Perspective on Fintechs and Innovation

CONFIDENTIAL AND PROPRIETARYAny use of this material without specific permission of McKinsey & Company is strictly prohibited

Milan, December 12, 2019

Alessio Botta, Partner

Perspective on Fintechs and Innovation

McKinsey & Company 1

Topics for today

1Demystifying the digital disruption: what happened to the music industry?

2The Chinese lesson: the rise of ecosystems

3Implications for us: what does it mean for European financial service players

McKinsey & Company 1McKinsey & Company 1


The typical pattern of “disruption”

Source: McKinsey analysis

Tippingpoint

Newnormal

Start-ups exploit new techniques

New models proliferate

Customers and economics shiftFinance Music

Laggardsshrink/ die



The Physical Era1980-1999

The Piracy Era1999-2010

The Streaming Era2010 – Present

Music: on the surface, a dramatic industry shift

Source: IFPI, MIDIA

2

18

10

0

4

20

14

24

86

12

22

16

03 1808 17120602 04 05 07 09 2019E10 11 13 14 15 162001

-41%+8% p.a.

PhysicalSynchronisation revenues StreamingPerformance rights Digital (excluding streaming)

Global recorded music industry revenues USD billions


Actually, more “restructure” than “disrupt”

Founders 45.0

7.5Tencent

5.7Sony

4.0Warner

4.0Universal

Spotify realized that it was much harder than they thought to find and develop talent. This capability is not a part of their core and there is a lot of competition where many of the best artists are signing with other independents/majors

They realized it’s better to cooperate than to compete. The majors have a really strong position, leveraging their catalogues

In September 2018 Spotify launched a beta program to license music and let independent artists upload their music In July 2019 the company announced that they had canceled it

Spotify largest pre-IPO shareholdersFebruary '18

Source: Spotify IPO filing, McKinsey analysis


Let’s step back to 2004

In 10 years you will consume music by paying a fixed subscription for all the music in the world off our mobile phone

Physical hard driveSynced only via cable

8 hours battery

36 characters on screen“Snake” a killer application

Customizable rings

McKinsey & Company 5Source: press search


Fintechs are a reality –at scale

Paypal, Adyen, Wirecard, Square, AliPay…


~50Unicorns globally

>$150billions total valuation

McKinsey & Company 6Source: CBInsigths, McKinsey Panorama Fintech database


So what can we learn from fintech innovators?



695

371 343 262

731

432 434287

Total internet usersMillions

Mobile internet usersMillions

Mobile internet users as proportion of total online users%

7986 9195

Source: China Internet Network Information Center; Internet & Mobile Association of India; World Bank; Statista; Internet Live Stats; McKinsey Global Institute analysis

Let’s go East……by the way, yes – China is different

However, players are headed West>2x

>2x


Four distinct financial innovation clusters


4. Small & mid-sized FIsEcosystem participants, being enabled

3. Fintech start-upsBlaze the path and grow rapidly

2. Large IncumbentsEmbrace technology with active transformation

1. Internet giantsWinner takes all, build ecosystem


Ecosystem model pre-dominant


China

Lending

Insurance

Credit scoring

Banking

Payment

Wealth management

Other

Western

Ant Financial ecosystem

Tencentecosystem

Ping Anecosystem

PaypalStripe

BettermentWealthfront

LendingClubSoFi

OscarMetromile

Monzo

Credit Karma

Amazon


3101 5

5

1

2012

5

5

34

4

13

2

6

6

11

3

29

3

8

15

6

216

9

7

2

15

7

2

17

2017E

1315

20

14

Source: McKinsey Global Payments Map, iResearch, PBOC

1. All retail transactions done by domestic Chinese by domestically issued cards and domestic bank accounts across all sectors and use cases2. Includes pure pass-through wallets and pass-through and staged wallets3. Includes only transactions done locally by locally issued credit cards4. 3PP transaction volume includes both consumption-related and non-consumption related

Technology entrants Cards Bank payments Cash and cheques

94

26

7

-16

CAGR%

Impact has been quite visible

Almost half of domestic payments flow now via third party platformsAlipay and WeChat Pay ~75% share

China retail paymentsUSD trillions


Incumbents are playing the ecosystem game just as hardPing An digital ecosystem

Source: Official website; McKinsey analysis

Digital and analytics at the core "One account" across all services Data collection from inside and outside

of ecosystem (e.g., WiFi, social security) “Wow” technology at scaleFit-for-purpose governance Strong brand control… …but large independency for individual

businesses (incl. IT and operations) Large-scale CVC to accelerate growthContinuous experimentation Internal competitions Willingness to rapidly change direction No bet on one single service

Cornerstones of Ping An’sapproach

Healthcare Housing

Automobile Financial assets

$150 billion revenues

1.4 million sales agents

380 million online users


What about us?

McKinsey & Company 13McKinsey & Company 13


Historically, Europe struggles to innovate…

1. Refers to country of headquarters; unicorn defined as privately held start-up company with a valuation >USD 1 bn; end of year for 2012 and 2015, Nov 30 for 2018

2. EU incl. EFTA countries (Switzerland with 2 unicorns in Nov 2018)

Share by countryPercent

Unicorns by country1

Number

2015 2018

Source: CB Insights

17 371422

8590

140

15

30

221

14

2012 2015 2018

144

292

USEU2 OthersChina

10 10EU

63 48US

15 29China

12 13Other

…and our share of unicorns is flat at 10%


The issue: we have an ambition challenge

Executives earnings calls topicsPercent of total topics

3. Product/service offering

1. Emerging tech (incl. IT)

2. Value creation

4. Mobile business

5. Financial results

6. Investment strategy

7. International business

1. Tax and regulation

5. Corporate management

3. Business development

2. Financial strategy

4. Financial results


EU executives primarily recap formal business themes from the fiscal quarter

US executives focus on topics around technology and growthUS executives address greater number of distinct topics (7 vs. 5)

General costs increased mainly due to indirect taxes, and provisions are higher… we still have some pending regulatory issues

We are moving into these better venues. And in fact, technology is a very powerful element behind it … It's an enterprise that is very effective in advancing on those, and it provides them an advantage


Unfortunately, European banks have no other choice but innovative…

Source: SNL; McKinsey Panorama, Global Banking Pools

0

6

8

10

18

12

14

16

18

No action

Average returnof digital adopters

5.2

06

17.4

4.908 10 12

8.6

14 23

9.3

202516 20

Return on Equity, GlobalPercent

Top digital banks

Globally, >55% of banks are not profitableEuropean banking sector is already operating way below 9% ROE on averageDigitally-advanced markets (e.g., Nordics) show a significant gap in cost-to-asset ratio (>5x) between top-3 banks and latest quartile, pointing to the increasingly transformative impact of technology


Increase revenueMaterially improve customer experienceDevelop or tap into ecosystemsInvest materially in innovation

Reduce costsTransfer non-differentiating

activities to third-party utilitiesRadically restructure cost base

using zero-based budgeting

Build resilienceManage risk with a ‘leader’s mindset’,

advanced analytics and scenario planning

OrganicInorganic

M&A to develop scale or acquire competency in any of the axes abovePartnerships to leverage the same thesis but in form of joint venture

EnablersRapidly scale data and advanced analyticsHire and manage talent for digital enterprise

…and need to act boldly across different themes

Source: S&P Global Market Intelligence, McKinsey Panorama McKinsey & Company 17


Some take aways

Demystifying the digital disruption

Implications for us

Disruption in music industry• Actually long-term growth, with a

different mix• Incumbents still play a relevant role• Seemed impossible – but it

happenedDisruption in banking• Fintechs are now operating at scale• We are on the verge of customers

and economics shift

The Chinese lesson

Yes, China is different – but it does not really matterFour distinct financial innovation hubs• Internet giants leading• Ecosystem plays predominant• Significant impact at fast paceIncumbent financial players are playing as hard

Europe struggles to innovate – we have an ambition challengeUnfortunately, European banks have no other choice or risk to become structurally unprofitableBold moves around a few themes including:• Third-party utilities• Develop or tap into ecosystems• Invest materially in innovation• Rapidly scale data and analytics

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