Bank profit margins are expected to decline at an accelerating pace over the next five years as bankers team up with technology firms to provide more cost-effective products and services.
is expected to reduce profits from non-mortgage retail lending, such as car loans and credit cards, by 60 percent and revenues by 40 percent over the next ten years. Profits and revenues for mortgages, wealth management, small and medium-sized lending, and payments processing are also slated to fall between 35 and 10 percent, and earnings on some financial products may decline by nearly two-thirds, according to McKinsey & Company, a global management consulting firm.
Technology firms are focusing on the most lucrative segments of bank portfolios, especially those that involve customer relations. This will return banks to their roots as a utility:
one that manages balance sheet assets and liabilities. McKinsey says banks generated $1.75 trillion of revenues in 2014 from origination and sales activities, earning a 22 percent return on equity, compared with $2.1 trillion of revenue and only a 6 percent return on equity for managing balance sheet net interest.
McKinsey calculates banks earned a record $1 trillion last year with a 9.5 percent return on equity. Nearly two-thirds of banks in developed markets and a third of those in emerging markets earned a return on equity below the cost of equity, causing their equity prices to fall below book value.
McKinsey expects this rate of return to plummet rapidly as bankers continue to enter technological finance as advisors, investors, board members, and company executives, such as former JP Morgan executive Blythe Masters, who is the current Chief Executive Officer of Digital Asset Holdings, a start-up that provides ledger and settlement services for digital and mainstream assets.
Thirteen more banks are now collaborating with R3CEV,
a New York based start-up to develop a private, distributed ledger system for financial institutions, bringing the total to twenty-two financial institutions. In contrast, the bitcoin blockchain platform permits access to all and is secured by a digital token.
These 13 banks are: Citigroup, Bank of America, Morgan Stanley, HSBC, Bank of New York Mellon, Deutsche Bank, Mitsubishi UFJ Financial Group, Commerzbank, National Australia Bank, Royal Bank of Canada, SEB, Société Générale and Toronto-Dominion Bank.
Nasdaq is also using the blockchain to set up a private share trading platform with Chain, a start-up that has received funding from Nasdaq, Citi Ventures and Visa.
The bitcoin blockchain methodology ensures more timely, efficient, cost-effective and secure asset ownership transfer. This will be especially useful for the syndicated loan market, where settlement can take 20 or more days to finalize.
The New York State Department of Financial Services recently approved two firms to operate Bitcoin exchanges: Gemini, founded by Cameron and Tyler Winkelvoss, and ItBit. The Wicklevoss brothers are also working on a bitcoin-backed exchange-traded fund, which is expected to trade on the Nasdaq exchange and awaits regulatory approval.
Banks are beginning to brace for the coming seismic shifts of the financial terrain.
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