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WORKING DRAFT
Last Modified 30/09/2016 20:25 GMT Standard Time
Printed
BANCO DE PORTUGAL
CONFIDENTIAL AND PROPRIETARY
Any use of this material without specific permission of McKinsey & Company
is strictly prohibited
Workshop document | October 2016
Digital Banking and FinTech:
Challenges and Threats for the
Banking System
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Contents
Trends in digital banking
Trends in Fintechs
Potential implications for the
banking system and regulation
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25 302015105
50
80
70
60
30
20
40
55 8040 50 85706535 45 60 75
Online banking penetrationPercent
In banking, digital adoption is not just “increasing”; in the last 4 years it has
doubled or even tripled in some countries and follows a relative predictive
path
20162012
SOURCE: McKinsey Retail Banking Consumer Survey 2016
Level of self-directed customers
Percent
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Already today ~70% of consumers prefer digital and remote
channels for of simple transactions
Digital and remote channelsBranches
SOURCE: Consumer surveys 2012 and 2016 in Europe (France, Germany, Italy, Netherlands, Spain, Sweden, UK)
Digital is already dominating transactions…
1 Preferred channel for transactions (e.g., credit/money transfer)
2 Contact center, broker / agent
4557
73
10
85
2012
560
2016
706
85
2020F
6
Online and mobile
ATM
Other direct channels2
15
30
40
2016 2020F2012
Survey results. Percent of transactions1
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Digital and remote channelsBranches
… and will dominate sales
Other direct channels2
Online and mobile
SOURCE: Consumer surveys 2012 and 2016 in Europe (France, Germany, Italy, Netherlands, Spain, Sweden, UK)
1 Preferred channel for opening an buy a simple product (e.g., Current accounts, savings accounts, credit card)
2 Contact center, broker / agent
34
51
68
2012 2016 2020F
23
38
559
11
11
49
2020F
66
2016
32
2012
Survey results. Percent of simple products sales1
Digital and remote will take over branches as main channels for
banking product sales in Europe by 2020
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19261624
1369 1197 1201 1068 1050 1052 1052833 833 833 800
1727
1648
1516
1378 12991249 1214 1159 1112
1010 911 900 800
846
701
591
581 559555 558 555 510
500508 467
408
289
250
185
180171
163 159 158156
1560 0
0
227
208
200
198175
167 170 146140
133
143 200200
10
090807060504
-52%
201202012000 03
ABN AMRO and
Fortis Bank NL
integration
283 ING branches
and 550 agents
11
The impact on distribution in advanced countries has been a continuous
decrease of physical presence
Branches by bank in the Netherlands
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In Portugal, digital channels have been increasing share in
customer interactions
NOTE: Data for Portuguese Average. Branch Touch = Monthly cash withdrawals + monthly deposits + monthly inter account transfers and third party
payments; Online and Mobile touch = Monthly log-ons in channel; Telephony touch = Monthly agent servicing calls and fully automated servicing
calls. Other channel sales include sales made through ATMs and third party agents.
1. % of active customers by channel (June 2015) 2. Distribution of customer service touch by channel
3. Distribution of customer transactions by channel 4. Distribution of retail sales by channel
3
27
35
27
44
36
28
42
OnlineBranch Mobile
N/A
Telephony
N/A
2015
2014
2013
Percent
58
6
28
7
56
9
30
5
Online ATM/IDMMobileBranch
-2.2pp
+1.4pp
+3.5pp
-2.2pp
0,70,1
11,9
0,10,40,4
14,6
0
Mobile Telephony ATM/IDMOnline
84.5
Branch
87.3
-2.8pp
+2.7pp
+0.3pp -0.2pp
59
02
36
3
58
04
36
2
Online ATM/IDMMobileBranch Telephony
-0.7pp
+0.6pp
+1.5pp
-1.3pp
0pp +0.1pp
SOURCE: Finalta
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Bank's current digital offer significantly lags behind demand
While digital sales
represent at best
40% for basic
products in more
advanced
countries, over
80% of customers
in these countries
are willing to adopt
digital
71
35
Southern
Europe
Eastern
Europe
2.4x
3.2x
4.7x
11
63
5.0x4.3x
Core
Europe
North
America
5652
141320
85
Northern
Europe
Willingness
Customer reported activity
1 Current account example
Digital product purchase1
Percent
SOURCE: McKinsey Retail Banking Survey 2016
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Contents
Trends in digital banking
Trends in Fintechs
Potential implications for the
banking system and regulation
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ESTIMATES
SOURCE: McKinsey Panorama FinTech database
Fintechs are focusing on all customer and product segments,
especially on payments
9%
4%
4%
18%
7%
2%
11%
12%
14%
4%
5%
…%# of startups and
innovations as % of
database total1
<5%
5%-7.5%
7.5%-10%
>10%
Banking segment’s share of
total banking revenues
1 970+ commercially most well-known cases registered in the database, might not be fully representative 2 Includes Small-, and Medium Enterprises
3 Including Large corporates, Public Entities and Non-banking financial institutions 4 Includes Investment Banking, Sales and Trading, Securities services,
retail investment, Non-CA deposits and asset management factory 5 Revenue share includes C/A deposit revenue
9%
McKinsey Panorama FinTech Landscape, # of startups and innovations as % of database total1
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The level of Fintech financing is booming
SOURCE: CBInsights; McKinsey Panorama; press
VC investments
Other investments
6.7
13.8
2.82.42.1
10
15
5
0
20
2015
19.1
+57%
+213%
+39%+17%
14
3.9
12
2.4
12.2
2.8
2011 13
Global investment in Fintech startups
USD billions
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Key Fintech trends
And we see a wide range of topics emerging as new norms in banking
SOURCE: McKinsey Panorama
Beyond banking
Payments Wealth managementRetailCapital markets &
investment banking
Operations and
infrastructureBlockchain
Payment
infrastructure
Big data-based
risk assessment
Insurance
Retail value
chain & coupons
Virtual
marketplace
SME
Mobile
payments $
International
remittances
mPos devices
Next gen.
trade finance
Digital cash
management
Crowdfunding
Robo-advisory
Social
investing
New digital
lending$
Next genera-
tion PFM
P2P lending &
investment
Telematics
Social
integration
IoT & connec-
ted devices
Investment
across regions
Aggregator,
Comparison
engine
Prevention
One-stop-shop
for businesses
P2P corporate
lending &
investment
Next genera-
tion SME
lending
Automated
credit processes$
Next generation
marketing
Digital for
unbanked
$$
NOT EXHAUSTIVE
Next gen.
collateral
management
Automated
processes
Trade
analytics
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Contents
Trends in digital banking
Trends in Fintechs
Potential implications for the
banking system and regulation
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Validation
App auto-authenticates
transactions made while
traveling using geo-services
Merchant payments
Peer payments
App enables user to send
money to friends’ mobile phones
Investments
App invests and tracks
returns across stocks,
bonds, and cash
Message Center
App sits in the background
and pop-ups message on
screen when an action is
needed
Bill payments
Pop-up alert to pay bill
opens app with 1-touch
payment approval
Gifting
Pop-up alert to remind you
of special events and
enables you to give a gift
with one touch
Expense management
App sits in the background
and tracks the user’s
budget following every
new transaction
Borrowing
Pop-up from banking app
with loan offer based on
recent search queries and
transactions
App enables user to send payment
to merchant. Recognizes when
user is ready through geo-services
New products are raising the bar for security – Mobile Banking example
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Increased concentration and
exposure of critical data assets
▪ Rising number of applications
that amalgamate data assets,
increasing risk of cross-
contamination when security
is breached
Heightened tension between
controls groups and the BUs
▪ Cyber security much be
managed in such a way as to
minimize impact on user
experience and time to market
Widened attack surface
▪ Exponential growth in endpoints,
many of which exist outside of
core security infrastructure
▪ Fragmentation in mobile platform
and application versions greatly
complicate maintaining product
security integrity
Heavier reliance on third parties
▪ Banks might not have the full picture on the
state of risk in their organization, due to their
integration with vendors and other service
providers that have lesser security measures
Increased complexity of
attack patterns
▪ Rapid evolution and
growing sophistication of
attacks and malicious
actors make it
challenging to stay
ahead of the curve in
identifying and protecting
against potential threats
These products introduce a number of new challenges in managing digital
risk
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It is a
currency
It is a
transaction
network
It is a secure,
distributed public
ledger
New solutions might have clear benefits but also intrinsic risks – Bitcoin
exampleWhat is it? What risks?
Used to shop illicit goods
Used In fraud schemes
Used for Criminal purposes
Bitcoin service
double your bitcoins
Assassination service
“Permanent solution to common
problems”
Stolen mac stores on the darkweb
use bitcoins to buy stolen apple
products
Bitcoin laundry
Blend bitcoins so that they are
untraceable
Subject to hackers attacks
The Bitfinex Bitcoin hack
More than $60m worth of bitcoin was
stolen
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A supportive regulatory system is needed with three core focus areas to
encourage digital innovation while ensuring security
1▪ Remote/e-KYC
▪ Multi-factor authentication
▪ Cryptographic encryption
Simpler but more
secure
requirements
▪ Common standards on use
of cloud
▪ Enhanced data security
Enable the
adoption of new
technologies2
▪ “Sandbox” measures to
encourage experimentation
▪ Level playing field for new
models and existing
players
Enabling
regulations to
encourage
experimentation
3
SOURCE: McKinsey