Analysis by McKinsey and Co suggests the trillion-dollar profits of traditional banks are vulnerable to being leeched by more than 12,000 fintech start ups. The digital innovators, often targeting a single link of the value chain, pose a grave threat to the business model of the old banking houses.

Banks have long made their money by bundling a number of businesses together and relying on the stickiness of life-long customer relationships to rake in super profits on high margin products and services such as investment management, foreign exchange and credit cards.

Challengers like Paypal, Nerdwallet and Wealthfront have targeted the profit centres while ignoring the low returns on basic asset and liability management. Ignoring the less profitable links in the value chain further advantages the start-ups, which do not have to convince their customers to suffer the friction of moving all of their finances to a new provider.

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McKinsey identifies “millennials, small businesses, and the underbanked” as three groups most vulnerable to cherry-picking by the fintechs. All three are cost sensitive and highly receptive to the message that digital delivery and distribution is cheaper and more convenient.

Without the legacy infrastructure of brick and mortar branch networks and large payrolls, the fintechs’ “highly automated, scalable, software-based services” enjoy significant cost advantages over the traditional banks. Many also still fly under the regulatory radar. They’re not yet too big to fail, but many are still too small to attract the attention of law makers. By the time they do, they have often grown too large and powerful to constrain. Uber is not just a cautionary tale for the transport sector.

On the other hand, the report cautions, a trillion dollars in profit is a sizeable war chest, and traditional banks can deploy their own weapons on the digital battlefield. McKinsey cites the example of Goldman Sachs in the US, which has aggressively embraced digitisation to reinforce its core businesses. Locally, Apple’s struggle to launch ApplePay in Australia speaks less to the wariness of the big four about new technology than it does to their fighting a holding action while they prepare a counterattack.

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