McKinsey: 2023 Global Banking Annual Review 2023 – The Great Banking Transition

Report Link: McKinsey’s Global Banking Annual Review 2023 | McKinsey

Size of Report: 48 pages

Key takeaways are:

1. 2023 saw a banking inflection point on several factors, technology is a key narrative and Payments are doing especially well BUT the advice seems to be with increased divergence on return on equity for many, irrespective of size mid-tier/smaller banks should consider:

• divesting payment assets – this is being played out in Greece and is now starting in Iberia to specialist payment players, and
• create partnership models (the smaller you are the more critical this is).
• an example cited is consumer digital payment processing conducted by payments specialists grew by over 50% between 2015 and 2022.

2. Strongest forecast growth is in a region deemed the Indo-Crescent (ref Page 24).  This region is home to over half of the world’s best performing banks and forecast to increase that share in the next few years. The divesting of (payment) assets point above is less likely to play out short term in this region.  The other strong geographic trend is Latin America.

3. The report provides:

• a strong nod to the importance of API enablement for Embedded Finance, and
• improved customer/merchant experiences (driven by user experiences & advanced analytics (rules engines/notifications), and
• the need to simplify complex operations.

Linked to trends such as Embedded Finance is a structural change in banks’ distribution approach, this will play out over a longer period, but the change is evident in Europe and Asia (Oceania).

4. For the more financial mindset orientated, all the above points are backed up by copious datapoints and tables on why advisory services from McKinsey are steering banks in this direction given an expected longer time period where higher interest rate environments will exist which will create slow returns on equity from still fast-growing payment businesses. This strongly correlates to research from BCG.

The report concludes by laying out five priorities that McKinsey believes could help institutions survive and thrive:

• Exploit technology and artificial intelligence, use talent better and improve delivery of products and services.
• Flex and unbundle the balance sheet through syndication, originate-to-syndicate and third-party balance sheets.
• Scale or exit transactions business (like payments), including through merger and acquisition, or by leveraging partners to help with exits.
• Level up distribution to sell to customers and advise them directly and indirectly; and
• Adapt to changing risks, including changing macro context, new regulatory requirements and risk associated with technology.

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