This insight was written before current events in the global banking industry. It is not presented to be read as a direct response to the current state of the sector.
Banking has been always a business of complex cross-financing dynamics for value creation at the group level: some products drive profitability, while others enhance liquidity or improve customer relationships. Products that create less value—as measured by return on equity minus cost of equity—such as corporate lending and mortgages, are often subsidized by products that create higher value, such as wealth management, payments, and deposits. This business model—though imperfect—has worked for banks. Over the last ten years, as we demonstrate in the accompanying charts, these highly profitable services accounted for more than $2 trillion of banks’ economic profit globally.
Now, however, the model is under threat from fintechs and big techs, which are (predictably) targeting banking’s rich seams of profit. More than 80 percent of fintech activities, for example, are concentrated in payments, consumer lending, and wealth management. The result is a steady disaggregation of these profit centers from the banking value chain.
The most effective response for banks is to deliver superior value and unique propositions for the higher-margin services. The other, equally challenging approach is for banks to restructure their operating and delivery models to turn their less profitable services into value generators.
In summary, it makes sense for banks to look at long-term through-cycle value creation by product category, to understand the implications for how they should reshape their competitive strategy.
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