Will digital disruption result in another financial industry crisis?

Could the banking industry revisit the financial crisis of 2008?

According to a 52-page analysis from McKinsey entitled, “The Phoenix Rises: Remaking the Bank for an Ecosystem World,” that is what banks and credit unions must be prepared for if there isn’t an increased focus on digitalization and a new perspective on what constitutes the banking ecosystem. Bottom line, the threat from digital technology players like Amazon, Tencent, Alibaba and Google is accelerating, and banks could be relegated to commodity providers in less than a decade if the industry doesn’t rethink how it delivers financial services.

McKinsey estimates that fully digitizing, along with significantly improving skills in digital marketing and analytics, could add $350 billion to the banking industry’s bottom line over the next three to five years. In addition, if the banking industry could find ways to compete effectively with big tech companies like Amazon, Alibaba and Tencent, an ROE between 9% and 14% is possible by 2025.

Alternatively, if the financial services industry does not rethink distribution, and if retail and corporate customers switch their banking to digital companies at the same rate that people have adopted new technologies in the past, the industry’s ROE, absent any mitigating actions, could fall by roughly 4 points, to 5.2 percent by 2025. This is close to the levels experienced in 2008, during the worst of the 2008 financial crisis.

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