Inflection point:Seven transformative shifts in US retail banking

McKinsey & Company | Oct 2019

7 transformative shifts in US retail banking banner - Inflection point:Seven transformative shifts in US retail bankingTen years ago

10 years ago, the US retail banking industry was in the depths of the global financial crisis, with many one-time leading institutions struggling to survive.

Since then, after bringing in billions in fresh capital, US banks have made a return to stable ground and greater liquidity. Despite this progress, aggregate return on equity is at the lower bound of sustainability, and the industry’s price-to-book value is about 1.4, not far above where it stood in 2009.

Customer trust has improved from the downturn but is still well below pre-crisis levels. Though most banks were able to avoid unsettling challenges in the following ten years, few were able to break out and significantly outperform the industry.

Now, however, several major forces are accelerating the evolution of the US banking industry–the encroachment of new competitors, rising expectations from customers on service levels and corporate responsibility, and an intensifying war for talent—and promising to make doing business more challenging in the coming ten years.

Further, US banks have yet to go through the restructuring that has already swept European and Asian markets, where a majority of services are delivered digitally. In this report, we describe seven transformative shifts reshaping US banking. The current state of US retail banking can be thought of as an inflection point for the industry.

Coupled with the difficult macroeconomic environment, and political and economic uncertainty, the seven shifts will decisively alter the operations, economics, and efficiency of US retail banking.

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Banks face a steep climb

To rank the relative performance of companies, McKinsey uses the Power Curve, which measures value created in terms of economic profit (defined as firms’ returns less their cost of capital). From 2010 to 2017, we assessed close to 2,400 companies across multiple industries on the Power Curve and found two surprising results. First, companies ranking in the top 20 percent generated more than 30 times the profit of those in the middle 60 percent, while the lagging firms made only marginal economic profit. Second, the curve is broadly stable over time, and a company’s position on it is persistent: between 2010 and 2017, only 1 in 12 companies rose from the middle ranks to the top of the Power Curve, while approximately 40 percent of companies in the bottom third stayed there.

7 transformative shifts in US retail banking - Inflection point:Seven transformative shifts in US retail banking

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