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Workshop document | October 2016

Digital Banking and FinTech:

Challenges and Threats for the

Banking System

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Contents

Trends in digital banking

Trends in Fintechs

Potential implications for the

banking system and regulation

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25 302015105

50

80

70

60

30

20

40

55 8040 50 85706535 45 60 75

Online banking penetrationPercent

In banking, digital adoption is not just “increasing”; in the last 4 years it has

doubled or even tripled in some countries and follows a relative predictive

path

20162012

SOURCE: McKinsey Retail Banking Consumer Survey 2016

Level of self-directed customers

Percent

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Already today ~70% of consumers prefer digital and remote

channels for of simple transactions

Digital and remote channelsBranches

SOURCE: Consumer surveys 2012 and 2016 in Europe (France, Germany, Italy, Netherlands, Spain, Sweden, UK)

Digital is already dominating transactions…

1 Preferred channel for transactions (e.g., credit/money transfer)

2 Contact center, broker / agent

4557

73

10

85

2012

560

2016

706

85

2020F

6

Online and mobile

ATM

Other direct channels2

15

30

40

2016 2020F2012

Survey results. Percent of transactions1

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Digital and remote channelsBranches

… and will dominate sales

Other direct channels2

Online and mobile

SOURCE: Consumer surveys 2012 and 2016 in Europe (France, Germany, Italy, Netherlands, Spain, Sweden, UK)

1 Preferred channel for opening an buy a simple product (e.g., Current accounts, savings accounts, credit card)

2 Contact center, broker / agent

34

51

68

2012 2016 2020F

23

38

559

11

11

49

2020F

66

2016

32

2012

Survey results. Percent of simple products sales1

Digital and remote will take over branches as main channels for

banking product sales in Europe by 2020

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19261624

1369 1197 1201 1068 1050 1052 1052833 833 833 800

1727

1648

1516

1378 12991249 1214 1159 1112

1010 911 900 800

846

701

591

581 559555 558 555 510

500508 467

408

289

250

185

180171

163 159 158156

1560 0

0

227

208

200

198175

167 170 146140

133

143 200200

10

090807060504

-52%

201202012000 03

ABN AMRO and

Fortis Bank NL

integration

283 ING branches

and 550 agents

11

The impact on distribution in advanced countries has been a continuous

decrease of physical presence

Branches by bank in the Netherlands

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In Portugal, digital channels have been increasing share in

customer interactions

NOTE: Data for Portuguese Average. Branch Touch = Monthly cash withdrawals + monthly deposits + monthly inter account transfers and third party

payments; Online and Mobile touch = Monthly log-ons in channel; Telephony touch = Monthly agent servicing calls and fully automated servicing

calls. Other channel sales include sales made through ATMs and third party agents.

1. % of active customers by channel (June 2015) 2. Distribution of customer service touch by channel

3. Distribution of customer transactions by channel 4. Distribution of retail sales by channel

3

27

35

27

44

36

28

42

OnlineBranch Mobile

N/A

Telephony

N/A

2015

2014

2013

Percent

58

6

28

7

56

9

30

5

Online ATM/IDMMobileBranch

-2.2pp

+1.4pp

+3.5pp

-2.2pp

0,70,1

11,9

0,10,40,4

14,6

0

Mobile Telephony ATM/IDMOnline

84.5

Branch

87.3

-2.8pp

+2.7pp

+0.3pp -0.2pp

59

02

36

3

58

04

36

2

Online ATM/IDMMobileBranch Telephony

-0.7pp

+0.6pp

+1.5pp

-1.3pp

0pp +0.1pp

SOURCE: Finalta

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Bank's current digital offer significantly lags behind demand

While digital sales

represent at best

40% for basic

products in more

advanced

countries, over

80% of customers

in these countries

are willing to adopt

digital

71

35

Southern

Europe

Eastern

Europe

2.4x

3.2x

4.7x

11

63

5.0x4.3x

Core

Europe

North

America

5652

141320

85

Northern

Europe

Willingness

Customer reported activity

1 Current account example

Digital product purchase1

Percent

SOURCE: McKinsey Retail Banking Survey 2016

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Contents

Trends in digital banking

Trends in Fintechs

Potential implications for the

banking system and regulation

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ESTIMATES

SOURCE: McKinsey Panorama FinTech database

Fintechs are focusing on all customer and product segments,

especially on payments

9%

4%

4%

18%

7%

2%

11%

12%

14%

4%

5%

…%# of startups and

innovations as % of

database total1

<5%

5%-7.5%

7.5%-10%

>10%

Banking segment’s share of

total banking revenues

1 970+ commercially most well-known cases registered in the database, might not be fully representative 2 Includes Small-, and Medium Enterprises

3 Including Large corporates, Public Entities and Non-banking financial institutions 4 Includes Investment Banking, Sales and Trading, Securities services,

retail investment, Non-CA deposits and asset management factory 5 Revenue share includes C/A deposit revenue

9%

McKinsey Panorama FinTech Landscape, # of startups and innovations as % of database total1

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The level of Fintech financing is booming

SOURCE: CBInsights; McKinsey Panorama; press

VC investments

Other investments

6.7

13.8

2.82.42.1

10

15

5

0

20

2015

19.1

+57%

+213%

+39%+17%

14

3.9

12

2.4

12.2

2.8

2011 13

Global investment in Fintech startups

USD billions

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Key Fintech trends

And we see a wide range of topics emerging as new norms in banking

SOURCE: McKinsey Panorama

Beyond banking

Payments Wealth managementRetailCapital markets &

investment banking

Operations and

infrastructureBlockchain

Payment

infrastructure

Big data-based

risk assessment

Insurance

Retail value

chain & coupons

Virtual

marketplace

SME

Mobile

payments $

International

remittances

mPos devices

Next gen.

trade finance

Digital cash

management

Crowdfunding

Robo-advisory

Social

investing

New digital

lending$

Next genera-

tion PFM

P2P lending &

investment

Telematics

Social

integration

IoT & connec-

ted devices

Investment

across regions

Aggregator,

Comparison

engine

Prevention

One-stop-shop

for businesses

P2P corporate

lending &

investment

Next genera-

tion SME

lending

Automated

credit processes$

Next generation

marketing

Digital for

unbanked

$$

NOT EXHAUSTIVE

Next gen.

collateral

management

Automated

processes

Trade

analytics

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Contents

Trends in digital banking

Trends in Fintechs

Potential implications for the

banking system and regulation

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Validation

App auto-authenticates

transactions made while

traveling using geo-services

Merchant payments

Peer payments

App enables user to send

money to friends’ mobile phones

Investments

App invests and tracks

returns across stocks,

bonds, and cash

Message Center

App sits in the background

and pop-ups message on

screen when an action is

needed

Bill payments

Pop-up alert to pay bill

opens app with 1-touch

payment approval

Gifting

Pop-up alert to remind you

of special events and

enables you to give a gift

with one touch

Expense management

App sits in the background

and tracks the user’s

budget following every

new transaction

Borrowing

Pop-up from banking app

with loan offer based on

recent search queries and

transactions

App enables user to send payment

to merchant. Recognizes when

user is ready through geo-services

New products are raising the bar for security – Mobile Banking example

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Increased concentration and

exposure of critical data assets

▪ Rising number of applications

that amalgamate data assets,

increasing risk of cross-

contamination when security

is breached

Heightened tension between

controls groups and the BUs

▪ Cyber security much be

managed in such a way as to

minimize impact on user

experience and time to market

Widened attack surface

▪ Exponential growth in endpoints,

many of which exist outside of

core security infrastructure

▪ Fragmentation in mobile platform

and application versions greatly

complicate maintaining product

security integrity

Heavier reliance on third parties

▪ Banks might not have the full picture on the

state of risk in their organization, due to their

integration with vendors and other service

providers that have lesser security measures

Increased complexity of

attack patterns

▪ Rapid evolution and

growing sophistication of

attacks and malicious

actors make it

challenging to stay

ahead of the curve in

identifying and protecting

against potential threats

These products introduce a number of new challenges in managing digital

risk

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It is a

currency

It is a

transaction

network

It is a secure,

distributed public

ledger

New solutions might have clear benefits but also intrinsic risks – Bitcoin

exampleWhat is it? What risks?

Used to shop illicit goods

Used In fraud schemes

Used for Criminal purposes

Bitcoin service

double your bitcoins

Assassination service

“Permanent solution to common

problems”

Stolen mac stores on the darkweb

use bitcoins to buy stolen apple

products

Bitcoin laundry

Blend bitcoins so that they are

untraceable

Subject to hackers attacks

The Bitfinex Bitcoin hack

More than $60m worth of bitcoin was

stolen

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A supportive regulatory system is needed with three core focus areas to

encourage digital innovation while ensuring security

1▪ Remote/e-KYC

▪ Multi-factor authentication

▪ Cryptographic encryption

Simpler but more

secure

requirements

▪ Common standards on use

of cloud

▪ Enhanced data security

Enable the

adoption of new

technologies2

▪ “Sandbox” measures to

encourage experimentation

▪ Level playing field for new

models and existing

players

Enabling

regulations to

encourage

experimentation

3

SOURCE: McKinsey