Pathways to growth in North American retail banking

With fintechs targeting profitable banking functions and products, North American retail banks will need strong capabilities in areas such as advanced analytics, digital factories and customer insights in order to capture revenues.

For nearly a decade, persistent low interest rates and a heightened regulatory environment have forced North American banks to focus on aggressive cost-cutting to boost returns on equity (ROEs). Many of these efforts have reached the point of diminishing returns, and banks are now turning their sights back toward the revenue side of the equation. At the same time, however, digitization is serving as an on ramp to the banking revenue pool for fintechs and other non-bank companies that thrive on speed, innovation and agility. Banks, in other words, are facing new competitors for the revenue they so badly need today.

Well-financed, nimble fintech firms are taking advantage of a favorable innovation environment to attack some of retail banking’s most profitable business segments. According to McKinsey’s Panorama, which tracks more than 3,000 fintechs offering traditional and new financial services, about 18 percent of fintechs are focused on disrupting retail payments, and 11 percent are pursuing retail lending (Exhibit). These companies are drawn by an attractive opportunity to access retail customers. McKinsey’s Panorama finds that 59 percent of U.S. retail banking profits result from loan originations and sales—banks’ core revenue-generating functions. Combined, these functions contribute 22 percent of average ROE—a compelling target for fintechs.

As the most attractive aspects of retail banking increasingly will be at risk, banks must respond by reinforcing relationships with their customers and committing to revenue growth. A number of banks have addressed this challenge successfully by focusing on a distinct set of growth opportunities:

• Building scale in unsecured lending
• Maximizing customer conversion and share of wallet
• Transforming branch sales to improve effectiveness at lower cost
• Using call centers to deepen relationships
• Developing a cost-efficient remote advisory model
• Redesigning the commercial business
• Expanding fee-oriented services

Focusing on these opportunities is one piece of the revenue growth puzzle for banks. Just as important are an underpinning set of core capabilities that enable banks to tap these growth vectors and compete with fintechs aiming for the same revenue targets. These capabilities center around advanced analytics, digital factories, technology talent, customer insights and strategic, creative partnering. Banks that commit deeply to new growth opportunities, and the core capabilities that support them, put themselves in a strong position for sustained, profitable growth.