Digital shift puts a third of traditional banks' revenues at risk, warn analysts

McKinsey said that European banks have generally been slow to transform their company into a truly digital one even though digital banks can gain "a vast competitive edge over a traditional incumbent" in the industry.

"We estimate that digital transformation will put upward of 30% of the revenues of a typical European bank in play, particularly in high-turnover products such as personal loans and payments," McKinsey said. "We also estimate that banks can remove 20 to 25% of their cost base by leveraging this digital shift to transform how they process and service. Put together, the economics of a digital bank will give it a vast competitive edge over a traditional incumbent. It’s fair to say that getting digital banking right is a do-or-die challenge."

"In the near term, we expect shorter-tenure, high-turnover products like credit cards, loans, and payments to see the most digital transformation. In fact, these are the areas most under attack from new digital entrants. Looking further ahead, bank accounts and mortgages, which together drive more than 50% of many banks’ revenues and usually provide 'sticky' annuity streams, will be brought into the fray. Given this development, European banks will need to carefully watch the evolution of their digital share and the success rate of digital products in the front book," it said/

McKinsey said that whilst the banks had developed new digital services for consumers to engage with, such as mobile apps, they had often not delivered underlying changes to accompanying "frontline tools, internal processes, data assets, and staff capabilities needed to stitch everything together into a coherent front-to-back proposition".

The analysts said that banks were wrong to raise security or risk concerns as reasons for taking a "slow approach" to digital transformation. It said companies in other industries have had similar security or risk concerns but made greater progress in using technology to improve customer service.

"The airline industry, arguably beset by even stronger risk concerns, has automated just about every aspect of its customer experience in the last ten years, boosting customer service without compromising safety," McKinsey said. "Banks can do the same. What’s more, the effort is likely to pay for itself -and then some."