Kim, and Jessica Moulton

Beauty players are embracing digital and social media to tap into the industry’s hottest growth areas.

Digital marketing and social media have disrupted the $250 billion global beauty industry more severely than most other consumer-goods sectors. “Born digital” brands, such as eyebrow specialist Anastasia Beverly Hills and makeup producer NYX, have used social-media tools to capture the attention of engaged, beauty-conscious customers. This generation of upstarts has already taken 10 percent of the color-cosmetics market and is growing four times as fast as legacy players (exhibit). And the growth of born-digital challenger brands could accelerate, with venture capital pouring into the sector.

In the beauty sector, some digital challengers are gaining share and growing nearly four times faster than legacy companies.

Born-digital brands recognize that younger consumers engage with products differently than older consumers do. Their use of channels, such as online videos (“vlogs”) and influencer marketing through social media to build a following, has been critical to their success. Charlotte Tilbury, for example, has ten times as many YouTube subscribers—many of them looking for tips on applying makeup—as the average legacy brand. Through these channels, the born-digital brands have created a way of marketing that is more than transactional. Rather, it’s about creating a relationship with consumers and making them feel part of a community centered on the brand.

Competing in a world of sectors without borders

Competing in a world of sectors without borders

This has not gone unnoticed: established players are stepping up their digital game, often with excellent results. One approach is to buy into this new expertise: in 2016, traditional companies made 52 acquisitions, many of them upstarts. Estée Lauder, for example, bought BECCA Cosmetics (makeup foundations), Too Faced (cosmetics), and a minority stake in Deciem (skin care). Another approach is imitation. The big beauty companies are making significant investments in digital media and influencer marketing: L’Oréal alone has hired 1,600 digital experts. A third is incubation, in the form of corporate venture-capital funds, such as LVMH’s Kendo, which has recently been successful with Rihanna’s Fenty Beauty.

The established beauty companies have shown that they can and must adapt to defend their position. It is a lesson that other consumer-goods companies would do well to heed.

For more, see “What beauty players can teach the consumer sector about digital disruption.”

About the authors

Sara Hudson is an associate partner in McKinsey’s London office, where Jessica Moulton is a senior partner; Aimee Kim is a senior partner in the Seoul office.