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Banking is radically transforming. Many banks can thrive by fundamentally changing the way that financial services are embedded into daily life.
The banking sector is at a turning point. Key measures for banks are at a historical low point. The sector’s price-to-book value has fallen to less than one-third the value of other industries. That gap is less the result of current profitability and more about uncertain profit growth in the future. While banks have pushed for great improvements recently, margins are shrinking—down more than 25 percent in the past 15 years and expected to fall to 30 percent, another 20 percent decrease, in the next decade.
Regulation and increasing intersectional competition are still worries, but the bigger threat is a global trend: new challenges—often from different industries and often benefiting from the kind of cross-industry platforms behind the recent success of companies such as Amazon, Google, Microsoft, PayPal, and Spotify—with a vastly superior economic model. The market believes that banks are headed in the wrong direction, without a future-proof strategy.
We believe that the skeptics are right about today—and wrong about tomorrow. Banking is facing a future marked by fundamental restructuring. But we also believe that banks that successfully manage this transition will become bigger and more profitable and grow faster while leading to a value creation opportunity of up to $20 trillion.
In the next era, banks can realign to compete in new arenas, organized around distinct customer needs. These arenas will expand far beyond the current definition of financial services, and they will also be hotly contested by a wide range of tech giants, tech start-ups, and other nonbanks. But this daunting reorganization, or breakup, could also provide banks with a huge opportunity: higher margins, new revenue streams, and loftier valuations. Ambitious banks can break free from stagnant valuations, thrive, and grow if they are willing to embrace the platforms of the future and make a few strategic, informed big bets.
Why break up? First, economic forces and technology have ended the run of the universal-bank model, and investors already are recognizing radical specialization to be greater than the traditional one-stop shop. By contrast, the future model relies on breaking up into four specialized platforms we will describe. Organizing around these areas...