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October 26, 2017

Alibaba & Amazon pose bigger threat to banks than fintechs

Platform giants are the real threat that should be keeping banks away at night.

By James Nunns

Banks may well be focusing on the challenge to their market domination from fintechs but the real threat could be coming from somewhere else.

Amazon and Alibaba are the real threat to the banks’ market domination thanks to their growing interest in the “distribution” side of banking, according to McKinsey.

Although these two platform giants are two of the big threats, there’s also the likes of Rakuten Ichiba, Google and many more that are looking to utilise their massive customer bases to challenge the banking status quo.

The likes of Alibaba are considered a significant threat thanks to their growing reach into asset management, lending and payments, whilst Rakuten is already distributing credit cards to customers.

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McKinsey said: “The manufacturing end of many businesses is fading from view, as the platform companies increasingly dominate the distribution end of multiple businesses, providing a wide range of products and services from a single platform.”

Manufacturing generates 53% of industry revenues, however, only 35% of profits and a 4.4% return on equity. Meanwhile, distribution – the key area under threat and sales side of banking, accounts for 47% of revenues and 65% of profits, meaning that the return on equity is much higher at 20%. In essence, this would be a really bad part of the business to have eaten by competitors.

The threat is such that the report suggests that ROE in the industry could be cut from 8.6% last year to 5.2% by 2025.

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Whilst banks have somewhat nullified the threat from fintechs by forging partnerships with the market newcomers, McKinsey suggests that banks need to combat the new threat from platform giants by building partnerships and monetising their data.

“Banks that successfully orchestrate a basic ecosystem strategy, by building partnerships and monetizing data, could raise their ROE to about 9% to 10%. Banks that can go further and create their own platforms might capture a small share of some nonbanking markets, which would elevate their ROE to about 14% — far above the current industry average.”

Banks need to take advantage of their strengths such as with consumer trust and their access to customer data – something they’ve had for decades and failed to capitalise on.

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