INTERVIEW
Why the universal banking model is no longer sustainable in modern-day banking
Changing customer attitudes and lowered barriers to entry has transformed how banks’ fortunes are made. ASIA PACIFIC
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n the past, the universal banking model has ensured that traditional banks retain their dominance in the banking sector. But changing customer attitudes and the crumbling entry barriers for new players has vastly transformed modern-day banking, and lenders will have to rethink dipping their toes on a little bit of everything if they wish to trim costs and supercharge revenue streams. “Historically banks, when they talk about customers, refer to transactions. Banking was seen as sticky because customers tend to transact in everyday banking on a more regular basis, maybe several times a month,” Renny Thomas, Senior Partner at McKinsey & Co., told Asian Banking & Finance in an interview. “That’s getting completely redefined with what I call as top of the funnel engagement, where a customer is not buying anything, or transacting or anything, but basically engaging with the bank. Nowadays it’s more on consumer engagement, not sales or service.” Instead of just transacting, customers instead now go to the bank to ask questions surrounding personal financial management, for example. And traditional banks are finding it tricky to adapt to this, Thomas noted, with the advent of technology has given rise to specialist banks and lessened the importance of an extensive branch network, he added. “Banking has always been a technology business with risk intermediation. We’re getting another wave of new technology where some of these entry barriers are fundamentally changing. These entry barriers are still necessary–customer acquisition, historically you needed a very large branch network, you still need these. But you don’t need the same density of branch network that you historically needed,” Thomas said. Asian Banking & Finance spoke with McKinsey’s Thomas to learn whether the universal banking model is still applicable today–and why traditional banks and specialist neobanks are competing in two different races. Is the universal banking model still sustainable for banks? Why or why not? If you look at how the universal banking model has evolved over the years, it provided us a source of portfolio diversification, natural hedges, etcetera. Over time, it ensured that the balance between the different businesses, the flows between them, would actually work out well. And if you look at some of the most successful banks in the world, they are universal banks. Now, what is changing is the following: historically, to set up a new bank, the entry barriers are pretty high. If you take a large part of the banking business, which is retail banking, the cost of the infrastructure, the branch network, the fixed costs are actually very, very high. If you have to set up a new bank from scratch based on a historical model, it would easily take somewhere between five and 10 years to not just breakeven, but get to any acceptable level of profitability. It’s the huge entry barriers which has actually protected the universal banking business model.
28 ASIAN BANKING & FINANCE | Q1 2023
Structurally, growth in many of the Asian markets makes the banking business still highly profitable (Photo from McKinsey.com: Renny Thomas, Senior Partner, McKinsey & Co.)
Banks in Asia are some of the most innovative and successful
Similarly, if you look at the cost of technology, some of the neobanks have established that the cost of technology could be one-tenth that of universal banks. So the combination of these things is basically making the entry barriers much lower. And the emergence of specialists business models, which are able to leverage technology and scale rapidly, is what’s actually leading to a number of some of these specialist players being valued a lot more richly than the universal banking model. However, it’s still the early days. I do think that in many of these cases, we still have to fully see if the cost model is fundamentally better and more efficient. But clearly, it’s been pretty well established now that the role of technology in actually helping scale these specialists models could lead to a completely different business model going forward. What shifts have taken place in the banking industry that made the universal model insufficient in modern times? Let me talk about a few. The first one is around how you actually engage with customers. Nowadays, it’s more on consumer engagement, not sales or service. This is something that traditional banks find very hard to do. If you are more of a consumer tech kind of neobank, then your ability to actually engage with customers more naturally
