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Banking at the Speed of Light

The expansion of real-time payments could give banks around the world an opportunity to win new customers, improve engagement and raise efficiencies. Up for grabs could be $60 billion of net expense reductions globally.

The global banking industry is at a digital tipping point.

As regulation stabilizes and rates begin to normalize, investors will be on the lookout for the next driver of earnings growth in the sector. The solution is likely the pocket-sized bank branch most of us carry each day: the smartphone.

In a recent BluePaper from Morgan Stanley Research, the division’s global bank stock analysts evaluated banks, technology infrastructure, regulations and populations in 27 countries to examine how smartphones, real-time payments and reimagined customer touchpoints could transform both customer experience and industry bottom lines. 

The research found that new digital innovations in banking could bring significant cost reductions for global banks, alongside increased customer satisfaction and financial inclusion for unbanked populations in emerging markets. Up for grabs could be an estimated $60 billion of net expense reductions globally—roughly 10% of consumer expenses, equivalent to 3% of total expenses—by 2022. 

The Digital Bank Branch

While the move away from old-fashioned teller banking has been slowly gaining ground, the smartphone has finally given consumers the power to truly bank on demand. Armed with the ability to conduct the most typical banking activities like depositing checks, transferring money and making payments, more consumers now consider digital banking to be critical in assessing which banks to choose.

By the end of 2018, about 97% of the developed world—up from just 25% today—is likely to have access to domestic real-time payments

According to Betsy Graseck, Global Head of Banks & Diversified Financials Research and U.S. Large Cap Bank Analyst at Morgan Stanley, for banks, more customers on mobile also means cost savings. “Wider adoption of mobile gives banks more flexibility in their branch design and footprint, customer service infrastructure and technology interface. That means smarter, smaller branch designs focused on sales and advice and a more flexible and functional smartphone interface for consumers.  The banks benefit with increased efficiencies.”

But banks aren’t the only winners. For consumers, mobile banking could mean better pricing, highly efficient branch networks, and state-of-the-art apps, driven by banks that realize app excellence is now a differentiator.

On average, mobile advances like these could help generate an average global expense ratio improvement of about 500 basis points, from 58% to 53% as banks reduce the costs of the branch network and the costs of shipping and storing cash and checks. 


$60 Billion in Net Expense Reduction over
the Next 5 Years Skewed to the Largest Markets

Source: Morgan Stanley Research

Real-Time Payments Come of Age

One of the drivers of mobile apps is the roll-out of real-time payments. The ability to transfer money instantaneously, instead of in days, promises an improved experience for customers and lower risk of fraud for banks.

According to James Faucette, who covers U.S. Communications Systems and Payments, by the end of 2018, about 97% of the developed world—up from just 25% today—is likely to have access to domestic real-time payments. “Armed with the ability to instantly transfer bank funds and make payments, customers are more likely to migrate to mobile banking. That's a win for banks that play this to their advantage by bringing new customers into the fold and shrinking their costs.”

To date, traditional banks in many countries have lagged FinTechs in offering real-time payments. Implementation of real-time payments should give incumbent players a leg up over FinTech apps. “This tilts the balance back in favor of the banks, since customers can benefit from the simplicity and security of using native bank apps. That balance shift may lead to more cooperation between incumbent banks and FinTechs.”

A Boost to Financial Inclusion

Mobile banking is also an effective tool to reach unbanked populations—
particularly in emerging markets—who may not have access to brick-and-mortar branches. This, again, benefits both banks and customers. 

For banks, new customers can be profitable even with lower deposit balances, as cost of acquisition through the mobile channel is significantly lower than through branches. It also provides financial data that allows banks to extend credit, creating a virtuous circle of economic growth.

For the unbanked, it means access to accounts, savings and payment mechanisms. That could boost productive investment and consumption, help with business creation and help populations better manage financial risk.

The report notes that the largest opportunities are in regions with a large unbanked population that is young and likely to embrace mobile banking. Key winners in Asia could be India and Malaysia.

Additionally, Sam Goodacre, Head of EEMEA Banks Research, highlights that banks in Turkey and Russia could be amongst the biggest beneficiaries of the shift to mobile banking. For the past several years, both countries have been making investments which could now pay off, delivering expense ratio saves almost double the 500 basis points global average.

Spotting the Leaders and Laggards

For investors, the report notes four key indicators which are a guide to countries and banks most likely to win the app war and accelerate cost saves: Technology infrastructure, a population's propensity to embrace mobile, regulations and ease of cost cutting.

“We expect countries with young populations, supportive regulations and fast mobile Internet speeds and planned migration to 5G to be best positioned,” says Graseck, adding that banks serving urban populations may have more latitude to consolidate branches than those focused on rural populations.


Biggest Beneficiaries of Efficiency Improvements are
Turkey, Mexico, Russia and Brazil

Source: Morgan Stanley Research

Among developed nations, Switzerland and the UK appear most likely to accelerate from here. Both countries benefit from advanced mobile and Internet infrastructure, flexible labor laws, and strong governmental support for technology and innovation. The potential for savings is significant for U.S. banks, although they will need to get past a merely average tech infrastructure to deliver smartphone banking ubiquity and leverage their relative ease of cost improvements. 

For more Morgan Stanley Research on the future of the digital bank, ask your Morgan Stanley representative or Financial Advisor for the full report, “Banking at the Speed of Light” (Jan. 7, 2018). Plus, more Ideas.