With most of the world’s economies showing clear signs of being in the late phase of the economic cycle, many traditional financial institutions are facing a critical juncture. Whether a recession or a prolonged stagnant period is in the cards, banks and credit unions can anticipate pressure on earnings and increasing risk due to continued pressure on margins and decreasing loan demand.
Even under current conditions nearly three in five (60%) of financial institutions worldwide studied by McKinsey generate returns below their cost of equity. Further, more than a third (35%) are considered “challenged,” according to McKinsey’s analysis. Not by the usual reason of poor credit quality, but by their weak competitive situation shaped by geography, scale, differentiation and business model.
What makes this scenario different from past economic cycles is that the normal pressures of a downturn are being compounded by the increasing threat posed by nonbank competition, both from fintech firms and big technology companies.
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