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1、The state of retail banking:Profitability and growth in the era of digital and AIOctober 2024The state of retail banking:Profitability and growth in the era of digital and AIBy Amit Garg,Marukel Nunez Maxwell,Marti Riba,Max Fltotto,and Oskar Skau,with Matic HudournikExecutive summary Retail banks ar

2、ound the globe are coming out of a period of strength.When governments stimulated economic growth during the COVID-19 years,banks benefited from increased consumer savings and reduced levels of credit risk.Then,starting in 2022,rising interest rates expanded net interest margins as interest income o

3、n loans grew faster than the cost of deposits.As a result,returns on equity(ROEs)for the broader global banking sector in 2023 reached their highest point since the 2008 onset of the global financial crisis:roughly 12 percent,according to McKinsey Panorama,up from 10 percent between 2013 and 2020.Lo

4、oking ahead,retail banks face three major headwinds:cost inflation,significant escalation of the occurrence and sophistication of fraud,and uncertainty about interest rates.These forces will limit asset growth,compress margins,and increase costs for banks.At the same time,the continuing rise of cons

5、umer expectations and a weakened but still competitive fintech sector are adding competitive pressure to the mix.However,these forces are not something banks never previously faced in some form or another.To counter them,banks will focus on two fundamental imperatives:doubling down on primary relati

6、onships and protecting margins.In our view,banks will pursue these goals with a combination of traditional leversfor example,improving branch effectivenessand next-generation capabilities such as digitization,AI,and generative AI(gen AI).In an environment in which the cost of deposits has increased

7、and liquidity has become a key constraint(over the past two years),banks will need to focus on building deep and lasting relationships with valued customers.Customers with primary relationships to a bank not only keep most of their deposits there but also are open to additional products and services

8、 that boost banks fee income.Banks have also faced regulatory headwinds in terms of fees;if this trend continues,it will be even more important to increase the value of each customer.To develop and deepen customer relationships,banks can offer an array of incentives,introduce one-to-one personalized

9、 experiences,and refine their channel distribution strategies.Our recent research shows that the channel landscape is shifting.Branches continue to play a role in customer acquisition and advice,but mobile is now the gateway to everyday banking for a growing majority of consumers in various markets.

10、Banks therefore need to design their distribution so it leads with mobile.Relatedly,banks continue to invest deeply in technology,even as they realize it will not be easy.Banks are still struggling to realize significant revenue or cost benefits1 from technology investments.Successful institutions w

11、ill focus on protecting margins through targeted investments in digitization and AI,including gen AI,to improve pricing,mitigate losses,control operating costs,and increase productivity.AI and gen AI in particular will be instrumental in the development of next-generation deposit capabilities.Finall

12、y,as fraud losses mount,retail banks must find a nuanced approach that contains and reduces fraud losses without drastic reductions in revenue.As market conditions become more challenging and the competitive environment shifts,the moment is fast approaching when banks will need to revamp their strat

13、egies and execute with precision.Leading institutions will set a course rooted in the basics of deeper customer relationships and superior operating efficiency,enabled by strong investments in digitization and the use of AI and gen AI.1 Baking&Securities matters,“For banks to demonstrate value from

14、tech and AI,they will need to reach beyond the CIOs office,”blog entry by Ido Segev and Vik Sohoni,McKinsey,July 1,2024.The state of retail banking:Profitability and growth in the era of digital and AI2The last few years have been among the most successful in the recent history of retail banking,wit

15、h a confluence of macroeconomic trends driving growth and profitability.In some geographies,pandemic-era government stimulus lifted economic growth,fueled consumer spending,created favorable conditions for balance sheet expansion,and helped keep credit risk in check.Following the pandemic years,risi

16、ng interest rates improved banks net interest margins as loan interest grew faster than the cost of deposits.1 Includes corporate banking,investment banking,and retail banking.Globally,according to McKinsey Panorama,banking1 ROEs have reached their highest point since the onset of the global financi

17、al crisis,roughly 12 percent in 2023(Exhibit 1),significantly outperforming recent historical averages,including the roughly 9 percent average the industry experienced in 201320.Latin America,the Middle East and Africa,and Emerging Asia(excluding China)led,with up to 17 percent ROE for 2023,followed

18、 by North America at 10 percent and Developed Asia,China,and Europe at up to 9 percent.Exhibit 1 Banking return on equity has exceeded prepandemic levels in recent years.05101520Period averages,%20132020212320132014201520162017201820192020202120222023Return on equity,%1Return on equity defned as net

19、 income/total equity.Source:McKinsey Panorama,McKinsey Value Intelligence,S&P Capital IQMcKinsey&CompanyLatin America15.915.7Middle Eastand Africa11.814.1Global8.811.1North America9.511.5AsiaPacifc10.99.1Europe3.96.51.The state of global retail banking3The state of retail banking:Profitability and g

20、rowth in the era of digital and AIIn 2023,the global retail banking market also surpassed the$3 trillion revenue mark on the back of sustained growth of about 8 percent annually in recent years(Exhibit 2).The positive performance has been geographically broad.Revenue growth accelerated in Europe(8.7

21、 percent CAGR for 202023,versus 1.5 percent CAGR for 201320),Developed Asia(7.0 percent versus 3.3 percent),Emerging Asia excluding China(11.2 percent versus 6.9 percent),Latin America(19.0 percent versus 10.3 percent),and the Middle East and Africa(10.0 percent versus 4.4 percent),driven by higher

22、interest rates and increasing financial inclusion.North America has shown stable growth of 5 to 6 percent throughout,whereas Chinas retail banking revenue growth slowed from 11 percent to 3 percent,primarily due to weaker economic expansion.A turning pointThe outlook for global retail banking is mor

23、e muted than its recent performance would suggest.External forces are combining to pressure the sector in the key economic metrics of asset growth,margins,and operational and risk costs.Intensifying competition for depositsIn 2022,following a long period of deposit growth driven particularly by favo

24、rable fiscal and monetary Exhibit 2 Retail banking revenue growth has accelerated in recent years across most regions.2013 2014 2015 2016 2017 2018 2019 2020 2021 20221.761.831.912.002.13+5.3%per year+7.6%per year2.272.402.522.702.9120233.14CAGR,%201320202023Retail banking revenue,$trillionNote:Figu

25、res may not sum to listed totals,because of rounding.12023 retail banking revenues based on partial-year estimates in certain regions.Source:McKinsey PanoramaGlobal Banking PoolsMiddle East and AfricaLatin AmericaEuropeAsiaPacifcNorth America4.410.31.57.05.010.019.08.76.75.80.501.01.52.02.53.03.5McK

26、insey&Company4The state of retail banking:Profitability and growth in the era of digital and AIpolicies through 2021,deposits started to decline(North America)or their growth decelerated(most other regions)2 as governments around the globe tightened monetary policy and moderated fiscal policies(Exhi

27、bit 3).Looking forward,banks are expecting the higher-interest-rate environment to continue despite some recent andpotentiallyupcoming reductions in interest rates by central banks.In a recent survey by the McKinsey Global Institute,two-thirds of senior banking executives shared that they expect som

28、e form of high-interest-rate scenario.This implies a longer-term 2 McKinsey Panorama.environment of positive real interest rates,in which nominal interest rates are higher than expected inflation,and a period of quantitative tightening with a more limited money supply.Given these trends,we still ant

29、icipate that deposit growth will remain sluggish for retail banks and that central banks will continue to limit the growth of their balance sheets for the foreseeable futureor in some countries even shrink them.The interest rate environment not only has an impact on deposit volume but also affects t

30、he mix Exhibit 3 Growth of retail banking deposits has significantly slowed in high-interest-rate environments.Deposit balance examples,$trillion1For United States,total household and nonproft deposit balances are used as a proxy for retail deposits.2Brazil 2023 retail deposits are estimated based o

31、n partial-year actuals for the 1st half.Source:Federal Reserve Economic Data;McKinsey PanoramaGlobal Banking Poolshigh-interest-rate environment.McKinsey&Company10121416North America:US household deposit balances1.51.71.92.12.32.5Europe:UK retail deposit balances AsiaPacifc:Australia retail deposit

32、balances0.200.250.300.350.40Latin America:Brazil retail deposit balances2019202020212022202320192020202120222023201920202021202220232019202020212022+16%per year4%per year+13%per year+7%per year+8%per year+3%per year+19%per year+6%per year2023estimate0.60.81.01.25The state of retail banking:Profitabi

33、lity and growth in the era of digital and AIof deposit classes.Consumers are adding to their fixed-term deposit accounts,which grew from 34.2 percent of total deposits in 2021 to 39.6 percent in 2023 globally,according to McKinsey Panorama.We expect this trend to continue,further intensifying bankin

34、g competition for consumers seeking deposit yield while increasing cost of funds.The interest rate landscape is a challenge but represents an opportunity for banks that reconsideror reinventhow they compete for deposits.In our experience,few have taken steps to reconsider their branch strategy or bo

35、lstered their analytical capabilities to upgrade their deposit-gathering approach in a highly price-sensitive and relationship-driven arena.Pressure on revenue marginsOver the last two years,as interest rates increased,retail banks have seen their margins peak.However,intensifying pressure on fees a

36、nd interest revenue from regulatory headwinds and the expected ongoing lowering of interest rates,respectively,will compress bank margins.Deposit betas are catching up with lending betas,and some central banks have already started to reduce rates.For example,the European Central Bank cut interest ra

37、tes in June 2024 for the first time since 2019 and followed up with another cut in September.The US Federal Reserve followed on September 18 with its first cut since March 2020.These actions will lead to steady margin contraction for retail banks as lending rates begin to drop faster than cost of fu

38、nds.Interest margins are likely to account for the bulk of margin contraction facing retail banksroughly 70 percent through 2026,with some variance across regions.If regulators continue to closely monitor and intervene in bank activities and offerings,particularly fees for mass-market products and s

39、ervices like credit cards,overdrafts,and deposits,margins will face additional downward pressure.At the same time,fintechs with low-cost business models continue to erode banks fee revenue,particularly in regions with deeper fintech penetration,like Latin America(see sidebar,“Fintechs:Still in the g

40、ame”).3 Economist Intelligence Unit.4 McKinsey Fraud Survey 2023;US Federal Trade Commission(FTC)Consumer Sentinel Network;and Verafin 2024 Global Financial Crime Report.The impact of these headwinds on retail banking margins will,of course,vary by region,but the trend is globally consistent.We anti

41、cipate margin declines of between 5 and 10 percent by 2026 across various geographies.Rising costsOperating costs for retails banks are increasing(Exhibit 4),driven by four trends:wage growth,increased occurrence and magnitude of financial crimes,rising imperatives for technology investments,and gro

42、wing credit risk.This confluence of trends will force banks to reenvision how they manage cost productivity in the coming years.Wage growth is catching up with general inflation in several regions.In Europe,it was 3.8 percentage points higher in 2023 than it was in 2019.In North America,it was 0.7 p

43、ercentage points higher.3 In AsiaPacific,wage growth since the pandemic has remained at high levels similar to those in the period leading up to the pandemic.As labor costs continue to rise,banks will need to raise salaries to compete for digital and analytics talent as well as other scarce resource

44、s(wealth advisors,for example).It will be critical for banks to actively monitor the impact of these increases on their overall cost base.Unsurprisingly,banks technology budgets have grown much faster than their other costs as they make necessary investments in digitizing and incorporating AI into t

45、heir business models.Globally,IT accounted for 20 percent of total expenses in 2022,compared with 14.8 percent in 2018,according to the McKinsey IT Spend Benchmark.As banks migrate demand from physical to digital channels,they need to develop the discipline to cut costs in distribution and operation

46、s.This will increase the ROI of tech investments while creating a digitization flywheel that allows efficiencies to be reinvested into further digitization.Also,financial crime is on the rise,according to McKinseys 2023 Fraud Survey and other public sources,4 as is frauds contribution to banks losse

47、s and operational expenses.The scale of the problem 6The state of retail banking:Profitability and growth in the era of digital and AIFintechs:Still in the gameThe tightening global macroeconomic environment has been a challenge for fintechs and digital retail banking attackers.In the core pandemic

48、years,fintechs benefited from easy access to fundingreceiving,for example,$92.3 billion in venture capital investment in 2021.However,amid rising interest rates,this trend has normalized,with 2023 venture capital funding decreasing by 63 percent in absolute terms to$34.1 billion.(Still,these funding

49、 levels are in line with pre-COVID-19 figuresfor example,$36 billion in 2019.)While fintech funding woes have alleviated some of the competitive pressure on banks,it is far too early to declare the fintech disruption over.Many fintechs have already established strong footholds.NuBank,for example,ann

50、ounced it had reached the 100-million-user mark in May 2024.And in the United Kingdom and Northern Europe,fintechs like Revolut and Klarna,respectively,have been able to break through and build strong brands with customer loyalty.Fintechs are also making inroads in select retail banking value pools,

51、capturing revenue from niche service lines and deploying new business models.While these gains may seem minor in the broader scheme of things,the pressure threatens the status quo of the universal banking model and raises the specter of death by one thousand cuts,whereby attackers capture one pocket

52、 of profits after another.In the United States,for example,according to the McKinsey Global Payments Map,digital attackers such as Square,Stripe,and Toast have already captured roughly 34 percent of total merchant services payment revenue by developing customer-centric solutions tailored to micro an

53、d small merchants,which now increasingly turn toward these players(and not the nearest bank branch)for their payments needs.A similar trend can be observed in global remittance flows.In 2014,38 percent of flows went through retail bank branches(and 58 percent overall through retail banks).Once finte

54、chs like Remotely and Wise entered the arena,offering more affordable transfers,these numbers declined significantly.Currently,only 18 percent of remittances flow through retail bank branches,while 31 percent flow through nonbank digital channels(versus 8 percent in 2014),according to McKinseys Glob

55、al Payments Map.Writ large,this kind of niche market dominance could spell deeper competitive trouble for banks.Many of the trends that led to the early success of fintechs are still in place:digital-native consumers continue to age and amass wealth while younger consumers favor low-or no-fee offeri

56、ngs,making the playing field more challenging for incumbents with more traditional fee-based models.Moreover,as banks in some developed economies have greater difficulty serving mass-market clients profitably,fintechs with their lower marginal costs are finding fertile ground in such markets.In addi

57、tion,consumers of all levels are increasingly banking with more institutions;for example,according to the McKinsey Global Consumer Survey,the average number of total banking relationships per consumer in the United States increased from 2.6 in 2021 to 3.2 in 2023.As a result,individual banks struggl

58、e to generate sufficient revenue per customer to overcome a higher cost to serve.As the case has been from the beginning of the fintech era,traditional retail banks long-term competitive success will continue to rely on the depth of their relationships with customers and the ability to serve them at

59、 low cost.D.7The state of retail banking:Profitability and growth in the era of digital and AIis growing.In the United States,reported consumer fraud losses have grown at a 44 percent CAGR since 2019.5 Meanwhile,60 percent of financial institutions in Latin America reported an increase in fraud in t

60、he last two years.6 In the United Kingdom,authorized push payment fraud has increased 14 percent per year,with reimbursement rates likely to grow by 40 to 60 percent at industry level in light of new regulation from the Payment Systems Regulator.7 Not only the scale of fraud is expanding,but also th

61、e level of sophistication,which leaves banks struggling to respond comprehensively and consistently.When one version of fraud is addressed or managed,another tends to arise in its place.For example,multifactor authentication has helped mitigate account takeover fraud,but new 5 US FTC Consumer Sentin

62、el Network.6 McKinsey Fraud Survey 2023.7 UK Finance fraud reports.scams(for example,elder scams and invoice scams)have stepped in to fill the void.The significant growth in fraud is particularly painful for smaller banks,as it inflicts disproportionate damage on their more modest balance sheets.Ret

63、ail banks need a balanced approach to fighting fraud,one that addresses the problem without drastically reducing revenue.However,most banks have yet to develop a holistic,end-to-end fraud-fighting approach that encompasses detection,prevention,and resolution.Instead,many are tightening controls acro

64、ss the board without nuance,while others develop one-off solutions for discrete challenges,such as check fraud.Mastering fraud is becoming as critical for digital banking as superior credit capabilities have been for traditional banking.Exhibit 4 Retail banking costs are rising on multiple fronts,in

65、creasing cost to serve.Select examples of increasing banking costs1Federal Trade Commision(FTC)reporting of consumer fraud losses does not refect magnitude of losses incurred by fnancial institutions.2Insights on IT spend refect 200 data points from banks across the world,collected by proprietary Mc

66、Kinsey benchmarking solution(Ignite)since 2013.3Risk cost margin refects impairment that banks provision as a%of average outstanding loans to account for bad debt.Figures are captured in terms of basis points to enable comparison.Source:Economist Intelligence Unit;US FTC Consumer Sentinel;McKinsey I

67、gnite IT Spend Benchmarks;McKinsey PanormaGlobal Banking PoolsMcKinsey&CompanyWage growthPersistent fnancial crimeRising IT costsHeightened credit riskEurope:Growth in averagewages,201923,%per yearUS:Total consumer fraudlosses,201923,$billion Global:IT spend overall,201822,%of expensesGlobal:Credit

68、card loan riskcost margin,202123,basis points20192.4202310.3+44%per year201814.8202220.0+5.2 p.p.20212552023341+34%20197.0202310.8+3.8 p.p.8The state of retail banking:Profitability and growth in the era of digital and AIBanks are also facing an uptick of credit risk,which is approaching early pande

69、mic(2020)levels(Exhibit 5).Government stimulus helped contain major delinquency risk throughout the core COVID-19 period,but credit risk provisions(see the increase of 86 basis points in credit card risk provision between 2022 and 2023)and delinquencies across consumer asset classes have been rising

70、 as the effect of the COVID-19 stimulus wears off.While banks are making impairments to price in this elevated credit risk,risk costs are creating additional pressure on top of other operating cost headwinds.Finally,the increase in regulatory oversight and scrutiny,particularly after the liquidity c

71、risis that resulted in the collapse of some major US and European banks,is creating an additional cost constraint on banks.Expected new capitalization 8 S&P Capital IQ.requirements are likely to further increase the cost of capital,while the additional administrative requirements that accompany more

72、 oversight are causing many banks to expand their risk and compliance capabilities.RepositioningConsidering the outlook of revenue margin compression(under pressure from deposit headwinds)and increasing costs,investors are rewarding banks ability to generate high-ROE fee-based revenue and lower thei

73、r cost of funds(Exhibit 6).Our analysis of more than 100 North American banks indicates that cost of funds and non-interest income correlate closest with overall valuation multiples(specifically,price to tangible book value,or P/TBV).8 Exhibit 5 Banks are provisioning higher risk costsapproaching 20

74、20 levels.Global risk cost margins,%1Risk cost margin refects impairment that banks provision as a%of average outstanding loans to account for bad debt.Figures are captured in terms of basis points to enable comparison.2Peak levels from global fnancial crisis(200709).Source:McKinsey PanoramaGlobal B

75、anking PoolsMcKinsey&Company+86basispoints+20basispoints+9basispointsGFCpeak841Credit card loansAuto loansMortgage loansGFCpeak185GFCpeak1352020335202125520222752023estimate3412020962021592022702023estimate792020352021202022222023estimate299The state of retail banking:Profitability and growth in the

76、 era of digital and AIIn other words,in an environment where interest rates are elevated but a high degree of uncertainty surrounds the pace at which central banks will manage rates down,investors are rewarding banks that can acquire granular,sticky,and low-cost deposits;build stable fee-based busin

77、esses that are more resistant to external and macro forces;and offset the likely decline in interest margins.Such businesses include,for example,wealth management,cards,and other payments products.To a lesser extent,cost efficiency also is a major driver of valuation for banks.Achieving and maintain

78、ing cost efficiency will require banks to invest in next-generation strategies effective at protecting their margins.Exhibit 6 Investors are rewarding banks ability to generate high-ROE fee-based revenue and low cost of funds.US example:Statistically signifcant drivers of P/TBVRevenue growth,FY 2024

79、25EReturn on tangibleequity(ROTE)drivers,FY 2023Balance sheet,FY 2023Net interestmarginsFee incomeEfciencyAsset qualityLoans anddepositsRevenue growth,%+0.07Top 2 driversPositivecorrelationNegativecorrelation0.220.300.370.150.070.070.11Parameter impact1Price to tangible book value.Analysis based on

80、112 US banks with total assets$10 billion.P/TBV priced as of Mar 11,2024.22025 estimate.Earning asset yields and cost of funds are based on latest quarterly data(Q4 2023).Earning assets include loans and investments in fnancial markets.Source:S&P Capital IQ;McKinsey analysisrevenue and low cost of f

81、unds.McKinsey&CompanyImprovement in P/TBV frombottom quartile to top quartileEarning asset yields,%+Cost of funds,%Operating expense,%of tangible assets Loan loss provisions,%of loans Loan-to-deposit ratio,%Commercial and commercialreal estate loans,%Non-interest income,%of tangible assets+10The sta

82、te of retail banking:Profitability and growth in the era of digital and AIA landscape shaped by cost pressures and revenue margin compression calls for banks to focus on dual imperatives:doubling down on primary relationships and investing in technology and analytics capabilities that will help prot

83、ect margins.This is,in a sense,a back-to-basics approach,but with a twist:banks need to use the latest tools and technology to bolster their fundamental strengths.The battle for primacyIn recent years through 2021,given near-zero interest rates across many geographies,banks benefited from the freedo

84、m to grow their balance sheet in an almost unconstrained way.Amid changing conditions,this approach needs to be recalibrated.Now banks must focus on nurturing primary customer relationships through deeper,more meaningful engagement in order to lower their cost of funds and improve their liquidity pr

85、ofile.Acquiring and retaining primary relationships and deepening existing relationships will be among the most important competitive advantages in the coming years.This is not a new idea in banking,but given the current market conditions,it is emerging as the most profitable approach to growth.Prim

86、ary customers are more likely to generate high-ROE fee income,lower cost of funds with primary operating accounts,and maintain longer-term relationships with a bank.Banks can develop primacy and deepen customer relationships in todays environment with three measures:a mobile-first integrated distrib

87、ution strategy,innovation in products with relationship-based incentives and integrated rewards,and hyper-personalization to foster ongoing engagement.Mobile-first integrated distribution strategyDistribution is the fundamental interface between retail banks and their customers across acquisition,9

88、“Integrated channels:The next frontier beyond omnichannel distribution,”McKinsey,May 4,2023.advisory,and servicing.It plays a critical role in building customer primacy and in modulating cost to serve based on client value and channel preferences.As digital channels mature and client preferences sta

89、bilize,mobile has become the channel of choice for most daily banking activities,and,increasingly,simple product cross-sales,while branches and remote models remain critical for new-to-bank acquisition,complex lending,and advisory across most geographies.As a result,leading banks are adopting a mobi

90、le-first integrated channel distribution model9 in which individual channels have specific roles based on customer segment and needs,with mobile acting as the orchestrator to help clients navigate to the right channel and offering key features.When it comes to branches,most banks globally have been

91、cutting down their physical footprint,but many are doing so without a clear strategy for balancing the cost savings and the revenue impact.The role of the branch is certainly changing,but in most regions,it remains pivotal for acquiring new customers and attracting deposit balances.According to prop

92、rietary research from Finalta by McKinsey,branches in North America accounted for 72 percent of newly acquired current accounts in 2023,representing 92 percent of new current account balances;in AsiaPacific,the figures are 55 percent and 80 percent,respectively(Exhibit 7).These figures imply that th

93、e“quality”or depthof digitally acquired accounts is not yet at the level of those acquired in branches.The branch story is more complex in Europe,where nearly half(44 percent)of balances are acquired digitally,but this still leaves the majority of new current account balances coming through branches

94、.Regional and local dynamics matter,and banks must balance their distribution network to account for them,but the overall message is broadly applicable:Many customers still prefer in-person 2.Winning strategies for a shifting banking landscape11The state of retail banking:Profitability and growth in

95、 the era of digital and AIengagement for complex and consequential interactions.In our view,branches will remain an important element of retail banking distribution,especially as interest rates remain elevated and deposits a key battleground.The question banks need to answer is how to move beyond th

96、e one-size-fits-all branch format and tailor branch designlayout,services offered,level of customer supportto the local market context and strategy.Additionally,there is a growing focus on improving staff productivity and sales effectiveness,ensuring that staff spend time on proactive,value-adding a

97、ctivities.The core principle is that physical presence is still critical for current account acquisition and complex advice,but most daily banking activities can and should be migrated to self-serve channels.While branches continue to play a key role,digital retail banking channels do account for a

98、growing share of product sales,especially with regard to cross-selling of simple products like credit cards and personal loans.Digital channels are also extremely valuable for increasing customer lifetime value and boosting retention;for example,North American banks with top-quartile digital adoptio

99、nthat is,customer digital usagehave half the attrition rate of less sophisticated bottom-quartile players.Perhaps the most salient trend emerging from Finalta research is the growth in the mobile channel.Globally,the share of consumers actively using mobile for their banking needs climbed 18 percent

100、age points between 2020 and 2023,to 57 percent(Exhibit 8).Similarly,mobile service touchpoints have proliferated over the same time period.The number of annual touchpoints grew by 72 percent,reaching 150 annual touchpoints per customer and surpassing some leading e-commerce players,suggesting that c

101、ustomers prefer the ease and efficiency of mobile for Exhibit 7 Branches still account for the bulk of new current account balances.Current account sales mix and share of new balances,by acquisition channel,2023,%1%of new accounts sold through branch and digital channels.%of new balances=fund rate o

102、f accounts opened in channel average balance of accounts opened in channel.Branch vs digital channels.Available data largely includes Central and Western Europe;sample of Southern European countries is limited.Available data largely includes developed markets(eg,Australia,New Zealand,Singapore)with

103、greater digital maturity.Source:Finalta by McKinseyMcKinsey&CompanyNorth AmericaWestern and Central EuropeAsiaPacificDigitalBranch28728925050445645552080NewaccountssoldNewbalancesNewaccountssoldNewbalancesNewaccountssoldNewbalances12The state of retail banking:Profitability and growth in the era of

104、digital and AIlighter-touch interactions.Mobiles gain is,in large part,onlines loss:online banking has seen an absolute decrease of four percentage points in total channel users since 2020,and customer service touchpoints declined 22 percent.Based on this trend,banks should position the mobile chann

105、el as the primary orchestrator of consumers interactions(Exhibit 9).Mobile thus becomes the point from which customers are steeredif neededto the channel that best suits their needs and expectations.Banks need to invest in a seamless mobile user experience that adds structure and clarity to their jo

106、urney,rather than overwhelming the customer.There is clear evidence from Finalta that leaders in mobile are now leading in retail banking overall:they outgrow the competition,have lower cost to serve,and deliver superior customer experience.As an example of the impact of a mobile-first integrated ch

107、annel strategy,we have seen retail banks fuel a 10 to 15 percent increase in deposit balances by optimizing distribution strategies within and across channels.One US bank we worked with,by identifying bottlenecks in its digital application process and improving drop-off rates for each step of the de

108、posit funnel,boosted Exhibit 8 Mobile adoption is growing rapidly,especially for customer service.242323222928262439202020212022202345515715141312544323211918871081271503322Select examplesActive channelusers,global,%OnlineMobileContact centerAnnual number ofcustomer servicetouchpoints percustomer,gl

109、obalShare of coreproduct sales,global,%Note:Figures may not sum to listed totals,because of rounding.1Active channel users=90-day active channel users/active customers.2For branch:payments,deposits,and withdrawals/active customers.For online:total online log-ons/active customers.For mobile:total mob

110、ile log-ons/active customers.For contact center:total inbound calls/active customers.Source:Finalta by McKinseyMcKinsey&CompanyBranch+18 p.p.3 p.p.4 p.p.3 p.p.+72%32%22%40%666057531417181991417225544+13 p.p.1 p.p.+4 p.p.13 p.p.13The state of retail banking:Profitability and growth in the era of digi

111、tal and AIpull-through rates across both digital and branch channels.Mastering this channel orchestration is becoming a key competitive advantage for banks seeking to boost client primacy,contain technology investment,and rightsize their cost to serve.Innovation in relationship-based incentives and

112、rewards Relationship-and rewards-based strategies are an effective tactic that banks often use to deepen relationships and guard against competition from digital attackers.Leading banks are increasingly Exhibit 9 Banks can use mobile to orchestrate and coordinate customer journeys across channels.Ch

113、annel strategy archetypesSource:McKinseyacross channels.McKinsey&CompanySingle channelEach customer segment has accessto 1 channelMultichannelEach customer segment can accessthe bank through multiple channels,but channels are not connectedOmnichannelEach customer segment can access thebank through m

114、ultiple channels withchannel orchestration and seamlesshandoversCallCustomersChannelsIn-personATMWebsiteMobile as the relationship orchestrator One primary channel(mobile)serves as starting point for all customer journeys and orchestrates interactions with other channelsCustomer careCustomersSelf-se

115、rviceMobile-frstAdvisoryChatbotCallInteractive voiceresponseIn-personATMRemote14The state of retail banking:Profitability and growth in the era of digital and AIproviding three types of benefits to reward consumers with bundled product offerings:1.Fee or price waivers.Waivers are the most common way

116、 to incentivize customers to use more products and services.This type of benefit gives customers discounts or free products and servicesfor example,a premium credit card or free ATM withdrawals outside of networkbased on the number of product relationships they have with the bank.2.Accelerated rewar

117、ds.Here,customers who have deeper and broader relationships with the banksay,an investment account and a mortgageare given access to accelerated proprietary rewards programs(for example,a 25 percent accelerator on certain credit card purchase categories).Such rewards can be from within a banks inter

118、nal ecosystem or part of an external program,such as airline points.3.Nonbanking benefits.Some banks are going a step further by offering lifestyle benefits unrelated to banking,often as part of a broader strategy to become more central in the lives of their customers.These benefits include access t

119、o hard-to-obtain tickets or cultural experiences,“free”entertainment passes,and exclusive invitations.Rewards and benefits are,of course,not new.Banks and particularly payments providers have been offering them for years.But given the competitive landscape,they are becoming more central to banks tac

120、tics to deepen relationships and increase primacy.According to McKinseys most recent Consumer Banking Value Proposition Survey,10 customers are highly responsive to incentives of these kinds when considering deepening their relationships through bundled product offerings.For example,we found that th

121、ere was a more than 60 percent likelihood of a customer signing on to a bundle combining a credit card,savings account,and checking account when the bank waived monthly checking account fees.10September 2023.11ChiefMartec Blog,“2024 Marketing Technology Landscape Supergraphic,”blog entry by Scott Br

122、inker,May 7,2024.As is often the case,a one-size-fits-all approach will not capture the full potential.Rewards packages should be crafted to capture the nuanced needs of target segments.For example,according to the same survey,only 28 percent of US baby boomers indicated they would sign up for check

123、ing,savings,and credit card bundles with waivers of late-payment fees,compared with 58 percent of millennials.Banks should iterate on their rewards strategy through a systematic test-and-learn approachnot only tailoring benefits and bundles to priority segments but also developing discrete approache

124、s for each stage of the customer journey(that is,from acquisition to deepening to retention).At the same time,to ensure that such programs deliver value,banks should rigorously assess the cost versus benefits;it is difficult to backtrack on benefits without compromising customer experience.Double do

125、wn on hyper-personalizationConsumer expectations for personalized experiences continue to climb as fast as digital leaders can match them.According to McKinsey research,roughly three out of four consumers report feeling frustrated when the website content of the brands they frequently interact with

126、is not personalized.Fortunately for banks,the tools and services available to meet these expectations and deepen relationships through highly personalized customer engagement are keeping pace with demand.There has been an explosion of both data and providers that specialize in helping companies depl

127、oy a more personalized engagement strategy,more granular audience targeting,and dynamic optimization of marketing content and creatives.For example,the number of marketing technology(MarTech)providers and solutions has roughly doubled in the United States in the last five years,according to one sour

128、ce.11 Banks own more customer data than companies in most other industries,but they are behind many other consumer-facing sectors when it comes to personalization at scale.Banks seeking to unlock 15The state of retail banking:Profitability and growth in the era of digital and AIthe full potential of

129、 personalization can focus on five key priorities:1.Identify and prioritize use cases based on value.Banks need to understand their customers life cycle in a granular wayparticularly which moments in the journey most influence decisions about financial products.A first step is to identify the most r

130、elevant personalization use cases and assess the potential value of investing in them.2.Rapidly activate and optimize at scale.The landscape of potential channels and touchpoints through which customers interact with their bank is becoming increasingly complex,which makes personalization challenging

131、 to deploy consistently.AI-driven decisioning,dynamic content,and measurement of results can enable activation of consumers across channels and touchpoints.3.Deploy MarTech and data enablement.A fit-for-purpose MarTech stack with 360-degree data connectivity is required to power the analytics engine

132、.4.Develop an agile operating model for personalization.Set in place a rapid test-and-learn engine with cross-functional talent,and an agile operating model to support speed and quality of impact.5.Build capabilities.Focus on talent development to sustain impact over time.Capabilities that will be i

133、n great demand include digital acumen,agility,and analytics skill sets.The impact of putting these priorities into practice can be significant.One Western European bank we worked with deployed more than 100 personalized campaigns powered by AI.The result was an increase in conversion rates of three

134、to five times;meanwhile,campaign durations compressed from several months to less than four weeks.The application of gen AI tools can further boost the power and scalability of personalization,enabling banks to deploy an end-to-end engine that uses bespoke imagery,subject lines,and language to perso

135、nalize touchpoints with customers at scale.However,many risks are still associated with deploying gen AI capabilities with customers.Most banks still keep a human in the loop in these interactions.However,the pace of technological development and risk controls indicates that the point where banks ca

136、n truly reap the full potential of gen AI tools is not so distant.Banks need to be prepared for this moment,but most still have gaps in their data foundations that would hinder their efforts.Protecting against margin compression with digital,AI,and gen AI capabilitiesAs retail banks face headwinds f

137、rom a host of cost pressures and can no longer rely on a supportive macroeconomic environment to fuel outsize growth,it becomes more important to look closely at where they can better manage their margins.We see three key areas of focus that will set leading banks ahead of the pack:next-generation a

138、nalytic capabilities to protect revenue margins on the deposits and assets sides,a holistic approach to fraud that balances prevention with a banks growth strategy,and proactive adoption of gen AI tools to boost productivity.Next-generation analytic capabilities for deposits and lendingGiven the unc

139、ertain interest rate environment and volatile deposit landscape,retail banks will need to take a closer look at their pricing strategies and elevate their analytical sophistication and agility when it comes to pricing on both the asset and liability sides.DepositsDeposits will continue to be a cruci

140、al battleground for retail banks.As interest rates are plateauing or coming down across regions,most banks are facing questions such as these:“What term should I offer to customers on term deposits without knowing how the central bank will set interest rates?”“How should I tailor my strategy based o

141、n retention risk of a customer?”“How do I empower the front line to make the right decisions?”16The state of retail banking:Profitability and growth in the era of digital and AITo address these questions,banks need a tool kit for pricing with precision and building deeper visibility into their custo

142、mer base.The following tools can help banks achieve best-in-class deposit pricing and retention management:1.Dynamic and personalized pricing strategy.Banks should develop a relationship-based strategy that targets newly acquired and long-standing customers separately(for example,based on price sens

143、itivity)and empowers the front line to take a personalized approach based on specific customer attributes(for example,transaction history)by providing them with real-time deposit product offers for clients.2.Customer balance sheet visibility.Banks should identify the data required to enable a near-r

144、eal-time 360-degree customer view,including transaction flows,demographics,and key churn events.This will help banks understand and act on critical moments for deepening relationshipsfor example,when a customer receives a job promotion.3.Advanced deposit modeling.Leading banks will build analytics c

145、apabilities that support a fact-based execution of their overall deposit strategy.For example,bespoke deposit models can test price elasticity at the relationship level or balance the trade-off between getting better rates and growing deposit volume.4.Unified operating model.To win the battle for de

146、posits,banks must ensure they are coordinated across the organizationfrom finance to the front lineand have a governance model that allows for dynamic deposit management.For example,banks can refine frontline scorecards to incentivize accurate execution of the overall deposit strategy.5.Rapid decisi

147、on support.Leading banks will put in place the capacity to track the effectiveness of promotion and marketing campaigns on a daily and weekly basis.With this capability,leaders can make fact-based decisions and set strategy accordingly.LendingImproving pricing on the liability side is only half the

148、battle.Many retail banks still lack a modern pricing strategy when it comes to consumer lending products.Instead,they revert to tactical pricing adjustments based on the competition,as opposed to truly understanding price sensitivity and the long-term value of their customers.Analytics leaders will

149、take advantage of the higher(and potentially more volatile)interest rate environment to improve their lending margins based on a deeper understanding of their product economics,refining their view of the customer and their risk profile.Most capabilities described in the deposit section apply to lend

150、ing as well.For example,some banks are already experimenting with AI capabilities applied to cost-of-risk adjustments and customer elasticity.In our experience,using a vast set of parameters from transaction history(for example,cash withdrawals,activity with competitor banks),channel data(for exampl

151、e,frequency of mobile interactions),and credit bureau data(say,number of financial institutions where the customer applied for a loan in the past),banks can accurately assess price elasticity for loans and use it to guide pricing at an individual level.Holistic approach to fraudMost banks still see

152、fraud management as a pure trade-off on the curve between revenue or customer experience and losses,tightening or loosening controls as they see fit.Given the growth in fraud,banks will need to shift that curve and minimize the trade-offs.To do so,they need a comprehensive,end-to-end approach across

153、 prevention,detection,and resolutionand,importantly,a system that guards against losses while setting an appropriate risk appetite and supporting healthy revenue growth(Exhibit 10).A series of actionable levers can enable retail banks to take a more resilient and proactive approach:1.Look beyond fra

154、ud losses.Fighting fraud in the current environment requires that most banking executives make a significant shift in mindset.Enhancing mitigation is no longer 17The state of retail banking:Profitability and growth in the era of digital and AIsynonymous with tightening controls.Banks that tailor the

155、ir fraud prevention systems to limit false positives(for example,through enhanced identity checks)can enjoy a significant revenue impact.For example,the impact from preventing revenue leakage due to false positives can be three to four times greater than the impact of preventing fraud by tightening

156、controls.2.Set an acceptable risk appetite.Very few banking executives have set a level of fraud losses that they deem acceptable as they seek to balance revenue growth and business strategy with prevention.Only by setting appropriate thresholds can banks measure fraud accurately and consistently,wh

157、ich enables active target setting and monitoring.Dashboards and analytics can provide a single integrated view of fraud losses,customer experience,and revenue impact to support decision-making by cross-functional teams.3.Take an end-to-end approach aligned with product strategy.Banks can fight fraud

158、 using a mix of prevention,detection,and resolution strategies.But very few are calibrating fraud enhancement strategies with their broader business objectives.For example,a recently launched fintech with a valuation driven by its number of users might consider a more lenient approach to letting new

159、 entrants into their ecosystem but be more stringent in fighting fraud at the transaction level.By taking an end-to-end view of the solution set(for example,bespoke models for first-party fraud,transaction limits based on risk segments,direct authentication),banks can find the optimal fraud-fighting

160、 strategies to support their business objectives.4.Streamline fraud operations.Finally,banks can improve their fraud approach by calibrating resources with their overall portfolio risk profile.For example,if a bank has Exhibit 10 By taking a holistic approach to fraud,banks can reduce losses while i

161、ncreasing revenue.Illustrative value creation opportunities Source:McKinsey Risk Practiceincreasing revenue.McKinsey&CompanyFraud losses,risk appetiteRevenue/customerexperienceCurrent stateMove along the curveValue creation opportunities Target stateShift the curve Improve fraudcapabilitiesand reduc

162、etrade-of betweenrevenue/customerexperience andfraud lossesAB1B2LoosencontrolsTightencontrolsCurrent stateTrade of between fraudlosses and revenue bytightening and looseningexisting controlsATarget stateB1Reduce false-positive ratewhile maintaining net fraudlossesB2 Reduce net losses whilemaintainin

163、g false-positiverate18The state of retail banking:Profitability and growth in the era of digital and AIdecided to loosen controls as part of a customer acquisition campaign,it could simultaneously scale up its fraud operations team to prepare for a spike in case volume.Operational alignment is espec

164、ially important as banks invest more heavily in fighting fraud.One regional bank we worked with recently overhauled its fraud management capability by identifying operational improvements across alert review,investigation,and resolution.After benchmarking against peers and designing a range of enhan

165、cements to bring the process up to industry standard,the bank built an automated tool to support analyst review of fraud alerts.As a result,process efficiency has increased by 35 percent(for example,through demand management),and thanks to improved onboarding and authentication,fraud losses have dec

166、lined by roughly 45 percent overall.Proactive adoption of gen AIGen AI is rapidly reshaping productivity12 in the financial services landscape.For retail banks,most use cases with sufficient maturity center on developer productivity and operations,but future applications will span a much broader spe

167、ctrum and likely include areas such as product design.Today,four domains are emerging as initial gen AI focus points for banks:1.Contact centers.In contact centers,gen AI has proven its capability to improve the quality of customer interactions and boost efficiency.Leading banks are testing gen AIs

168、capacity to deliver value in contact centers and through the use of virtual assistantsAI“copilots”to offer real-time suggestions for script generation based on rapid customer profiles.Other emerging use cases include call analysis and coaching for call center agents and advisors.Some banks are also

169、exploring opportunities to deploy AI-powered chatbots.By our estimate,these applications have the potential to drive down human interaction costs by roughly 10 to 25 percent.12“Scaling gen AI in banking:Choosing the best operating model,”McKinsey,March 22,2024.2.Operations and technology.On the oper

170、ations and technology front,gen AI can reduce costs for a wide range of back-end processes,using automation to replace“manual”labor(thereby freeing up time for employees to focus on more value-added tasks)and accelerate time to completion.As an example,gen AI could be used to clean-sheet a mortgage

171、appraisal review and write-up process,searching for comparable properties and comparing them based on rules(in the appraisal report process),and synthesizing findings.By ingesting key data inputs at several points in the appraisal process,gen AI capabilities could significantly accelerate an otherwi

172、se manual and operationally burdensome process.3.Legal,risk,and fraud.In the area of legal,risk,and fraud,gen AI will have a significant productivity impact on activities requiring document interpretation and text generation.Approximately 10 percent of an average retail banks staff are dedicated to

173、legal and risk functions,and these resources are allocated to activities like refining and implementing risk model documentation and fraud detection and reporting.Given the nature of these activities and processes,the use cases for legal and risk functions are wide-ranging;examples include drafting

174、suspicious-activity reports based on recent customer transactions and automated monitoring of regulations to scan for updates and compare against internal processes.Leading players are deploying capabilities that reduce document generation costs by 35 to 40 percent.4.Talent management.Finally,retail

175、 banks can utilize gen AI to create efficiencies for their talent functions and improve the productivity of their existing workforces.With respect to hiring,banks can leverage gen AI to create job descriptions and postings,screen candidates rsums and applicant responses,draft interview questions,dev

176、elop targeted recruiting content to reach specific applicant 19The state of retail banking:Profitability and growth in the era of digital and AIpools(for example,university students seeking internships),and create a self-serve employee onboarding experience.Similarly,algorithms can generate educatio

177、nal content in text,photo,and video formats to bolster workforce training and development.We see an opportunity for 20 to 35 percent of productivity potential in talent development that could be realized through these capabilities.Piloting and deploying early gen AI use cases does not come without r

178、isk.Gen AI is opening the door for new dimensions of risk(for example,hallucinations,regulatory complexity,responsible AI),but new governance and technology solutions(watermarking,data sequestration)are already emerging to manage these.Banks need to take a thoughtful approach that balances cost and

179、operational upside with potential risks while investing in new risk mitigation strategies to lay the groundwork for broader,longer-term adoption.As we near the completion of an upbeat chapter in retail banking,leaders will begin now to set a clear agenda for competing in a more constrained and compe

180、titive environment.History shows that when the going gets tough,opportunities for outperformance and growth abound.For banks,the imperatives are clear:rapidly develop the tools,skills,and capabilities to boost primacy with value-generating customers and protect margins by investing in digital and AI

181、 capabilities that support deposit growth,pricing,and fraud management,among other needs.Banks that focus with laser intensity on these points will turn the page on a bright future.Copyright 2024 McKinsey&Company.All rights reserved.Amit Garg and Marukel Nunez Maxwell are senior partners in McKinsey

182、s New York office,Marti Riba is a partner in the Boston office,Max Fltotto is a senior partner in the Munich office,Oskar Skau is a partner in the Stockholm office,and Matic Hudournik is an associate partner in the Miami office.The authors would like to thank Alvaro Cubria,Felipe Costa,Jatin Pant,Ma

183、tthias Lange,Sergey Khon,Shital Chheda,Tim Natriello,Wajid Ahmed,and Zane Williams for their contributions to this report.Scan Download PersonalizeFind more content like this on the McKinsey Insights App20The state of retail banking:Profitability and growth in the era of digital and AIMcKinsey Financial Services Practice October 2024 Copyright 2024 McKinsey&Company Designed by D McKinsey McKinsey21