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Debit or credit? How retail banks win in the new digital age

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OUR BEST IDEAS, QUICK AND CURATED | NOVEMBER 11, 2022

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Edited by Barbara Tierney
Senior Editor, New York

This week, we look at how retail banking incumbents, and even central banks, are shifting toward digital models. Plus, a new report on decarbonizing India, and an interview with management expert Richard Rumelt on how not to talk about strategy.

Change machines. Remember going to the bank? Depositing a paycheck, taking out some 20s for the weekend, maybe getting a new box of checks? For consumers and retail banks alike, that reality is (way) in the rearview mirror. Thanks to the likes of digital wallets and payment systems embedded in consumer apps, fintechs, software makers, and other disruptors are forcing banks, and even central banks, to keep up.

Pay app. Nearly nine in ten Americans are now using some form of digital payments, according to McKinsey’s 2022 Digital Payments Consumer Survey, the seventh such annual effort that has chronicled the continued mainstreaming of digital payments. Between 2018 and 2021, the number of noncash retail payment transactions increased globally at a CAGR of 13 percent. Now, the fastest growth is coming in emerging markets , with a 25 percent CAGR in noncash retail payment transactions.

Embedded finance. The reality today is that new small start-ups may never interact with a conventional bank. By logging into their e-commerce or accounting platform, they can open a deposit account, order a debit card, and meet most of their financing needs. These platforms are often not operated by banks but rather by software companies that partner with banks and technology providers. So-called embedded-finance products reached $20 billion in revenues in the United States alone in 2021, according to McKinsey’s market-sizing model, and could double in size within the next three to five years. Still, many banks, payments providers, fintechs, and others are unsure of how to crack the market. McKinsey partners Andy Dresner , Albion Murati , and Jonathan Zell do some demystifying in “Embedded finance: Who will lead the next payments revolution?”

Cash free. On the flip side, people are using a lot less cash. In Europe, cash usage declined by roughly one-third between 2014 and 2021, dropping to as low as 3 percent (in Norway) of overall payment transactions. At the same time, there’s a growing interest around the world in privately issued digital assets. Those factors, among others, are prompting global central banks to reassess their roles, with 90 percent pursuing digital-currency projects. That means it’s imperative for traditional banks to engage central banks to learn more about digital initiatives and help shape future models.

Universal appeal. Where does all this leave traditional banks? The current model of universal retail banking—institutions that offer everyday deposit and payment products, along with loans, investing, and wealth management services—is unsustainable over the long term. To thrive in the new digital world, banks must reinvent themselves, focusing on businesses where they can achieve and extend market leadership. While we believe incumbent banks will continue to lead in retail banking, those running the old playbook will not survive. Here are the hallmarks of the new winners.

Off the charts

Decarbonising India: A decisive decade

A new McKinsey report, Decarbonising India: Charting a pathway for sustainable growth, models the outcomes of India’s net-zero journey along two scenarios: first, the present, line-of-sight scenario, with current (and announced) policies and foreseeable technology adoption; and second, the accelerated scenario, with far-reaching polices such as introducing carbon pricing and ramping up technology adoption. The analysis shows that the benefits of a well-planned and accelerated transition could outweigh the downsides, given India’s growth outlook. Still, many challenges remain.

Chart of various challenges for India's decarbonization process

Check out our chart of the day here.

PODCAST

Why strategy sessions can become ‘success theater’

In the latest episode of our Inside the Strategy Room podcast, Richard Rumelt, author and long-time professor at the UCLA Anderson School of Management, talks with McKinsey senior partner Yuval Atsmon about the parallels between mountain climbing and strategy, the difficulty in committing to choices, and strategy sessions as “success theater.” Rumelt cautions: “The beginning of strategy is, which of these ambitions can we make progress on today or in the near future? Then you formulate an action plan. This gap between action and ambition is where most bad strategies come from.”

More on McKinsey.com

Stepping up: What COOs will need to succeed | COOs are increasingly important to corporations, but what skills will they need to perform at their best? We spoke with COOs from various sectors about what skills they see as necessary to operate effectively in the years to come.

Smart scheduling: How to solve workforce-planning challenges with AI AI-driven schedule optimizers can alleviate age-old scheduling headaches—reducing employee downtime, improving productivity, and minimizing schedule-related service disruptions.

How to overcome the challenge of filling high-quality jobs | Thriving industrial-technology companies use apprenticeships, upskilling, and upward mobility to staff and retain their workforces. These practices could help remediate the growth of income inequality and broaden opportunities for more people.

PARTING QUOTE

Image of a quote that reads, 'Understanding net zero means you understand climate risk. There are no returns on a dead planet,' from Steve Howard.

BACKTALK

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by "McKinsey Shortlist" <publishing@email.mckinsey.com> - 02:41 - 11 Nov 2022

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