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It takes more than an idea, a fancy technology and a team of full-spirited people with talent and passion to achieve digital transformation and develop disruptive services in banking, according to Joydeep Sengupta, a senior partner of McKinsey & Company.
A bank will need to change its organizational culture, and work with third parties such as fintech startups to develop an ecosystem surrounding its envisioned platform.
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This is because banking is a regulated sector, and authorities can help create an environment under which banks can pursue innovation with partners, Sengupta said.
In short, all wheels ― banks, startups, regulators, tech ecosystems ― have to be turning for total digitalization and transformation.
"Technology and regulation are two driving forces of change in the financial industry," said Sengupta at a forum on digital transformation hosted by The Korea Times in Seoul, June 26.
"New technology enables business models, and ecosystem players with a new integrated network economy are turning financial institutions into utilities in disruptive scenarios."
Sengupta heads the consulting firm's Asia-Pacific banking practice and has served leading financial companies across multiple markets in Asia and Europe.
He introduced four key enablers that can help banks use increasing amounts of data and work with non-banks to become agile, change and scale up their business.
They are incubation at scale, entrepreneurial talent, data mastery and collaborative partnerships.
Banks should reorganize as a platform company and incubate internal or external teams for innovation.
They should aggressively recruit and reward professionals or entrepreneurs with strong tech capabilities.
Banks also need to master using data to increase scalability and flexibility.
Last but not least, they should form partnerships to create ecosystems.
"This will help banks in continuous experimentation, while rapidly changing direction, and creating an ecosystem and value," the senior partner said.
He pointed to the Hangzhou, China-based Ant Financial Services Group as one of the prime examples in rapid business scale-up and value generation.
Ant, formerly known as Alipay and part of Alibaba Group, is the world's biggest fintech company valued at $60 billion.
It has 870 million registered users who can manage their finances on its platform, according to McKinsey.
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Changing at forefront
Korea is at the forefront of many of the changes the world is witnessing in banking, Sengupta said.
Local consumers are fast adopters, making a fast transition from using offline to e-commerce retail.
Its internet-only banks such as Kakao Bank are scaling up rapidly acquiring more than 8 million users.
The Financial Services Commission (FSC) is stimulating innovation through an open interface infrastructure and "sandbox" programs not only for fintech startups but also traditional financial companies.
"Regulators are facilitating financial innovation and competition while balancing systemic risk" he said.
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Without such efforts, Sengupta warned banks' future profitability will face limitations.
He added their returns on equity (ROE) will suffer as fintechs and internet players are intensely competing away distribution margins.
"An unmitigated digital disruption can further reduce it to half," he said.
"Digitalization is not enough. Banks that successfully execute ecosystem and platform plays can potentially restore their ROE to double digits."
Data showed those that pursue digital innovation and ecosystems, or so-called digital attackers, can help reduce their operating costs compared to traditional and direct banks. Such efforts can also help maintain low customer acquisition costs, according to McKinsey & Company.
Digital attackers' operating costs only account for 2 percent of their outstanding loan balance, compared to 5 to 7 percent for traditional banks and 3 to 5 percent for direct banks. Traditional banks spend roughly $300 per customer acquisition on average, while direct banks spend $110 and digital attackers $5.
Direct banks are those that offer remote online or mobile banking services without any branches.
