# data[].attributes.attachment_link.readable_text
Technological progress and innovation are the linchpins of fintech development, and will continue to drive disruptive business models in financial services. According to McKinsey analysis, seven key technologies will drive fintech development and shape the competitive landscape of finance over the next decade:

1. Artificial intelligence will drive massive value creation

McKinsey estimates that artificial intelligence (AI) can generate up to $1 trillion additional value for the global banking industry annually. Banks and other financial institutions are tipped to adopt an AI-first mindset that will better prepare them to resist encroachment onto their territory by expanding technology firms.

In financial services, automatic factor discovery, or the machine-based identification of the elements that drive outperformance, will become more prevalent, helping to hone financial modeling across the sector. As a key application of AI semantic representation, knowledge graphs and graph computing will also play a greater role. Their ability to assist in building associations and identifying patterns across complex financial networks, drawing on a wide range of often disparate data sources, will have far-reaching implications in the years to come.

Finally, analytics that incorporate enhanced privacy protections will foster minimal data usage, or the use of only relevant, necessary and appropriately sanitized information, in the training of financial models. These include federated learning, a form of decentralized machine learning that addresses the risk to privacy associated with centralizing datasets by bringing the computational power to the data, rather than vice versa. Advanced encryption, secure multi-party computing, zero-knowledge proofs, and other privacy-aware data analysis tools will drive a new frontier in consumer protection.

AI applications will penetrate the entire spectrum of financial industry operations across front, middle, and back offices. Customer-facing applications include tailored products, personalized user experience and analytics services, intelligent service robots and chat interfaces, market trackers, automated transactions and robo-advisors, as well as alternative credit ratings based on non- financial data, and facial recognition authentication. Middle-and-back office applications include smart processes, enhanced knowledge representation tools (epitomized by knowledge graphs), and natural language processing for fraud detection.

Many financial institutions still use AI in a sporadic and scattered way, often only applying the technology to specific use cases or verticals. But bank industry leaders are transforming their operations by systemically deploying AI across the entire lifecycle of their digital operations. Notably, the financial industry is coming to realize that algorithms are only as good as their data. Attention is turning to gaining competitive advantage from previously under-used customer behavior data collected via conventional operations. This will unlock the hitherto untapped potential of ecosystem-based financing, in which banks, insurers and other financial services firms partner with non-financial players to facilitate seamless customer experiences in areas outside their traditional remit.

For banks, the "AI-first" institution will yield greater operational efficiency via the extreme automation of manual tasks (a "zero-ops" mindset), and the replacement or augmentation of human decisions by advanced diagnostics. Improved operational performance will flow from the broad application of traditional and cutting-edge AI technologies, such as machine learning and facial recognition, to (near) real-time analysis of large and complex customer data sets. "AI-first" banks of the future will also adopt the speed and agility enjoyed by "digital native" companies and users. They will innovate at a rapid clip, releasing new features in days and weeks instead of months and years. Banks will also collaborate extensively with non-bank partners to offer new value propositions that are integrated across journeys, technology platforms, and data sets.

2. Blockchain will disrupt established financial protocols

Distributed Ledger Technology (DLT) allows the recording and sharing of data across multiple data stores, and for transactions and data to be recorded, shared, and synchronized across a distributed network of participants at the same time.

Some DTLs use blockchains to store and transmit their data, as well as cryptographic and algorithmic methods to record and synchronize the data across the network in an immutable manner.

DTL will increasingly underpin ecosystem financing by allowing the storage of financial transactions in multiple places at once. Increasingly, cross-chain technology, will facilitate blockchain interoperability, allowing chains established on different protocols to share and transmit data and value across tasks and industries, including payments processing and supply chain management.

Technologies such as smart contracts, zero- knowledge proof, and distributed data storage and exchange, which are key to existing fintech innovations such as digital wallets, digital assets, decentralized finance (DeFi), and non-fungible tokens (NFT), will continue to play a prominent role.

Moreover, traditional stakeholders, including institutional investors and funds, are gradually increasing the share of digital assets in their portfolios, broadening access to financing and elevating the potential of blockchain and DTL to disrupt established markets. For example, decentralized finance (DeFi), a form of blockchain- based finance that uses smart contracts to remove the need for a central intermediary, is taking off. The total locked-up value (TLV) of DeFi has surged by nearly 50 times in the past 10 months, with the sector now holding digital assets worth $2.1 trillion. The fact that digital asset exchanges earned about $15 billion in revenue in 2021 offers a further indication of blockchain's mounting technological value.

DLT is also making a mark on government policymaking and regulation. According to a survey conducted by the Bank for International Settlements (BIS) in early 2021, about 60 percent of central banks said that they are testing or studying Central Bank Digital Currency (CBDC). The People's Bank of China, for instance, has begun operational trials of a digital RMB effort based on permissioned DTL, paving the way for improved oversight of monetary policy and resource allocation at the macro level.

Other blockchain applications worthy of mention include:

Real-time transaction settlement: Banks are using smart contracts to settle the collateral and cash part of a transaction at the same Transaction processing, securities lending, and equity trades can also be settled on the blockchain to improve the efficiency and scalability of cross-border sales. Meanwhile, trading securities supported by digital collateral on the blockchain makes for more efficient, transparent, and secure capital management, as well as post-transaction equity settlement.

Digital asset support services: Institutional investors are seeking DLT capabilities, including tokenization for unlisted companies or private equity funds, spot exchange between established currencies and cryptocurrencies ondigital exchanges, and custody services such as key escrow encryption on behalf of customers.

Authentication ecosystems based on zero- knowledge proof: Customers are using agreed- to-share information from partner institutions to verify their identity online, face-to-face, or through phone calls, simplifying authentication procedures and offering streamlined access to health records and government services. Only information required for each specific transaction is shared, while all other data remains safely on the server of the trusted provider.

Decentralized finance (DeFi): Decentralized non-custodial applications can replace intermediaries by automatically generating deterministic (or "always valid") This makes it possible to obtain loans, make investments, or trade financial products without relying on financial entities under centralized management. DeFi adopts deterministic smart contracts, which eliminate counterparty risks and cut out the costs associated with rent- seeking intermediaries, while improving market efficiency with real-time transparency.

DeFi based on blockchain technology is ushering in a new era of opportunity, disrupting established traditional value chains and structures. As financial policies and regulations adapt, DeFi is set to massively expand.

3. Cloud computing will liberate financial services players

McKinsey research shows that by 2030, cloud technology will account for EBITDA (earnings before interest, tax, depreciation and amortization) in excess of $1 trillion across the world's top 500 companies. Our research shows that effective use of the cloud can increase the efficiency of migrated application development and maintenance by 38 percent; raise infrastructure cost efficiency by 29 percent; and reduce migrated applications' downtime by ~57 percent, thus lowering costs associated with technical violations by 26 percent. At the same time, cloud can improve platform integrity through automated and embedded security processes and controls. Development, Security and Operations (DevSecOps), or the idea that security is a responsibility that can be actioned across an organization in step with the growth of its development and operations, is a primary example of a cloud-based feature that reduces technical risks through a consistent, cross-environmental technology stack.2

Financial institutions should be aware of three major forms of cloud services: public cloud, hybrid cloud, and private cloud. Public cloud means that the infrastructure is owned by cloud computing service providers, who sell cloud services to a wide range of organizations or the public. Hybrid cloud infrastructure is composed of two or more types of cloud (private, public) that are maintained independently, but connected by proprietary technology. Private cloud means that the infrastructure is built for an individual customer's exclusive use, deployable in the company data centers, or via other hosting facilities.

Looking ahead, we have identified several relevant cloud-computing trends:

Edge computing and edge cloud are essential: Partition and development logic based on the relationship between edge devices, data centers, and the cloud is increasingly recognized in multiple Development of the edge cloud is accelerating as 5G communication drives new interactions and synergy across the internet of things (IoT), cloud computing, AI and other technologies in areas like new retail, healthcare, industrial parks, smart cities, and industrial IoT.

Cloud containers are stimulating innovation. Public cloud providers are actively pushing the implementation of container technology on cloud, allowing multiple workloads to run on a single operating system instance, and so reducing overheads and improving efficiency. This is driving innovation of cloud delivery models on the platform as a service (PaaS) layer. Cloud technology providers will increasingly focus on building platforms that incorporate container as a service (CaaS).

AI-cloud integration is on the rise: AI-cloud platform applications are proliferating in fields like image and audio search, driving advances in high-value areas such as medical image Deep learning will continue to improve services for a broader range of users via cloud platforms.

Cloud computing liberates financial companies from non-core businesses such as IT infrastructure and data centers, while enabling access to flexible storage and computing services at a lower cost. At the same time, the cloud is spawning new formats such as open banking and banking-as-a-service, shaking up the age-old relationship between customers and financial service providers.

Financial institutions will continue to rely on the cloud as they onboard more agile capabilities, and launch new businesses that require high responsiveness to market and customers, and flexible scalability. Meanwhile, the at-scale application of big data analytics will boost demand for cloud-based elastic computing, which allows computing resources to be dynamically adjusted to meet shifts in demand.

Banks will also recognize the potential to adopt cloud-based microservice architecture at scale in the next few years, where application programming interfaces (APIs) unlock machine- to-machine communication, and allow services to scale independently without needing to enlarge the coding base of the overall offering. The next generation of core banking applications will spur a microservice-driven architectural transformation in banking.

4. IoT will drive a new era of trust in finance

After years languishing on the lower slopes of the hype cycle, IoT is finally coming of age, with important ramifications for financial IoT systems are composed of three layers - perception and smart sensor systems, wireless communication networks, and application and operations support. On the sensor front, RFID labeling still has broad untapped potential to automate item identification and logistics management. IoT communication solutions are also expanding, casting a wider net for devices to communicate across wired and wireless networks, near-field communication solutions, low-power wide area networks, narrow-band IOT, connected end-point devices, and centralized control management. Finally, embedded-system and smart technologies are developing fast, enabling more intelligent communication with objects.

From the financial applications perspective, consider the fact that environmental, social, and corporate governance (ESG) considerations now govern many investment strategies and regulatory policies. For instance, several major countries have committed to achieving peak carbon emissions and carbon neutrality. Aside from broader use of renewable energy, success in achieving these goals will be predicated on the effective monitoring and management of industrial energy and power efficiency. This presents a perfect scenario for IoT applications. Carbon trading, for example, will be increasingly indexed to IoT measurements, opening new opportunities for astute players.

Meanwhile, insurers are using IoT to more accurately determine risk, while improving customer engagement and accelerating and simplifying the underwriting and claims process. Auto insurers, for example, have historically relied on indirect indicators to set premiums, such as the age, address, and creditworthiness of a driver. Now, data on driver behavior and the use of a vehicle, such as car speed and frequency of driving at night, are available thanks to IoT. The technology allows insurers to interact with customers more frequently, and offer new services based on the accumulated data. The sector is also ripe for efficiency gains, as customers often engage exclusively with agents or brokers; and only directly contact the insurer for policy renewal or claims handling. IoT can deliver benefits in the management of customer relationships, allowing insurers to establish more intensive and targeted customer contact.

In banking, IoT-based inventory and property financing, involving the integration of IoT and blockchain, is refining risk management by ensuring that accounting records match real-world transactions, facilitating a brand new system of trust. In shipping and logistics, IoT is shaking up traditional trade finance, allowing banks to develop new products based on goods flow tracking, such as on-demand liquidity, and other innovations delivered via smart contracts. Embedding banking services into wearables, for example digital payments, is another scenario under which IoT is bringing banks closer to their customers.

5. Open source, SaaS and serverless will lower barriers to entry

Speed and scalability are critical for new businesses and financial innovation, particularly amid the intense competition and winner-takes-all dynamics of the digital economy. Open source software, serverless architecture, and software-as-a-service (SaaS) have become must-haves for technology players and traditional financial institutions launching new fintech businesses.

SaaS allows companies to use software as needed without having to own or maintain it themselves, while serverless architecture removes the need for firms to run their own servers, freeing up time and resources for customers and operations. Serverless architecture also reduces cost because charges are linked to executed software code, and are not generated round-the-clock, regardless of business need. It also fosters flexible scaling that avoids idling and loss, improving development efficiency. Open source software is a godsend for companies looking to scale rapidly as it provides free-to-use source code that gives developers a head start in programming their own applications. In 2019, Quantum Black, McKinsey's analytics firm, released Kedro, an open-source tool for data scientists and engineers to create data pipelines, for example.

Each technology is value-generating in its own right, but they are most advantageous when used in combination; companies can quickly scale infrastructure, and develop and launch prototypes at low cost. However, traditional finance companies face significant challenges in leveraging the technologies across IT organizational structures, development skills, and risk management capabilities. They will need to rethink their IT strategy, putting rapid response IT capabilities at the top of their fintech innovation agenda.

6. No-code and low-code will redefine application development

No-code development platforms (NCDPs), and their close relation low-code platforms, allow programmers and general users to develop applications through graphical user interfaces and configurations (e.g. drag-and-drop) instead of traditional computer programming. While still relatively immature, the platforms can reduce the need to hire scarce and expensive software talent.

From a technical point of view, NCDP is the combination and application of component reuse and assembly in software engineering, DSL (domain specific language), visual fast development tools, customizable workflow process orchestration, and design thinking. NCDP development is closely linked to the advance of cloud computing, DevOps, and other technologies that solve problems such as containerization, inflexible scaling, and maintaining high availability computing environments.

Companies often use NCDPs to accelerate the development of cloud-based applications while keeping business strategy synchronized. For example, as audit trails and document generation can be automated on no-code or low-code platforms, compliance can be maintained and improved. This is of great help for financial institutions and fintech companies that need to quickly respond to market shifts.

Google Cloud has invested in no-code software platform Unqork, and acquired AppSheet - one of the largest players in the low-code and no-code software market. Both services allow general staff to develop applications without having specialized coding skills. Alex Schmelkin, Unqork's Chief Marketing Officer, said that tasks that previously took years for financial services companies to complete can now be done within a few months after going "no-code". Unqork currently has about 100 programmers, mainly focusing on financial services. No-code or low-code development platforms have the potential to liberate vital R&D resources to work on multiple projects at once, giving traditional financial institutions the advantage they need to compete with fintech start-ups, even as they pursue company-wide digital transformation projects.

7. Hyper automation will replace manual work Hyper automation refers to the introduction of AI, deep learning, event-driven software, Robotic

Process Automation (RPA), and other technologies and tools that improve decision-making efficiency and work automation capabilities.

RPA, which makes it easy for companies to deploy software robots such as chatbots at scale, is already a major component of digital transformation, but technology is constantly enlarging its boundaries. RPA's core function is to allocate the handling of workflow information and business interactions to robots, thereby automating and standardizing business execution. High repeatability, clear logic, and solid stability are the key criteria to validate RPA tech feasibility. In future, RPA will become more deeply integrated with AI, improving its effectiveness in dealing with more complex business scenarios, and further streamlining financial service provision.

RPA is already at work across middle and back- office operations, automating financial processes and accounting reconciliation for financial institutions. Areas where RPA is being deployed include process automation for accounts receivable and payable, fund appropriation at shared finance and accounting service centers, work hour adjustment and review, automation of financial recording, reporting and treasury processes, and period-end accounting and settlement.

Replacing manual work with automation not only improves efficiency, but also reduces human errors, and allows businesses to respond to fluctuations in demand. While already well established among leading financial players, we expect RPA to penetrate more deeply throughout the industry. Accounts payable processes, for instance, have the potential to be 60 percent automated using robots that mirror human actions for basic paperwork and decision-making.

Unlocking future competitiveness

These key technologies and trends are becoming increasingly intertwined and integrated, giving massive impetus to fintech and financial industry innovation. As it stands, it is niche financial

sub-sectors that are most adept at harnessing technological innovations to launch applications, generate value, and shape the competitive landscape. In future, traditional financial institutions will need to bring their considerable resources to bear to stay on top of the gathering wave of financial industry disruption.

# data[].attributes.attachment_link.title
Seven technologies shaping the future of fintech | Greater China

# data[].attributes.attachment_link.description
In the next 10 years, seven key technologies will drive business model reinventions while shaping the competitive landscape of the financial industry.

# data[].attributes.attachment_link.readable_text
Recent turbulence in the banking world comes against a backdrop of higher interest rates colliding with high leverage amid heightened geopolitical tensions. This is a major change in background conditions from the years of loose money and seemingly endless increases in wealth.

The future of wealth and economic growth hangs in the balance. How long might stress in the financial system last? Is the world facing a major rebalancing in its balance sheet? How severe could the impact on real estate, equity, and debt become, and what might happen to deposits? What is the optimal course of action for stakeholders, from investors to financial institutions to policy makers?

The range of plausible long-term paths remains wide. Much depends on whether the world returns to an era of weak investment and a glut of savings, entailing slow GDP growth, low interest rates, and unabated expansion of the global balance sheet. On another path, stronger consumption and higher investment requirements for the net-zero transition, supply chain reconfiguration, or defense lead to persistently higher inflation and interest rates. What would the policy response be, and could strong tightening trigger an asset price correction and balance sheet reset? Or could productivity growth come to the rescue, generating higher rates of economic growth as capital is redirected toward productive investment opportunities?

In this paper, the McKinsey Global Institute (MGI) models four scenarios to capture the range of potential outcomes. We call them "return to past era," "higher for longer," "balance sheet reset," and "productivity acceleration." In the most desirable scenario by far, productivity accelerates so that economic growth catches up with the balance sheet, thereby combining fast GDP growth, rising wealth, and a healthier balance sheet. The three other scenarios are all far from ideal, each in its own way.

The economic, banking, and investment landscape of the next ten years may look very different from that of the past 20 years.

The stakes are high. The economic, banking, and investment landscape of the next ten years may look very different from that of the past 20 years. The differential impact of the scenarios on economic output is enormous, and the fallout for the balance sheet an order of magnitude larger still. MGI has developed a model for the economy and the balance sheet for the United States, the United Kingdom, and Germany. A balance sheet reset in the United States would lower annual GDP growth by 1.7 percentage points, compared with an accelerated productivity scenario (Exhibit 1). Likewise, total household wealth would be $48 trillion lower in a reset scenario than in a productivity acceleration one. Beyond a potential decline in wealth, which would likely produce its own scarring effects, a reset with material asset price correction would also mean that many debt-financed assets end up underwater. This would amplify existing stress in the financial system. For this reason, decision makers need to pay close attention to balance sheet impact when making choices for economic policy.

The past two decades stand in marked contrast to the post-World War II historical trajectory of global wealth (and debt) accumulation. Before the turn of the millennium, growth in global net worth largely tracked GDP growth. But then something unusual happened. Around the year 2000, with timing that varied by country, net worth, asset values, and debt began growing significantly faster than GDP (Exhibit 2). In contrast, productivity growth among G-7 countries has been sluggish, falling from 1.8 percent per year between 1980 and 2000 to 0.8 percent from 2000 to 2018.

Between 2000 and 2021, asset price inflation created about $160 trillion in "paper wealth." Valuations of assets like equity and real estate grew faster than real economic output. And each $1.00 in net investment generated $1.90 in net new debt. In aggregate, the global balance sheet grew 1.3 times faster than GDP. It quadrupled to reach $1.6 quintillion in assets, consisting of $610 trillion in real assets, $520 trillion in financial assets outside the financial sector, and $500 trillion within the financial sector.

Balance sheet expansion accelerated during the pandemic as governments launched large-scale support for households and businesses affected by lockdowns. During 2020 and 2021, global wealth relative to GDP grew faster than in any other two-year period in the past 50 years. The creation of new debt accelerated to $3.40 for each $1.00 in net investment.

Values of all major asset types grew relative to GDP as real interest rates declined

By 2021, four types of assets made up 80 percent of the three interlocking global balance sheets (financial sector, financial balance sheet of nonfinancial sectors, and the real economy): real estate (27 percent), equity (21 percent), debt (20 percent), and currency and deposits (12 percent). All four have risen relative to GDP since 2000, including real estate by 33 percent more, equity by 100 percent more, and debt by 90 percent more. Currency and deposits grew 124 percent faster than GDP.

The broad pattern of growing asset value holds across economies, but with variations in timing and relative pace of growth across asset types. Taking the United States as an example, the four largest balance sheet items outgrew GDP by between 50 percent (real estate) and 200 percent (equity) at market values relative to 1995 values (Exhibit 3). In the United Kingdom, growth was faster still in real estate and debt, and slower in equity. In Germany, balance sheet expansion was less pronounced across asset classes.

A structural decline in real interest rates underpinned the expansion of the balance sheet, all while economic growth remained sluggish. For example, in the United States, forward-looking expectations for real interest rates steadily declined between 1995 and 2021. Low interest rates encouraged borrowing, lowering the cost of loans and bonds and spurring commercial banks to collect-and create-deposits. In highly simplified terms, an overhang of capital chased too few productive investment opportunities, and much of it flowed to real estate and equity, driving up prices. Debt rose faster than net investment, and paper wealth grew.

In the rest of this section, we explore the drivers of balance sheet growth across the four asset classes.

Falling real interest rates fueled the rise of real estate values

The decline in real interest rates has played a remarkable role in driving real estate valuations (Exhibit 4). Investors could afford to pay more for a property with a given rent, and therefore value-to-rent multiples rose. The cost of equity for real estate also fell, amplifying the effect. This meant that the effective yield of real estate, or cap rates, dropped.

There are some country variations. In the United States, for example, the market value of real estate expanded 1.5 times faster than GDP from 1995 to 2021. While there was a significant correction after the global financial crisis, the rise quickly resumed. Declining real interest rates drove almost the entire increase.

In the United Kingdom, real estate grew even more strongly relative to GDP than in the United States. Declines in the real estate cost of equity played a comparatively larger role. As investors felt prices could only go up, risk perceptions and the cost of equity declined sharply before the global financial crisis. After correcting upward as a result of that crisis, the cost of equity fell again.

In Germany, real estate values experienced a long period of decline relative to GDP in the late 1990s and early 2000s as a real estate bubble in eastern Germany following reunification corrected. As a result, the German real estate industry went through the global financial crisis relatively unscathed and then began to catch up rapidly as interest rates declined.

Declining real interest rates drove growth in equities, and in the United States, increasing returns on capital also played an important role.

Falling real interest rates boosted equity values across economies as future earnings were discounted at a lower rate. In both the United Kingdom and Germany, falling rates were responsible for all of the growth in equity values relative to GDP between 1995 and 2021. In the United States, they contributed about one-third of this growth (Exhibit 5).

However, another powerful factor was also at work in the United States: a rising GDP share of corporate earnings, which contributed two-thirds of the growth in equity values versus GDP. The earnings share of GDP rose by 80 percent from 1995 to 2021 to 12.3 percent-the highest share in a century (Exhibit 6). The earnings share grew despite the fact that the stock of corporate capital, as is common, closely tracked GDP.

Our analysis suggests that investors did not-and do not-expect the earnings share to rise further. Yet investors do seem to build in an expectation for the earnings share to remain at today's high levels and for long-term real interest rates to stay low, judging by current US equity valuations.

For each $1.00 of net new investment, $1.90 of new debt was created

With equity values climbing, debt rose sharply, too, and, with it, equivalent wealth for lenders and bond holders. By the end of 2021, in the United States, Japan, China, and all major European economies other than Germany, debt was not only higher relative to GDP than in 2000 but even increasing from the peak following the 2008 global financial crisis. In the United States the figure climbed from 2.5 to 2.8 times GDP, in the United Kingdom from 2.5 to 2.8, in Japan from 3.4 to 4.3, and in China from 1.6 to 2.7. In Germany, debt remained stable at about 2.0 times GDP.

Globally, for every $1.00 of net investment, $1.90 of additional debt was created. Much of this debt financed new purchases of existing assets. Rising real estate values and low interest rates meant that households could borrow more against existing homes. Rising equity values meant that corporates could use leverage to reduce their cost of capital, finance mergers and acquisitions, conduct share buybacks, or increase cash buffers. Governments also added debt, particularly in response to the global financial crisis and the pandemic. Interestingly, rising bond prices as interest rates declined played only a minor role driving the debt-to-GDP ratio, as the time range used is much longer than typical bond maturities.

Currency and deposits in commercial and central banks have expanded

Growth in deposits exceeded GDP growth in the United States, the United Kingdom, and Germany. In the United States, the volume of currency and deposits in commercial and central banks expanded from 0.6 times GDP in 1995 to 1.2 times GDP in 2021; it is now 80 percent higher relative to GDP than the average of the past century. In the United Kingdom deposits grew from 1.9 times GDP in 2000 to 3.5 times GDP in 2021, and in Germany from 1.4 times GDP to 1.9 times GDP.

In the United States, the rise unfolded in three waves, with varying drivers. Loose mortgage lending before the global financial crisis in 2008 triggered the first wave. At the financial system level, every new loan requires a corresponding new deposit. A second wave came with quantitative easing and thus the creation of central bank (or "outside") money in response to the crisis. Finally, a third wave occurred with another round of quantitative easing in response to the pandemic. Moreover, the support for households and firms during the COVID-19 pandemic led to excess saving as households spent less during lockdowns.

Weak investment and excess saving have prevailed over the past several decades, underpinning expansion of the global balance sheet. There was a relative paucity of productive options for savers-retail as well as institutional-and the price of existing homes and shares duly rose. GDP growth remained below its structural potential. Central banks kept interest rates low to stimulate economic activity, aiming for their inflation targets. This was classic "secular stagnation."

Much in the world certainly seems to be shifting, from geopolitics to technology, energy systems, and demographics. It is possible that the more structural forces behind high savings and weak investment will themselves shift, although this remains a matter of uncertainty and debate.

Will investment requirements and demand for capital grow after decades of decline?

Over the past several decades, there has been too little productive investment. In advanced economies, net investment has declined as a share of GDP. In the 2010s, this ratio was roughly 50 percent lower than before the 2008 financial crisis in Europe, and 40 percent in the United States (Exhibit 7). Markedly, in the aftermath of the global financial crisis, private-sector investment plummeted in the face of uncertainty and weak demand outlooks. Capital deepening (growth in capital stock per worker) dropped to the lowest rate in the post-World War II period. Public investment has also lagged, including in infrastructure and affordable housing. In infrastructure, for example, past MGI analysis showed that the United States invested about 0.4 percent of GDP less than the estimated amount needed to support economic growth between 2010 and 2020.

Uncertainty is high and decisions can yet determine the path ahead, but overall, investment, and thus demand for capital-and its cost-could well rise substantially. Even if not all incremental investment is productive, economic growth could accelerate.

Infrastructure investment rises.Particularly in the United States, a shift appears to be emerging after decades of underinvestment in infrastructure. For example, the Infrastructure Investment and Jobs Act, signed into law in November 2021, provides for an incremental $550 billion in government spending focused on public transit, high-speed broadband, clean drinking water, and electric vehicle charging infrastructure. Higher infrastructure investment will accelerate productivity growth.

Energy transition gains momentum. MGI research suggests that the net-zero transition alone will need incremental investment equivalent to about two percentage points of GDP in the 2020s. This will likely initially dampen productivity growth at first but could accelerate it in the long run.

Intangible assets continue to grow. Investment in intangible assets, such as in digitization and R&D, has risen and will continue to rise steadily as they become structurally more important for the economy. However, two factors have limited the speed of this growth. First, the skills needed to deploy intangible assets have been in short supply. This could change with increased investment in skill building and deployment of easier-to-use AI technology. Second, intangible assets have struggled to serve as a vehicle for long-run savings. Because of their shorter life cycles, they can absorb savings only for a more limited period before becoming obsolete or passing value on to consumers as competition picks up. While regulation could limit such spillovers, this would be negative for growth.

Geopolitics drive a stepping up in investment related to defense, supply chains, and industrial policy. More fractured geopolitics may increase investment in supply chain reconfiguration, industrial policy initiatives, and defense-with mixed outcomes for productivity. New business investment is rising in areas like chips and clean tech, and supply chains are being reconfigured. Done well, this can lead to more resilient and still productive local economies, but it can also lead to less efficiency at a global scale. In the case of defense, European economies have tended to not invest in line with their NATO commitments, but in the wake of Russia's invasion of Ukraine, they are stepping up. While some of these investments may generate productivity, especially at the national level, politically induced investments do generally face the risk of unproductive capital allocation.

Are the forces behind the savings glut on the wane?

Three factors that drove a glut of savings in the past stand out. Each of them may be shifting:

Rising inequality and declining labor share of income: Reversal under tight labor markets? For decades, inequality rose and the labor share of income declined. This has reduced consumption by channeling a disproportionate share of value creation to the wealthy, who tend to save more than the population overall. Rising saving by the wealthy has bid up prices for assets, particularly those with expected higher returns. At the same time, corporate earnings have grown rapidly, particularly in the United States, driving equity valuations and thus balance sheet growth further.

Some of the factors underpinning income inequality and declining labor shares may shift in the longer term, boosting consumption relative to savings. In the United States in recent years, the trajectory on both, labor share and inequality, has already become much flatter (again, see Exhibit 7). Workers' bargaining power could rise if the labor market remains tight and unions regain influence, particularly in the United States. Superstar dynamics and globalization, which lifted incomes for all but not in the same way for everyone, are being exposed to changing domestic and global politics and rules. Talent shortages have boosted wages in general, particularly for higher-skill workers. At the same time, automation has undermined the wages of low- and medium-skill workers. The advent of generative AI may affect the wage premium for skills. For now, it is too soon to know where we are going. In 2022 and early 2023, wage growth did accelerate markedly, but in most economies it remained below inflation, and earnings have grown faster.

Aging: Shift from saving for retirement to spending in retirement? An aging population has consequences for an economy's aggregate savings rate. The conventional view holds that households accumulate wealth to prepare for retirement and then run down savings in retirement. But, with some variation across countries, households have not been spending savings as much as the conventional argument suggests, rather keeping capital as precautionary savings and to be inherited by their offspring; this is the so-called retirement savings puzzle.

Do demographics therefore imply a continuous savings glut, or are we more likely to experience a "great reversal"? The mainstream view's answer is that the savings surplus is set to continue for an extended period. But a minority position holds that the trend is about to break, that consumption expenditure (such as old-age healthcare costs) could rise substantially, and aggregate savings could fall. In addition, a rising dependency ratio means that the number of people dissaving in retirement relative to those saving during working life will grow (again, see Exhibit 7). Balance sheet expansion-asset valuation effects-also may play a role. If retirees no longer benefit from the same rate of asset price appreciation as in past decades, they will have to consume more of their savings.

Savings glut from net exporters: Retreating?Particularly after the 1997 Asian financial crisis, economies in the region built up large foreign reserves to self-insure as a buffer against future shocks, which repeatedly led to sudden stops in capital flows. Much of this pool of reserves was invested in US Treasuries, bidding up their prices, which is tantamount to lowering their yields. The stunning net exports of China, but also of other net exporters like Japan and oil-exporting countries, added to this trend. China's foreign reserves peaked at nearly $4 trillion in 2014, of which more than $1 trillion was directly invested in US Treasuries. But those holdings have since declined. Amid rising geopolitical tensions, the future path remains to be seen.

Can supply respond?

If the balance between investment and savings does shift, headwinds from demographics and geopolitics may make it difficult to meet the demand generated. Global labor supply grew rapidly in recent decades, adding capacity to an economy with soft demand. In advanced economies, rising participation by women has so far compensated for a rising share of the population in retirement age. However, as the population continues to age, the relative number of working-age people will continue to fall. In addition, about 60 million workers around the world ultimately serve North American demand, and about 50 million European demand. Geopolitical forces may affect these global flows and increase supply pressures locally.

On the upside, technology promises to generate tailwinds for supply. Could they move the economy from productivity stagnation to more innovation in and diffusion of technology? Past decades were characterized by slow productivity growth across advanced economies. So far, digitization has not translated into increasing productivity growth. But this could change as adoption spreads and technologies such as artificial intelligence add new capabilities.

To provide a window into an uncertain future, MGI developed four scenarios for how the economy and the global balance sheet might evolve in the period to 2030 (Exhibit 8). They differ in how forcefully and persistently the balance of desired savings and investment described in the previous section will shift, and in choices about monetary and fiscal policy as well as productivity investments. Each of the pathways is plausible; none were developed using extreme or low-probability assumptions (for more detail, see sidebar, "Development of macroeconomic scenarios".)

Each scenario-return to past era, higher for longer, balance sheet reset, and productivity acceleration-includes a pathway to 2030 for GDP growth, inflation, and interest rates, the aim being to explore the longer-term trajectory rather than to make short-term predictions for the next year or two (Exhibit 9). MGI built a quantitative scenario model for the United States, United Kingdom, and Germany, but the characteristics are applicable more broadly.

Return to past era scenario: Unsustainable balance sheet expansion at the expense of GDP growth

It remains possible that shocks will prove temporary, the structural overhang of savings will prevail, low interest rates will return, and balance sheet expansion will resume. At first blush, this scenario may appear attractive because wealth continues to grow. But that growth comes at the expense of real economic output, accentuates inequality, and continues to raise the risk of financial stress and future corrections (all numbers in this and the three other scenarios are for the United States).

The "return to past era" scenario may appear attractive, but growth comes at the expense of real economic output, accentuates inequality, and continues to raise the risk of financial stress and future corrections.

What happens: Secular stagnation returns. In this scenario, inflation comes down over the next couple of years to well below 2 percent. Labor market tightness subsides, and unemployment settles at previous or slightly elevated rates. Demand is weak and mediocre GDP growth resumes, averaging roughly 1 percent between now and 2030. The earnings share of GDP continues to grow. Smart money chases opportunities in capital appreciation, such as real estate, rather than productive investment. Real interest rates turn slightly negative again. Capital is misallocated, and productivity growth remains low.

Balance sheet outcomes: Continued expansion and vulnerability. The balance sheet continues its secular expansion relative to GDP, but, as before, remains vulnerable to future shocks and disruptions. The total market value of equity, adjusted for inflation, grows roughly in line with past rates as the tailwinds of strong earnings and low interest rates continue. The value of real estate continues to benefit from low interest rates. The total value of bonds grows as leveraging resumes. Only deposits modestly retreat as central banks reduce the size of their balance sheets. Real household wealth grows by a cumulative 28 percent, or $40 trillion on paper, with rising wealth inequality.

Higher for longer scenario: Using inflation to lower balance sheet vulnerabilities at the expense of price stability

If investment picks up and the savings glut wanes in a meaningful and persistent way despite headwinds impeding GDP growth, inflationary pressure may become entrenched. Then if policy tightening remains moderate due to financial stability risks, the economy may experience a higher for longer scenario. This scenario has parallels with 1970s stagflation in the United States, albeit with somewhat lower inflation (4 percent rather than 9 percent). While the lack of price stability in this scenario is problematic, it comes with solid income growth, positive (if not impressive) growth in wealth, and improved balance sheet stability.

While the lack of price stability in the "higher for longer" scenario is problematic, it comes with solid income growth, positive (if not impressive) growth in wealth, and improved balance sheet stability.

What happens: Persistently elevated inflation and rates. In this scenario, inflation settles at roughly 4 percent as tight labor supply continues and the net-zero transition, supply chain reconfiguration, and national defense add two to three percentage points to the investment share of GDP. Nominal wages rise quickly, and consumption is strong. Policy rates rise in response but, with rising stress in the financial system, not by enough to bring inflation down to target. Strong demand and higher investment-even if not all of it is productive-support GDP growth somewhat above the recent trend. With bargaining power shifting in favor of workers and more forceful competition policy, corporate earnings grow more slowly than labor income and GDP. Risk premiums rise by one to two percentage points relative to averages over the past decade as volatility stays high.

Balance sheet outcomes: Stagnation in real values and balance sheet contraction relative to GDP.The size of the balance sheet overall starts to revert toward historic averages relative to GDP, due to the combination of inflation and somewhat stronger GDP growth. As earning growth slows, the total market value of equity (adjusted for inflation) contracts in absolute terms and as a multiple of GDP. The market value of real estate falls in real terms as higher interest rates weigh more strongly for investors than inflation protection benefits and additional construction. Debt and deposits grow to finance higher investment, but more slowly than inflation; their ratios to GDP also decline. Real household wealth contracts by a cumulative 8.5 percent or $12.6 trillion.

Balance sheet reset scenario: A drawn-out recession is the worst case for wealth, income, and financial stability

Tighter policy, perceptions of rising risk, and stress or even failures in financial systems could lead to a sharp correction in asset values as well as a prolonged recession and a period of deleveraging. Monetary and fiscal policy cannot come to the rescue as they did in the global financial crisis because balance sheets are already large. This scenario bears some resemblance to what happened in Japan in the 1990s.

What happens? A very hard landing and an almost-lost decade. Forceful monetary and fiscal tightening ends the bout of inflation. But higher real interest rates expose elevated debt levels and asset prices, which drop significantly. Financial institutions come under pressure with potential additional bank closures; value losses in bonds as well as in commercial and other real estate bite strongly into capital buffers. In the worst case, liquidity crunches force a fire sale of assets, further depressing values and triggering more systemic financial stress. Affected countries-and even the global economy-face debt restructuring or a drawn-out period of deleveraging. Uncertainty and risk premiums rise materially, and monetary and fiscal policy softens again to stabilize economic activity. Balance sheet adjustment drags down economic growth via deleveraging and thus weak demand as consumers pay back debt rather than spending. The supply side sees zombification of firms, banks, and assets, as well as capital starvation and weak investment. Deleveraging could last for a decade, and GDP growth would be one percentage point lower than in the previous decade. What makes the situation particularly difficult is that almost all sectors and countries are affected simultaneously at this stage, but deleveraging of one sector or country typically requires another one to add debt. Socializing the losses could accelerate the adjustment, but it is more difficult to achieve with already-high public debt and long central bank balance sheets.

Balance sheet outcomes: Asset correction and deleveraging.Overall, the size of the balance sheet corrects relative to GDP. The total market value of equity declines in real terms and as a multiple of GDP. Equities are negatively affected by a brief spike in real interest rates (but then supported as rates come down again), increased uncertainty and risk premiums, and muted GDP growth and earnings expectations. For instance, US equities and real estate values might drop by more than 30 percent between now and 2030. Real estate values fall in real terms and relative to GDP, driven primarily by higher rates as well as falling tolerance for risk. Bond premiums grow, and debt and deposits come under pressure from deleveraging, although the public sector is assumed to have to further grow its debt to stabilize the economy. Real household wealth declines by a cumulative 20 percent-as in the case of total net worth in Japan in 1990 to 2000-or $30 trillion by 2030.

Productivity acceleration scenario: The Goldilocks outcome; rapid GDP growth improves wealth and balance sheet health

The scenario decision makers should strive toward is the one in which investment strengthens and is productive, accelerating productivity growth. This scenario somewhat resembles the period of very rapid productivity growth in the late 1990s and early 2000s. The balance sheet grows, but less quickly than GDP, and therefore is healthier and more sustainable.

What happens? Productive investment and technology adoption step up to drive productivity. The forces outlined in the previous section lead to continued strong demand and an abundance of attractive investment opportunities. New investment materially accelerates productivity growth and GDP growth by one percentage point compared with the past decade. Faced with tight labor markets, firms accelerate investment in and adoption of digital and automation technology, fostering productivity growth. Reimagined supply chains remain efficient, and a new wave of emerging economies provides ample global labor. Industrial policy successfully drives innovation and technology. Fast supply growth moderates inflationary pressure. Inflation declines to target while real interest rates rise to about 1 percent on average, further supporting productive capital allocation.

Balance sheet outcomes: Sustainable growth.Thanks to rapid GDP growth, the size of the balance sheet overall as a multiple of GDP declines slightly. The total real market value of equity grows only modestly more slowly than in the past, but it declines relative to accelerating GDP. Faster economic growth nearly compensates for losing tailwinds from a growing earnings share of GDP and a slight headwind from rising real interest rates. The value of real estate (adjusted for inflation) broadly stagnates, and it therefore declines relative to GDP. The total value of bonds grows to finance higher investment despite headwinds from interest rates. In a stable economy, deposits shrink in real terms as central banks roll back their balance sheets with quantitative tightening. Real household wealth grows by a cumulative 11 percent or $16 trillion.

The divergence of asset values and debt from GDP may end, reshaping the economic, banking, and investment landscape

Decision makers have become used to a balance sheet, both debt and asset values, that outgrew GDP for decades, but the next decade could see the world heading in a materially different direction. In all but one scenario-the return to past era-current asset price and financial system volatility prove to be only the early signs of a fundamental shift in how the balance sheet grows relative to GDP. In three of the four scenarios, the balance sheet contracts relative to GDP, be it via asset correction and deleveraging, inflation higher than nominal asset and debt growth, or faster GDP growth (Exhibit 10).

Growth in equity, real estate, bonds, and deposits looks markedly different than in the past two decades. For instance, during the past 20 years, the total market value of the equity of listed as well as unlisted companies has grown by 5 percent annually in real terms; in the period to 2030, rates vary between minus four percent in a balance sheet reset scenario and plus six percent in a return to past era scenario. (Note that these numbers represent total market value growth, not performance, nor price.)

There are similarities and variations depending on the country. Notably, equities decline less in Germany and the United Kingdom than in the United States in the higher for longer and balance sheet reset scenarios, largely reflecting the fact that they did not experience as large a run-up in corporate earnings. In real estate, Germany and the United Kingdom experience a smaller decline relative to GDP than the United States in the higher for longer and productivity acceleration scenarios as interest rates rise less amid somewhat slower growth.

Decision makers will need to adjust their thinking to potentially a very different world economy and global balance sheet in the decade ahead, and indeed for an unusually wide range of potential outcomes. This calls for longer-term thinking, and a much broader set of indicators-including the global balance sheet itself-to be accounted for in strategy and planning than arguably they have been used to. Governments and corporations alike should collectively strive toward accelerated productivity growth, the only one of MGI's modeled scenarios that achieves strong growth in income and wealth over the long term and a healthy global balance sheet. At the same time, however, they should actively prepare for less favorable outcomes.

Striving toward higher productivity is vital

Productivity growth and the choices made to achieve it are of preeminent importance in the current environment. Only an acceleration of productivity growth can underpin economic growth in the long term-and a healthy, sustainable global balance sheet. The situation has become much more urgent and important. Typically, policies to drive productivity achieve a few tens of basis points of additional economic growth. Now, the difference in household wealth between a productivity acceleration and a balance sheet reset scenario amounts to $48 trillion in the United States alone. Monetary and fiscal policy makers face a predicament: fail to tighten enough, and inflation stays uncomfortably high; tighten too much, and wealth and the financial system face stress. Without faster GDP growth, the line between these outcomes may be very thin.

Only an acceleration of productivity growth can underpin economic growth in the long term-and a healthy, sustainable global balance sheet.

What is needed to achieve a productivity acceleration scenario? First and foremost, it requires productive capital allocation and investment as well as more rapid adoption of digital tools, MGI research has shown. Reshaping the financial system to focus capital allocation toward new, productive capital formation could also help. What could shift the relative attractiveness of financing new businesses and projects in energy or infrastructure versus financing existing asset transactions like mortgages for existing homes at ever-rising prices or leveraged buyouts?

Moving toward higher productivity growth also requires decision makers to believe that it is achievable and to translate it into a credible outlook. If firms prepare for a slowdown in GDP growth or a recession, they are less likely to invest. Instead, waiting becomes attractive. Real estate developers, for instance, expecting lower prices, will delay developing new projects. Banks focused on strengthening their balance sheets will tighten lending standards, reducing the production of loans. All this might set the scene for a self-fulfilling prophecy of doom and gloom. Leadership from both public and private sectors will need to articulate the basis for the acceleration scenario in order to make it happen.

Firms will need to develop strategies to get ahead of a broad range of long-term outcomes

Since uncertainty may persist for at least some time, firms will need to plan for multiple scenarios. Past strategies may work well in a return to past era. Yet the other possibilities, and particularly the higher for longer and balance sheet reset scenarios, involve ruptures that arguably need a material shift in thinking, particularly among investors and financial institutions. Reacting to shifts in the macro environment will no longer suffice. Firms should identify markers for which scenario the world is headed toward, plan for a sufficiently broad set of scenarios, and test risk management approaches, as well as adjusting business models and seeking new growth opportunities.

Identify markers for which scenario the world is headed toward. Many players still emphasize short-term financial indicators such as the latest inflation readings, an interest rate decision by the US Federal Reserve or Bank of Japan, and the reaction to any of these in the financial markets. Longer-term structural shifts generally attract less attention.

Given today's high uncertainty and structural forces shaping possible futures, decision makers need to look further ahead. This means tracking indicators on the factors that might drive investment and savings, which are now shifting. They should also look at long-run drivers of supply and productivity growth, as well as the political and economic constraints that may shape the trajectory of fiscal and monetary policy.

Plan for a sufficiently broad and long-term set of scenarios.What consequences would business bear, for instance, if interest rates and inflation stayed high for a decade or, in contrast, if GDP growth were to materially accelerate? To provide some examples:

How can investors and asset managers develop foresight and adjust asset portfolios? "Everything will be fine if you take a ten-year perspective" may apply less than in the past, whether for asset prices, financing conditions, or economic parameters. The scenarios have significantly different outcomes for different asset classes, and these need to be accounted for. For instance, in a higher for longer scenario, asset managers will want to contemplate reducing their relative weighting of growth equity funds. In several scenarios, cap rates would rise and stay higher, affecting investment cases for real estate developers.

How can banks rethink deposit models and secure liquidity and longer-term funding in the transition to a new interest rate regime? In several scenarios, deposits will fall at a systemic level, not only for individual banks.

Test and strengthen risk management approaches.This might include bolstering equity buffers, strengthening balance sheets, or offloading macro risk. Stress-testing business models and balance sheets to these scenarios-or reverse stress-testing which parameters and thresholds would expose the largest vulnerabilities-should be a priority.

Adjust business models and seek new growth opportunities. A sustained shift in the macro environment can make some business models partially obsolete and others newly attractive. To provide some examples for the questions that may be asked:

For investors, how to prioritize opportunities to capture value creation, including earnings and rent growth in scenarios where multiples no longer expand? Even with market headwinds, there will, of course, be opportunities in individual investments, from neighborhood redevelopment in postpandemic real estate to new business models in corporations. And in any case, increasing fiscal support, with rising investment in defense, energy, automation, and AI, could be available.

For financial institutions, how to restructure business models that often are still hardwired into an expanding balance sheet, abundant liquidity, and substantial maturity transformation of liabilities? What sources of revenue beyond net interest income could be most promising across scenarios? Examples for fee-based income include payments, advisory transaction pricing and facilitation, the origination and financing of new capital projects, and ecosystem services such as real estate brokerage and moving services. Mortgages (even more so in commercial real estate) and Lombard loans may require a critical reappraisal.

For banks, how to anticipate substantial shifts of product, customer segment, and geographic attractiveness? Increasing the speed of capital and business reallocation could pay off and capture money in motion ahead of competitors. In a higher for longer scenario, for instance, lower- and middle-income and -wealth quintiles could make up some of the ground they lost to higher-income and wealth quintiles. M&A opportunities will abound.

The turbulence of recent times is a shock to the system after a period of relative calm for the global economy and uninterrupted decades of rising wealth (and debt) on paper. The path ahead is highly uncertain, the range of possible scenarios unusually wide. The situation demands that assumptions be revisited and planning, strategy, and business models adjusted. The adjustment from what went before may well be prolonged.

# data[].attributes.attachment_link.title
The future of wealth and growth hangs in the balance

# data[].attributes.attachment_link.description
The future of the global economy's growth hangs in the balance. In this article, we look at four possible scenarios when it comes to global wealth.

# data[].attributes.attachment_link.title
Why Gen Z talent will make or break the future of banking

# data[].attributes.attachment_link.description
To attract talent with tomorrow’s skills, banks will need to win over a Gen Z workforce. Learn more.

# data[].attributes.attachment_link.readable_text
Geopolitical Risks on the Rise

Financial markets around the world are increasingly being pushed and pulled by geopolitical dynamics. J.P. Morgan Research highlights the key, market-moving risks to watch out for.

April 10, 2019
Heightened geopolitical risk has become the new normal, with uncertainty surrounding policy, international relations and political leadership now a driving force behind financial market volatility and sentiment. In this report, the J.P. Morgan Research team takes a closer look at some of the main themes and sources of increased geopolitical risk and how these risks could impact markets.

# data[].attributes.attachment_link.description
J.P. Morgan Research highlights the key, market-moving risks to watch out for. Read more.

# data[].attributes.attachment_link.readable_text
The banking sector is at a turning point. Key measures for banks are at a historical low point. The sector's price-to-book value has fallen to less than one-third the value of other industries. That gap is less the result of current profitability and more about uncertain profit growth in the future. While banks have pushed for great improvements recently, margins are shrinking-down more than 25 percent in the past 15 years and expected to fall to 30 percent, another 20 percent decrease, in the next decade.

Regulation and increasing intersectional competition are still worries, but the bigger threat is a global trend: new challenges-often from different industries and often benefiting from the kind of cross-industry platforms behind the recent success of companies such as Amazon, Google, Microsoft, PayPal, and Spotify-with a vastly superior economic model. The market believes that banks are headed in the wrong direction, without a future-proof strategy.

We believe that the skeptics are right about today-and wrong about tomorrow. Banking is facing a future marked by fundamental restructuring. But we also believe that banks that successfully manage this transition will become bigger and more profitable and grow faster while leading to a value creation opportunity of up to $20 trillion.

In the next era, banks can realign to compete in new arenas, organized around distinct customer needs. These arenas will expand far beyond the current definition of financial services, and they will also be hotly contested by a wide range of tech giants, tech start-ups, and other nonbanks. But this daunting reorganization, or breakup, could also provide banks with a huge opportunity: higher margins, new revenue streams, and loftier valuations. Ambitious banks can break free from stagnant valuations, thrive, and grow if they are willing to embrace the platforms of the future and make a few strategic, informed big bets.

Why break up? First, economic forces and technology have ended the run of the universal-bank model, and investors already are recognizing radical specialization to be greater than the traditional one-stop shop. By contrast, the future model relies on breaking up into four specialized platforms we will describe. Organizing around these areas will be a structural advantage.

In this article, we aim to draw a picture of what the future of banking could look like. We examine the forces currently squeezing bank revenue, value, profits, and usefulness to customers. We identify five distinct areas where banks may well have to transform to thrive.

Of course, we don't know exactly what banks will look like in the future. Regulation, technology, geopolitical shifts, and unforeseen innovations could radically alter the way that the industry develops. But we do believe that the banks that successfully manage the coming transition will use tech and data to embed themselves deeper into customers' lives with real-time services that were unimaginable just a few short years ago. The opportunity is great for those who move fast into this new future.

Banking is losing its traditional advantages

Until recently, big banks drove profits and growth by applying synergies, economies of scale, and access to huge pools of capital. This massive industry already manages an estimated $370 trillion in worldwide assets, and its growth is accelerating. We project that global assets will grow to between $500 trillion and $550 trillion in the next decade.

While traditional banks have been convenient one-stop shops for businesses and consumers, many haven't evolved their products in a way that matches the tech-driven pace of change in other industries. Products such as checking accounts, loans, and even corporate advisory can seem undifferentiated. And people increasingly feel frustrated by the financial fragmentation that banks have imposed on many consumer processes. For instance, buying a home once required navigating a confusing world of disconnected real-estate brokers, mortgage lenders, insurance companies, lawyers, renovation contractors, and so on. Our grandparents tolerated those frustrations, but they also used pay phones. There were no other options. Today, we are awash in new ways to reach and connect with consumers. Banks need to identify and engage these customers-as their newer competitors are doing.

While traditional banks have been convenient one-stop shops, many haven't evolved their products in a way that matches the tech-driven pace of change in other industries.

To compete, most banks will have to embrace cross-industrial platforms. These new platforms dismantle the barriers between traditional industries, reshaping customer behavior and turning formerly linear value chains into ecosystems that fulfill customer needs in new ways. The process has already reached critical mass in industries such as healthcare, media, music, and retail, where diverse players are connected by platforms created by global leading companies that have been amply rewarded by the global capital markets. In contrast, banks have been consistently undervalued by the capital markets, making banking the lowest-valued sector in the world in 2021.

Because of cross-industrial "platformization," banks must now compete with any organization that has the capacity and desire to offer any kind of financial services. Global tech giants such as Google and Tencent have used their platforms to offer banking services seamlessly to their millions of customers. But new competition is booming exponentially around the world.

Tech advances have eliminated size as an advantage in providing excellent services, winning customer loyalty, aggregating and analyzing data, and building networks of capital. Roughly 200 digital banks have launched since 2015, as have new brokerages such as Robinhood, wealth-advisory services such as Betterment, alternate investment banking paths such as special-purpose acquisition companies, payment platforms, and start-up capital platforms such as SeedInvest Technology.

The new competitors have raised the bar on customer expectations. Both individual and organizational customers now seek a long list of attributes from their financial-service providers. Surveys show that these desires include high levels of personalization, zero friction, and a commitment to social and environmental impact. The markets believe that the newcomers can meet their customers' demands. As of September 2022, there were at least 274 fintech companies with a unicorn valuation of more than $1 billion, up from just 25 in 2017. Collectively, they have a market value of more than $1 trillion.

Many traditional banks, on the other hand, face stagnant or decreased revenue and profits. The average global banking ROE was around 9.5 percent in 2021-a significant recovery from 6 percent in 2020, but a sharp decline from 15 percent prior to the 2008 crisis. By 2030, we project that it will fall below 7.2 percent.

These falling margins are contributing in turn to weaker stock market valuations. Banking stocks trade at an accelerating discount to other industries-from a 15 percent discount in 2000 to a 70 percent discount in 2022. This means that global investors are voting with trillions of dollars against the future profitability and sustainability of the existing business model of universal banks.

Competitive arenas and business models are emerging in banking

The era when all financial services were dominated by monolithic banking entities is over. What, then, will arise to take its place? We believe that the future of banking will be contested by banks and nonbanks in five cross-industry competitive arenas: everyday banking, investment advisory, complex financing, mass wholesale intermediation, and banking as a service (BaaS).

The future of banking will be contested in five cross-industry competitive arenas. In the next decade, revenues for all these arenas could grow by as much as three to 30 times.

While these arenas encompass the products and services provided by banks today, they will be redefined and reinvented by different customer needs. This new competitive landscape has transformative potential. In the next decade, revenues for all these arenas could grow dramatically, by as much as three to 30 times.

In each of the five arenas, we see the potential for at least two platform business models. These ten platforms aren't theoretical models. They are trends that we already see in progress among organizations that are winning better valuations in the capital markets.

Everyday banking

Everyday banking encompasses day-to-day financial services, such as checking and savings accounts, credit cards, personal loans, payment processing, and lines of credit on the traditional-banking side, for individuals and for small and medium-size enterprises (SMEs). This arena will also include e-commerce ecosystems, loyalty programs, discounts, advertising, and peer-to-peer marketplaces-making banking not a chore or obligation but something easy and even enjoyable (see sidebar "A full-fledged e-commerce bank: Kaspi"). For SMEs, it will include tools to help organizations manage their finances.

The common thread of all these services is that customers want them to be hassle free, reliable, highly automated, and inexpensive in their day-to-day life (see sidebar "A multipronged approach: Royal Bank of Canada"). The ultimate goal for everyday banking is invisibility -offering services that are cheap and easy and accessible through all channels via business models such as the following:

Commerce marketplace specialist (CMS). Specializing as a commerce marketplace offers everyday banking for individuals and many nonbanking services via a marketplace platform (see sidebar "Commerce marketplace specialist: From WeChat to WeBank"). It can be a single access point for anything from consumer goods and electronics to home-cleaning services and movie tickets, all connected to bank accounts, or niche solutions embedded into selected specialized journeys. A CMS uses automation and personalization to make everything simple-online, offline, and eventually in the metaverse. It will have to compete with the generalist and specialist e-commerce platforms of tomorrow.

Business gateway provider. Serving as a gateway provider offers everyday banking for SMEs via an integrated online portal, aggregating services that facilitate payments, cash flow financing, accounting, taxes, and so on. It allows organizations to focus on their core activities by automating many of the basic activities of running a business.

A business gateway provider will compete with online accounting platforms, software companies, and even telcos for the small-business service ecosystem.

Investment advisory

Investment advisory is the arena to provide investment and insurance products for all kinds of customers, from young people just starting to build wealth to older people who need sophisticated investments and protection to institutions. This includes financial planning, brokerages, trusts, retirement plans, and many kinds of insurance. People crave tailored advice and trust-based relationships that make them feel understood, even when dealing with virtual advisers online.

On the business side, this arena comprises the advisory aspects of investment banking and other financial-advice services. The goal for investment advisory is superb personalization -blending the human touch with digital efficiency through business models such as the following:

Personal wealth and health guardian. Guarding personal wealth and health means offering investment and personal-protection advice in the broadest sense, including health insurance, virtual care, and life insurance. It features a blend of human experts and highly personalized AI that can guide customers through a broad range of investment and protection options. Imagine a retirement plan, aid in college savings, and protection against surprise medical costs-just a few of the services a guardian provides.

B2B advisory boutique. Serving as a specialist in B2B advising means offering tailored investment advice for corporate customers, with high-level expertise in specialties such as asset management and debt options.

Complex financing

Complex financing is the arena for individual and business services that require more sophistication than everyday banking. Examples include mortgages, home equity loans, car loans, and start-up loans. Such services are complex because many kinds of players are part of each ecosystem.

While familiar, these products and services are used less frequently than others, but they have a big impact on the customer. For instance, getting a mortgage is just one aspect of buying a home, which requires navigating a maze of real-estate brokers, lenders, insurers, attorneys, and other professionals. Consumers crave a trusted expert to help them get through that maze and simplify it, weaving it into a single touchpoint.

The end goal for complex financing is journey integration -making these processes convenient, efficient, fast, and low cost yet also as personalized as possible from start to finish via business models such as the following:

Real-estate-journey orchestrator. Serving as an orchestrator of the real-estate journey means handling the complex process of buying, renting, operating, and selling real estate for both individuals and companies and coordinating across mortgages, insurance, utilities, and maintenance with seamless integration. The orchestrator can compete to become the end-to-end "concierge," integrating mortgages or rents and all other services into a subscription model.

Equipment and vehicle marketplace specialist. Specializing in the equipment and vehicle marketplace means providing complex financing of cars, trucks, and industrial equipment for individuals and businesses. It can create marketplaces for these high-price goods and support a customer's journey from selection to financing, insurance, maintenance, and resale.

Mass wholesale intermediation

Mass wholesale intermediation is the corporate-focused arena. It's a combination of expertise and new, efficient systems. It includes corporate finance, cash management, portfolio management, M&A advisory, equity and debt financing, and other traditional investment banking offerings. The ultimate goal for mass wholesale intermediation is extreme efficiency-and know-how -which banks can pursue through business models such as the following:

Automated trading and funding marketplace. Serving as an automated marketplace means offering mass wholesale products and services for corporate customers. This model automates large marketplaces of liquid capital via superefficient, frictionless, low-cost platforms, including "tokenization" through smart contracts.

Integrated enterprise services platform. Serving as an integrated platform means offering corporate customers deep integration with enterprise systems such as SAP. The platform can personalize and coordinate services such as accounting, commodity trading, and enterprise resource planning.

Banking as a service

BaaS is the only arena that's not customer facing. BaaS providers create highly efficient tech and infrastructure platforms, which they can license to customer-facing organizations. Some will offer credit to nonfinancial institutions, enabling them to act as banks; and some will bolster the balance sheets of existing financial institutions. The goal for BaaS is utility -giving clients robust, secure, and efficient services and liquidity through business models such as the following:

BaaS utility provider. Providing BaaS utilities is the same kind of relationship that an anonymous food company has with companies such as Costco or Target, creating white-label products for retailers to market under their own brands. BaaS can provide regulatory know-how and back-office services, such as customer service, documentation, and HR.

BaaS balance sheet provider. Providing BaaS balance sheets gives both banks and nonbanks access to distinct pools of capital and offers asset liability management and regulatory-required licensing for nonbanks. By bolstering the balance sheets of banks' customers, this kind of BaaS greatly reduces their need to keep raising capital.

An inside look at the biggest arena: Everyday banking

The new arenas will require banks or nonbanks to ramp up their presence on new platforms, create touchpoints with customers, and mine and capture data in new ways. To understand how these concepts will play out, let's examine the biggest arena: everyday banking.

Imagine that a forward-looking bank or a new fintech competitor offers an app we will call "MyLifeAssistant." MyLifeAssistant will take many existing technologies that customers find on their phones-and many still to be developed-and fold them into a single offering that addresses a whole range of users' daily needs. For instance, it might send an alert that today is the birthday of a friend, along with a gift recommendation. Users could order the gift through MyLifeAssistant and arrange for same-day shipping, or they could shop for alternatives.

Later in the day, when a user visits a local café, MyLifeAssistant might preselect their favorite coffee or lunch, giving them one-tap access to their favorite repast-with discounts and rewards. In fact, MyLifeAssistant is so easy to use that customers use it for investing, planning, shopping, socializing, and more throughout the day. As a customer keeps using MyLifeAssistant for more kinds of shopping and services, the app increasingly knows their friends, how their money is spent, and what they do in their free time. It will also follow them into the metaverse or virtual reality.

Of course, MyLifeAssistant is far more than just a simple app. In fact, MyLifeAssistant is the front-end evidence that the institution that created the app has decided to compete aggressively as a CMS. Behind the scenes, while coordinating all this activity, MyLifeAssistant is constantly adding to its database so that it can improve its future predictions via advanced analytical models.

The more appealing the app's personalized recommendations become, the more money its users will save via discounts and loyalty programs-and the more commissions the bank will earn from its vendor partners. Everyone involved benefits from MyLifeAssistant's constantly improving analytics and its ability to automate customer experiences. The more invisible and embedded its services become, the happier its customers.

There are limits. MyLifeAssistant and its parent have strong incentives not to take advantage of their customers. The more partnerships and personalized services that they offer to both individuals and businesses, the more that everyone involved benefits. The key to the parent institution's competitiveness and profitability is constantly upgrading its data analytics to improve convenience, customer care, and hypertargeted offerings-without attempting to overcharge or exploit its customers.

By processing both e-commerce and consumer finance transactions (including peer-to-peer payments, car loans, credit cards, and so on), a CMS can begin to predict what customers want even before those desires become conscious. Banks can also sharply reduce their own risks because they will know each customer's creditworthiness better than most credit rating agencies do.

Again, MyLifeAssistant isn't a banking app. It's a core component of being a CMS. It goes far beyond everyday banking services to offer tight integration with e-commerce journeys. It can serve as the hub of an ecosystem that blends banking with shopping and other highly personalized services.

A thriving CMS will offer more than mere personalization, simplicity, and affordability. It will go all the way to invisibility. CMSs will have more access to their customers and much more data about those customers than traditional banks have ever had. Because they will become primary touchpoints for a wide range of transactions, they can build an unbeatable edge in collecting and analyzing big data.

Because commerce market specialists will become primary touchpoints for a wide range of transactions, they can build an unbeatable edge in collecting and analyzing big data.

Excelling at this transition will require banks to look beyond their traditional metrics of success, such as margins and risk costs. They will need to focus more on performance indicators used by leading e-commerce players, such as the number of customer touchpoints and time of engagement. This business model has enormous economic upside. Any bank that successfully transitions into a CMS can multiply revenues by ten, with higher profit margins for higher-value services.

The impact of data and money regulation around the world is uncertain

The kind of transformations and competition that we have examined in everyday banking are sure to take place in each of the other four arenas. But predicting the winners, as well as how long it will take them to get there, in different countries is extremely difficult. That's because it's hard to say how digital currencies and data will be regulated in the future, especially in a world where countries and regions have such differing approaches to regulation.

It's possible that, over the next decade, customer data will become the new oil-highly regulated, jealously guarded by institutions that capture it, and a key source of business value. A more likely scenario is that customer data will become the new water-a public utility accessible to all and therefore much lower in value.

And while the advance of digital currencies is unstoppable, its regulatory future is similarly unclear. A decade from now, cryptocurrencies, easily exchanged via blockchain and other tech, might be well established as mainstream alternatives to central-bank currencies. Digital currencies might then be far more convenient for all kinds of transactions and deposits, potentially removing a main function and competitive advantage of banks. On the other hand, there might well be a regulatory backlash against cryptocurrencies, with developed nations cracking down on its misuse for illegal activities or financial warfare.

The landscape of currency could fall anywhere on a spectrum between wide open and tightly closed. However, none of the scenarios would stop what's certain to be the breakup of traditional banking. Rather, they would likely determine the shape of the industry and the winning players. If digital currencies become commonplace, banks face a tougher road. If currency isn't a factor, data take center stage and create a more even playing field.

Making things even more uncertain is the fact that banking is a "multilocal" rather than a truly global business. Banking experience and regulation differ greatly by region. The average American still uses checks and spends weeks getting a mortgage. The average Dutch citizen pays every bill from a smartphone, opens new bank accounts online, and gets approved for a mortgage in a few days. Regional rules shape what banks can and can't do.

The next phase of banking for incumbents, challengers, and the rest of us

The successful bank of the future will be defined as a network of platforms. Few banks will capture all of the ten platform opportunities described in this article in their regions, but many will participate in multiple platforms. Given the platforms' enormous value creation scale, getting even one right can unlock tremendous value for shareholders and broader stakeholders alike. But success will come to only those banks willing to move beyond their traditional operating models. Banks should be prepared to evolve through multiple stages on their way to becoming a platform network.

This vision of the coming shakeout may seem daunting. But the challenges are manageable taken one step at a time. The first and most important step is to commit to adapting as soon as possible. Banks and nonbanks that begin to transform themselves now will have a huge advantage over competitors that become paralyzed with indecision and confusion.

The good news is that there's still enough time for most financial institutions to transform their business models. Additionally, the capital markets are likely to be very supportive in valuing those transformations over the next five to ten years.

For incumbent, universal banks, the key steps will look something like the following:

1. Decide which arenas and business models to focus on, based on your strengths.

2. Start to align your organizational resources-especially tech talent-for the coming shifts.

3. Start to develop and test your platform business models.

4. Redefine your purpose (including your environmental, social, and governance impact) to build stronger bonds with your customers and talent.

5. Build a more entrepreneurial culture by protecting your experimental projects from conservative pressures within the organization-and give management incentive to succeed.

For challengers looking to exploit a tech edge as a way of entering banking, the first step is to analyze which arenas offer maximum advantage based on that edge and which platform-based business model makes most sense. These organizations will have the advantage of not being tied to the old standards and practices of traditional financial services. But they need to be mindful that this advantage doesn't guarantee success, even for companies with cutting-edge innovations.

To be clear, this transformation will take time, but leaders who move fast, stay ahead of the curve, and remain patient can break out of today's stagnant growth trajectory and put themselves on a strong valuation path. Many banks already are moving forward and getting recognition from the market. We believe that as more and more banks embrace this kind of transformation, the market will see the change, recognize the increasing potential, and view the industry as one with a bright future.

Ultimately, whether you are the leader of a company that depends on banking or a consumer hoping to enjoy better customer service in your life, there is a lot to look forward to. The new era of banking will arrive after a period of complex, confusing evolution, but it will ultimately raise the quality of life for anyone who interacts with any kind of financial services, including customers, employees, shareholders, and regulators-which, of course, is everyone.

# data[].attributes.attachment_link.title
The future of banks: A $20 trillion breakup opportunity

# data[].attributes.attachment_link.description
In this article, we look at the future of banking and the incredible new opportunities stemming from how financial services are embedded into daily life

# data[].attributes.attachment_link.readable_text
Sustainability has become a topic of crucial importance for many corporations, including financial institutions. One reflection of this is the strong growth in sustainable debt instruments, which according to BloombergNEF surpassed $1.6 trillion in 2021. In contrast, sustainable global transaction banking (GTB) is still in the early stages, but its potential for growth is significant. We estimate that revenue from sustainable trade finance and cash management products will grow by 15 to 20 percent annually to total combined revenues of $28 billion to $35 billion in 2025, with market penetration reaching approximately 25 percent in trade finance products and 5 percent in cash management products.

Sustainability in GTB: Opportunity and imperative

By contrast, most banks across the world have taken only preliminary steps toward incorporating sustainability features within GTB products. This slow uptake derives in part from complexity-which arises from paper-intensive processes involving multiple parties-and from the lack of reliable data on companies' sustainability-related activities and of industry standards for evaluating these activities.

Despite these challenges, embedding sustainability-tracking capabilities within core transaction banking services can be highly effective in improving companies' performance on ESG metrics, as trade and payment transactions are systematic and recur frequently. What is more, trade finance rolls over frequently (every 30 to 90 days), which means that products such as supply chain finance (SCF), letters of credit, and guarantees have the potential to contribute disproportionately to new volumes in sustainable finance.

The trade finance community-including financial institutions, export credit agencies, trade organizations, technology and service providers, and corporations-is focusing on various sustainability initiatives. Diverse banks offer sustainability-linked solutions, including deposit accounts backed by investments in sustainability-rated assets and letters of credit issued for transactions in which the underlying asset (for example, batteries for electric vehicles) contributes to efforts to mitigate climate change. In addition, the number of requests for proposal (RFPs) for trade finance projects involving sustainability criteria is increasing, especially in the United States and Europe.

The main reason for strong corporate demand for sustainable GTB products is that banks have unique access to transaction data (through various products like cash pooling and supply chain finance), which can be used to help companies manage the carbon impact of their operations and achieve their target contributions to industry sustainability goals, such as the UN Sustainable Development Goals (SDGs) for 2030. Banks can be particularly effective in assessing scope 3 greenhouse gas (GHG) emissions, which typically account for most emissions linked to a company's supply chain and are the most difficult to measure (see sidebar, "How to define sustainability for GTB products"). Stronger monitoring enables a company to reduce emissions along its supply chain, which enables it to meet the expectations of shareholders and stakeholders.

Given the strong and growing demand among corporates for sustainable financial services, McKinsey estimates that in 2025, sustainable GTB global revenue pools will reach $16 billion to $20 billion in trade finance and $12 billion to $15 billion in cash management, both growing at an annual rate of approximately 15 to 20 percent. This opportunity entails primarily a shift from traditional GTB products to GTB products and services incorporating measurable sustainability objectives. Secondarily, it involves incremental revenues flowing from the anticipated acceleration of overall GTB revenue growth. Our projection of $28 billion to $35 billion in sustainable GTB revenue in 2025 represents 8 percent of global transaction banking revenue from core products, including trade finance (buyer-led, supplier-side, and documentary) and cash management, including commercial cards, acquiring, POS, deposits, liquidity management, payments, and collections (Exhibit 1).

A best-in-class sustainable GTB ecosystem

Based on our analysis of banks' current offerings in sustainable transaction banking, we believe that banks aiming to lead in this space should broaden their value proposition in three waves. First, they should enhance the basic products of trade finance and cash management with basic sustainability features. The next wave would involve building a more elaborate supply chain ecosystem with a robust sustainability rating methodology and advanced analytics to assess sustainability across the supply chain. Finally, depending on client needs and expectations in the markets served, banks could build advisory services to help corporate buyers and their suppliers improve their performance on sustainability goals.

Basic sustainable products

The basic products of trade finance and cash management should incorporate sustainability features such as a basic rating methodology for qualified transactions:

Documentary trade finance. For sustainable buyers or sustainability-linked transactions, banks could offer documentary trade finance, including letters of credit or guarantees, at better pricing and improved access. As an illustration, a letter of credit for the delivery of solar panels would qualify as a sustainable transaction, offered at a preferred rate to the buyer-and transferable as a sustainable trade asset.

Cards. On commercial cards, banks could offer favorable terms for purchase of sustainable goods or a mechanism to compensate for high-emission expenses such as travel. In addition, this category could include other products such as acquiring and point-of-sale (POS) products with features such as rounding up each transaction to divert the surplus to sustainability projects or lowering POS or e-commerce fees for purchases of sustainable goods or purchases from merchants with higher sustainability scores.

Account-related liquidity. Banks could invest deposits in sustainable assets.

Payments and liquidity management. In payments, banks could offer favorable terms on transactions for sustainable underlying assets and with counterparties scoring high on sustainability. In the area of liquidity management, banks could enable virtual accounts, which can be segregated from the account structure, to separate balances and transactions related exclusively to sustainable activities. Within collections, banks could offer favorable terms on digital collections and sell CO₂ emissions credits to offset the environmental impact of cash and check transactions.

Some banks are already offering sustainable products. Examples from one bank include green guarantees and standby letters of credit, which guarantee an underlying project with a clear contribution to the environment. This solution focuses on five main sectors: renewable energy, clean transportation, waste management, sustainable water, and hydrogen. Another bank offers a sustainable deposit, which is dedicated to financing sustainable assets located in developing countries and is aligned with the UN SDGs. This offering-priced in US dollars, British pounds, and euros-is broader in scope than "green deposits," available for several years, which focus on financing renewable-energy projects.

Supply chain ecosystems

A fully fledged sustainable supply chain ecosystem should enable suppliers and buyers to interact seamlessly, provide a robust sustainability rating methodology, and offer preferable rates to organizations that meet sustainability thresholds. The key strategic distinction of this wave is the use of advanced analytics to assess and manage ESG risk across the entire base of suppliers and buyers. For example, banks can help corporates assess the amount and types of GHG emissions that each supplier adds to total supply chain emissions and set policies for minimum standards and bidder exclusion criteria. The ratings capability (typically provided by a third party focused on sustainability assessment) is integrated within a technology platform that is usually supported by a trade fintech company.

Products in this wave include buyer-led and supplier-side trade finance:

Buyer-led trade finance. With buyer-led trade finance, such as reverse factoring, the bank could pay sustainable clients' suppliers before maturity at a more favorable financing rate than in traditional reverse factoring. Or the bank could offer dynamic discounting, in which the buyer pays suppliers before maturity in exchange for a discount on the payable amount, with the discount rate decreasing as the supplier or underlying asset becomes more sustainable.

Supplier-side trade finance. Approaches to supplier-side trade finance could include invoice factoring where the invoice is discounted at a favorable rate for the supplier according to underlying sustainable assets or the involved companies' ratings.

For example, a global bank has developed a sustainable SCF platform, one of the main partners of which is a third-party sustainability ratings agency, affording participants greater transparency and objectivity than typically available with internal key performance indicators (KPIs). The platform also provides quantifiable, external evidence of participants' ESG status in various areas, including the environment, human rights, labor, and sustainable procurement. The digital platform, developed in partnership with a fintech organization, includes market-tested capabilities for capturing, accessing, and onboarding suppliers. Fast integration of new suppliers reinforces supply chain resilience, which-along with enhanced visibility and communication on invoices-increases the value of the platform to all participants.

Another example is the launch of a sustainability-linked reverse-factoring or SCF program in Asia-Pacific to help corporate clients and their suppliers achieve their sustainability objectives and improve supply chain resilience, as well as manage working capital needs. The program includes criteria for periodic evaluation of suppliers' performance in meeting ESG standards. ESG scorings are conducted by the corporate buyer's independent assessor. Qualifying suppliers can access supply chain financing at preferential rates tied to their sustainability score.

Advisory and certification services

Advisory and certification services can support companies in their ongoing efforts to reduce GHG emissions along their value chain. These value-enhancing services, which are adjacent to sustainable GTB products and platforms, extend beyond the traditional core competency of transaction banking. By consulting on various marketwide standards and assisting clients in achieving ESG certifications and improving their ratings, banks can reinforce the trusted advisory role that any GTB institution claims to pursue and can gain a distinct competitive advantage. Banks may also consider providing an ecosystem of nonfinancial sustainable offerings, including mobility- and energy-related products.

Significantly, banks have the potential to provide comprehensive and holistic advisory on sustainability performance metrics by leveraging their extensive data sets. As an example, a bank might advise a corporate on reducing emissions along its supply chain or provide support in establishing baseline emissions of the company's suppliers or projects. It might also consult on using aids for sustainability that are available to the public at no charge, such as sustainable metrics in procurement selection, and on benchmarking with other banks or companies to raise targets and improve monitoring. In addition, banks can work with suppliers to reduce emissions linked to materials and processes. Further, they might prioritize personal engagement with small and medium-size enterprises (SMEs) to expand the reach of their advisory business, as smaller firms are typically underserved by rating agencies, which, due to their limited sales networks, tend to focus on large firms.

Banks can also support certification on emissions by standardizing the process for obtaining broadly recognized assessments of each supply chain participant's performance on environmental sustainability measures. This service would include the identification of environmental-sustainability KPIs, customized by industry and subsector, and the selection of thresholds for varying levels of compliance with GHG emissions standards. Leveraging their unique access to data along the value chain, banks can establish automated tracking systems to evaluate suppliers' performance on select KPIs.

Based on our examination of 12 banks, we have observed that sustainable GTB offerings vary according to bank size and markets served. For instance, global banks offer the broadest range of sustainability-linked trade finance and cash management products, including advanced digital platforms through which corporates and qualified suppliers may access SCF at preferential rates (Exhibit 2). However, few of these platforms operate at scale. The sustainability offering of banks operating in two or more global regions (multiregional banks) is typically limited to the incorporation of basic sustainability features into trade finance products, with the majority also partnering with independent rating agencies to score suppliers on the extent of their sustainable practices. Few multiregional banks offer an advanced digital platform. Domestic banks generally focus their sustainability program on lending and currently do not offer GTB products with sustainability features.

Across banking segments, sustainable advisory and certification services are limited or nonexistent. Advanced digital platforms provide an excellent environment for scaling these adjacent services, which have the potential to contribute significantly to GTB revenue. At present, however, sustainability advisory represents white space to be explored.

Constraints to scale

With so many untapped opportunities, what is holding back banks? We see three types of constraints limiting their ability to scale sustainable GTB products:

1. lack of standards on several levels

2. limited capital available for ecosystem development and operation

3. an economically challenging business model

Lack of standards on several levels

Standards for sustainable digital trade documents. While numerous efforts have attempted to make electronic documents legally acceptable and some countries have adopted the Model Law on Electronic Transferable Records (MLETR), more effort is required to increase adoption by making the law more broadly acceptable and introducing electronic transferable records for sustainable trade.

Standard definitions of sustainable trade finance products. There are disparate efforts to establish a widely accepted trade finance product taxonomy, such as that published by the Global Supply Chain Finance Forum. However, the global trade finance community still lacks common definitions of "supply chain sustainability" (broadly) and "sustainable trade finance products" (more narrowly).

Standards for uniform sustainable trade finance data models. Sharing information among participants is at the center of a sustainable ecosystem. A data model might, for example, govern how a specific sustainable product or company sustainability rating should be presented and which technical format should be used.

Standards for sustainable trade finance APIs. Standard APIs would enable participants to connect and exchange data seamlessly with multiple networks and service providers. Adoption of standards governing the design of APIs for trade finance systems has been limited, however, and the proliferation of proprietary models increases the fragmentation of the global trade finance ecosystem. Banks continue to publish proprietary B2B APIs, just as fintechs design data models for interaction with their own platforms.

Standards for shared utilities. As an example of industry efforts to establish standards for shared utilities, SWIFT announced last year that its KYC Registry would be the first global utility to integrate the ICC's Sustainable Trade Finance Guidelines for customer due diligence, which cover key areas such as sustainability commitments, capacity and track record, supply chain practices, and commodities.

Limited capital for ecosystem development and operation

The capital available for investment is limited, which for banks and corporates alike poses a significant challenge to the implementation of a sustainable GTB offering. Further, a substantial investment is required to build the data platforms critical for the advanced sustainability products and services of the second and third waves (that is, a GTB digital ecosystem and advisory and certification services). As fintech valuations have dropped significantly this year, technology providers are facing new constraints in accessing capital, which may hamper development of more robust platforms.

Additional investments are needed to establish and run partnerships with the various parties involved in the trade finance ecosystem-for example, fintech companies, ratings agencies, shipping and logistics companies, banks, and technology companies. These arrangements can carry hidden costs that are often overlooked. Banks may also need to consider the potential opportunity costs that come with partnerships: the decision to enter a partnership instead of developing a capability in-house usually closes the door on other opportunities. Furthermore, the cost to unwind a partnership can be significant, should it not live up to expectations.

An economically challenging business model

Next steps: How to build a sustainability value proposition

Banks differ in how far along they are in developing a sustainability value proposition for GTB. While several have incorporated sustainability elements in select cash management and trade finance offerings, many lack a clear sustainability strategy for the enterprise. Others have launched solutions to match their competitors or in response to a client request, but these initiatives are often launched without assessing the potential impact of offering the solution to other clients.

Choose the appropriate sustainability strategy

Across global markets, any GTB service provider must consider the expectations of customers, investors, regulators, and the public and think holistically about how to add value to corporate and SME relationships with a sustainable GTB offering. Based on their starting point, banks should consider the following elements for implementing the sustainability strategy:

Banks without any sustainable GTB offering should start by embedding sustainability principles and goals within their business line strategy in alignment with the bank's broader sustainability strategy. This strategic vision should also broadly identify the sectors expected to benefit the most from the bank's sustainable GTB offering.

The next step is to identify the priority products and criteria for sustainability ratings, bearing in mind that these constitute the core value added for clients from diverse industries and segments. Leaders should start by stating clearly which elements of ESG the sustainable GTB offering will cover and then-in many cases, in partnership with an ESG-ratings company- develop metrics for assessing performance to discrete objectives. These metrics can be applied, on the one hand, to the evaluation of financial instruments or products to be offered to clients and, on the other, to the establishment of sustainability ratings for SCF platform participants.

Banks with basic sustainable GTB products should complete their offering by extending beyond trade finance products to enhance traditional cash management products-for example, deposits, commercial cards, and acquiring-with sustainability features. These banks will also need to build partnerships, as sustainability is part of an ecosystem where different organizations fulfill distinct roles, such as maintaining the technology platform, enabling sustainability-linked transactions, administering sustainability ratings, and managing data assets to ensure consistent execution and transparency. Selecting partners can be an arduous journey, encompassing identification and evaluation of potential partners and implementation and integration with the platform. Several cross-industry groups are developing services to leverage transaction data to reduce carbon emissions. Banks can partner with fintech or open-banking platforms to access open-banking data.

Banks with a leading offering should focus on building value-added services in sustainability (such as advisory, certification, and analytics), which could help to differentiate a bank's sustainability offering. Advisory services could provide deep knowledge on regulations and insight into the implications of sustainable GTB and sustainability ratings across diverse industries. Certification should provide legitimacy and consistency in the increasingly complex population of sustainability rating agencies, and banks should be able to provide KPIs and tracking mechanisms to monitor corporate clients and their suppliers and customers. Finally, analytics should provide a rigorous framework to guide clients' and banks' decisions about how to maximize the impact of the actions taken to reduce emissions. This capability could be developed in-house or in partnership with specialized data analytics providers.

Go to market and then accelerate

Banks should define a go-to-market strategy for sustainable GTB, prioritizing sectors that have higher overall emissions and are more relevant to the institution's business. Examples of priority sectors might include energy, retail and luxury, and automotive and industrials. By targeting industries with higher scope 3 emissions, banks have greater potential to deliver a significant improvement in the sustainability performance of corporate clients and their suppliers.

Once a bank has launched any offering, it is important from the beginning for it to promote and accelerate the adoption of the sustainability offering by engaging effectively with clients in target sectors, using automated monitoring and feedback loops to improve messaging. It will also be crucial to train sales specialists for sustainability-linked products, as well as educate colleagues about the bank's overall position on ESG principles and what the new sustainable GTP offering can do for clients (and for society)-all supported by a robust digital engagement and communication strategy. Internal communication across the bank should be continuous, fast, and consistent. Sharing success stories, including public recognition of clients who achieve new levels of certification, also can strengthen engagement with both clients and colleagues.

Sustainability in GTB represents a significant opportunity for banks not only to meet their ESG objectives but also to expand revenue as they help customers meet their business and ESG needs. Moreover, the transaction banking business, through which different flows converge, has the potential to deliver an outsize impact on the reduction of societies' GHG emissions by serving as a channel to deliver tools for improving sustainable practices at client organizations in diverse industries around the globe. For all these reasons, success at sustainable GTB is an imperative; achieving it depends on implementing a comprehensive and coherent strategy.

# data[].attributes.attachment_link.title
Sustainability in global transaction banking: A market imperative

# data[].attributes.attachment_link.description
A view on how sustainable financial products can propel revenue growth for banks and contribute substantially to businesses' progress in meeting global climate goals.

# data[].attributes.attachment_link.readable_text
The banking industry is facing mounting pressure to meet fast-changing demands in environmental, social, and governance (ESG) issues. New and evolving regulations call for greater transparency and disclosure of ESG-related data (see sidebar, "ESG regulatory and disclosure requirements"). Stakeholders and investors are increasing their scrutiny of the effects investment decisions have on the climate and society. Consumers are holding banks to higher ESG standards as well-in 2019, about 14 percent of total client-driven revenues were controlled by consumers whose banking preferences were influenced by concern about purpose and sustainability.

To meet these expectations, banks must adapt their IT systems to systematically collect, aggregate, and report on a broad range of ESG data. However, many financial institutions still do not have a comprehensive approach to integrating ESG data into their existing risk reporting.

Moving toward this goal will require significant changes to the IT infrastructure, from applications to data integration, architecture, and governance. New applications include not only the management and capture of ESG data but also financed emissions models, climate risk models, ESG scorecards, climate stress tests, and climate-adjusted ratings. ESG data must be woven into existing processes, such as credit approvals and decision making. And banks will need to adjust their data architecture, define a data collection strategy, and reorganize their data governance model to successfully manage and report ESG data.

Investing in the right priorities from the beginning will enable banking IT leaders to quickly build these new capabilities and solutions without accumulating technical debt.

An ESG data road map

Banks can begin by developing an ESG data and technology road map that balances tactical, short-term solutions with a strategic, long-term vision. In the process, banks should consider the following components and steps.

Define potential ESG platform solutions

Set up a central data platform that is integrated with existing finance and risk platforms to build a single source of truth.

Create a data model to capture ESG data at the certificate level, including integration with third-party data providers (via APIs) and compliance with ESG data policies.

Enable investors to gain real-time visibility into the ESG-related aspects of their investment portfolios.

Replace legacy ESG platform solutions with a cloud solution to reduce technical debt and modernize the technology infrastructure for future solutions.

Embed ESG requirements into core banking processes

Integrate new workflows into existing processes, such as using artificial intelligence to incorporate ESG data into decision-making processes (for example, credit decisions).

Communicate ESG requirements across the organization and bring all employees on board with an intentional change management approach.

Review and revise existing data processes to comply with changing ESG requirements (for example, increasing the frequency of data updates).

Develop a clear plan to support the integration of new ESG policies (such as how to add new certificates to investments).

Build a robust ESG data governance model

Identify central ownership and responsibility within the organization (such as by appointing an ESG data officer to serve as a point of contact).

Create a cross-functional steering committee for ESG data governance-including leaders from the business, technology, data, risk, and finance functions-with joint accountability and decision-making processes.

Establish ESG data controls to ensure compliance with regulatory frameworks (for example, to indicate whether a certificate has been assigned to an investment).

Ensure that ESG data governance reflects shifts in market demand (such as investments in offshore wind turbines) and location-specific regulatory requirements (such as bans on investments in combustion engines after 2030 in Germany).

Common detours and dead ends

In our experience, three pitfalls can create significant delays and technical inefficiencies for banks. By taking intentional steps to avoid these detours early on, banking IT leaders can increase their chances of success and accelerate the time to impact.

Functional silos

Too often, organizational silos lead to disjointed processes and a fragmented data architecture that does not allow for synergies across ESG use cases. While some redundancy might be unavoidable, there is often a substantial overlap across data needs. Effective ESG data governance thus requires a coordinated and centralized approach across multiple stakeholders. This can take place only within a culture of open communication, cross-functional collaboration, and close alignment of the business and IT functions. Crucially, the ESG data and technology strategy must be closely integrated into the broader ESG and business strategy, with active sponsorship and a clear mandate from the highest levels of leadership.

Process traps

When redesigning processes to incorporate ESG data governance, banking IT leaders must balance between two extremes-and avoid two common traps. On one side, a narrow focus on simplicity and standardization often leads to a failure to make the necessary adjustments to align with existing business and IT processes. On the other side, anchoring too much on legacy processes can create unnecessary complexity and hamstring the ESG data governance model. Banking IT leaders must therefore find a middle ground by designing new and improved ESG-related processes while addressing the requirements of current processes.

Technical debt

The design of ESG technical solutions involves constant trade-offs between short-term needs and the long-term vision. Trying to solve everything at once-or devise the best possible solution-can extend development time, increase the pressure to implement short-term tactical solutions, and lead to lasting technical debt. Instead, banks should apply a use case-driven approach to introduce new ESG capabilities in the right sequence at the right time.

Leaders can identify and prioritize specific ESG use cases, create clearly defined stage gates, and collect metrics to track success during interim phases. For example, consider how ESG data will be integrated into each step of the credit approval process, from customer data collection and risk scoring to credit monitoring and reporting (exhibit).

Other potential use cases include regulatory and internal stress tests, analytical risk-weighted asset calculations, provisioning, risk-appetite frameworks, credit policies, capital allocation, pricing, portfolio emissions alignment, external disclosures, and internal reporting.

Additionally, some banks default to building in-house technical solutions for which some software-as-a-service (SaaS) solutions may provide a more cost-effective and feasible alternative. Banking IT leaders should implement a clear build-versus-buy framework with proper market screening mechanisms and early-warning capabilities to ensure resources are deployed as efficiently as possible.

Finally, resistance to upgrading legacy IT interfaces can hamper the integration of ESG data. While it may seem like an adequate short-term solution, adding new components to a complex, "spaghetti-like" architecture creates operational risk in the mid- to long term. Indeed, new ESG regulatory and business imperatives present an opportunity for banks to revise their existing enterprise architecture framework to be more closely aligned with best practices. Banks should aim to design modular, decoupled architecture components, linked by a well-managed and standardized API-based integration architecture.

Banking IT leaders must move quickly to integrate ESG data governance into their IT systems and processes to keep pace with the regulatory environment and consumer needs. By developing a road map that balances short-term and long-term objectives-and by taking preemptive measures to avoid detours along the way-banks can get ahead of their competitors and be better prepared to meet the growing ESG demands of tomorrow.

Daniel Heller is an alumnus of McKinsey's Frankfurt office, where Henning Soller is a partner; Andreas Reiter is a consultant in the Vienna office; and Sebastian Schöbl is an associate partner in the Berlin office.

# data[].attributes.attachment_link.title
ESG data governance: A growing imperative for banks

# data[].attributes.attachment_link.description
A forward-looking ESG data and technology road map can help banks get ahead of growing regulatory and consumer demands-and avoid technical debt.

# data[].attributes.attachment_link.readable_text
Customers' needs are changing. They expect more from service providers in the form of fast, frictionless, and personalized journeys. Their banking practices have also altered, with many of them now using digital and looking for it from their banks. Customer experience (CX) is proving to be the strategic differentiator for banks, with experience leaders outperforming laggards.

In this article, we explore how banks can improve customer experience, identify five bold moves they can make to gain the competitive advantage, and why they must act now, given the current dynamic macroeconomic environment.

Our research shows that banks that are frontrunners in customer satisfaction lead in financial metrics such as total shareholder return (TSR), increased growth, and decreased costs (Exhibit 1). We also see a positive correlation between customer satisfaction and purchasing decision-customers who are satisfied with their banking experiences say they will purchase more of that bank's products. And satisfied customers are six times more likely to say they'll remain with a bank than dissatisfied customers are.

In this uncertain economic environment, excelling in customer experience is more important than ever for banks-the past year has seen one of the most dynamic macroeconomic conditions in the past several decades. Over the past 12 months, interest rates have risen by more than 300 basis points, mortgage originations have dropped by 60 percent, and the flow of money between financial institutions has increased four times.

Confidence is waning-more than 65 percent of customers are pessimistic about the economic outlook for the coming year, about a ten percentage point increase compared to last year. Their biggest concerns are inflation, the rising cost of goods, and savings for emergency funds.

With the dynamic macroeconomic environment and the overall pessimism consumers are feeling, customers are thinking to the future, shifting their financial practices, and reevaluating relationships with their financial institutions. We notice a move toward increasing household spending and accelerating paying down credit card debt, as well as reducing savings for retirement and emergency funds. New financial accounts are being opened at twice the average rate, and new banking relationships and switching banks are being considered (Exhibit 2).

Five critical CX moves banks can make to get ahead

Here are five get-right moves for those that want to seize the moment and become industry leaders.

Reimagine, not just de-friction, priority journeys

A typical regional bank has over 1,500 customer journeys (across business units, product lines, and customer interactions). Looked at simply, these journeys can be categorized into two broad categories-those that a bank needs to "de-friction" and those that need to be reimagined. Most journeys fall into the de-friction bucket, as streamlined, seamless experiences still matter and drive customer satisfaction. However, our research shows that the "bookend" journeys of shopping, onboarding, and problem resolution disproportionally drive the overall experience that a customer has with their bank. It is here that a bank could consider flexing its reimagination muscle (Exhibit 3).

To truly reimagine a given journey, banks can take the following steps:

Assemble a cross-functional group that can bring diversity of experiences and thinking.

Understand the competition, including recognizing that experience leaders also come from adjacent and other B2C industries outside purely banking-for example, a mobile payment application.

Take inspiration from other industries as a customer's bar for great experiences is driven by interactions and experiences outside banking.

Leverage the concept of a zero-based design ("clean sheeting"): start with a blank canvas and imagine a new journey without considering the current state or any constraints; layer on (technical and operational) constraints afterwards.

Co-create with customers to increase the chances of success, especially for novel signature moments.

Push innovation to the next level. For example, how could something happen with no user-inputted data, with one click (or even no clicks)?

As a case in point, a large North American bank established an innovation factory to redesign critical banking processes and digital journeys. This brought together cross-functional teams-across product, business, technology, design, marketing, risk and compliance, legal, operations, finance, etcetera-to work on reimagining key customer journeys. Over the course of two years, more than 30 reimagined journeys were developed and rolled out. The resulting impact was a 25 to 50 percent increase in customer satisfaction of those journeys.

Radical shifts in customer behavior can be disruptive, but by delivering differentiated value for their customers, banks can take advantage of this defining moment to stand out.

Help customers migrate to digital

Most banks have highly inconsistent digital adoption. Even for banks that have similar levels of digital migration, McKinsey's proprietary Digital Migration Index shows a two to four times variation in digital adoption of the underlying products and journeys. Our research reveals that customers who regularly use a bank's mobile app or website (or both) have the highest average satisfaction compared to customers who use other interaction channels or infrequently use the digital channels (Exhibit 4).

So, while banks have correctly focused on building digital experiences to enable customers to bank in their channel of choice and self-serve for many interactions, there is still an opportunity for banks to actively help customers migrate to digital channels. This, in turn, will likely not only drive higher customer satisfaction, but result in a lower cost-to-serve and convenience.

Banks can actively migrate customers to digital in several ways:

Enable: Banks can streamline enrollment into digital, seamless login, pre-authentication, and more.

Educate: They can drive awareness of new digital offerings or features with marketing and communications, such as "how-to" videos on the website and mobile app.

Redirect: Banks can utilize in-branch and call center or IVR intercepts to direct customers to digital channels, for example, in-branch digital and co-browse tutorials.

Motivate: They can consider charging fees for using non-digital channels, and reward employees who redirect customers to digital channels, for instance.

Nudge: Lastly, they can encourage customers to migrate with messaging on statements, reminders in emails or mails, gamified experiences, and so forth.

A leading Latin American bank launched a holistic digital adoption campaign to drive digital migration for its new web and mobile experiences. The bank rolled out a broad advertising campaign to encourage customers to download the new mobile app, developed incentives for recurring digital users (such as digital payments), sent out targeted customer messages after non-digital transactions were completed (for instance, in branch transfers), and thoroughly trained its front-line branch employees so they could redirect customers to digital. This broad campaign resulted in a 20 percent increase in customer satisfaction, a 5 percent increase in digitally active customers, a 25 percent increase in digital payments, and a 10 percent reduction in branch costs.

(Re)establish and (re)fortify trust

Our research shows that around 60 percent of customers currently trust that their primary bank will be helpful in navigating the next financial downturn. And this number jumps to more than 80 percent for customers who report high satisfaction with the experience their bank delivers.

Banks can take several actions to establish (or reestablish) trust

First, they can be transparent for emotionally charged interactions such as the ways fees are charged and explained (for example, on statements), the status of a loan application, and how disputes are handled. One leading payments player recently underwent a company-wide program to dramatically simplify its customer communications-from everything such as statements to the terms of loan applications to product offers on its mobile app. This program resulted not only in higher customer satisfaction (CSAT) scores, but also fewer calls coming into the contact centers (for example, for customers not understanding bills or terms and conditions clauses).

Second, they can deeply know how customers want to bank and then give them the power to interact across any channel. For example, the marketing messages they want to opt into, what channel with which they prefer to interact (email, mail, phone call, or text message), and what data they would like the bank to use when making them product offers.

Third, banks can proactively identify and help customers resolve fraud by leveraging advanced analytics. Fraud resolution is one of the most emotionally charged journeys for customers, and anything that can help them feel at ease dramatically drives trust, as well as "advocacy" by the bank on their behalf. Several banks now send text messages or emails and phone customers at the first sign of potential fraud-offering customers an opportunity to "dismiss" the alert or follow through with a fraud claim. Many banks also use this to drive advocacy by removing the charge from statements while they investigate (versus charging customers first and then refunding the charge).

And last, banks can offer a window into a customer's financial wealth, based on customer spend and transaction history, credit bureau data, balance information, interest charges, fees, and so forth. This opens the space for banks to offer a "financial-health" score for their customers. For example, a fintech company took this to the next level by not only showing a financial-health score for its clients, but also offering advice on how to improve that score (for instance, through paying off high-interest debts and savings strategies). With this move, they aimed to become more customer-centric and develop clients' trust.

Close the loop on measurement

"You cannot manage what you don't measure" is a common adage in business. This is especially true for customer experience. Traditionally banks have relied on surveys, which are necessary but not sufficient to achieve these capabilities. In fact, only 16 percent of chief customer experience officers believe surveys are granular enough to act on, and only 4 percent think that surveys allow them to calculate the ROI of a decision.

Organizations that measure up well do so across four capabilities: capture (how feedback is collected and integrated), interpret (how feedback is analyzed and insights produced), act (how insights are implemented), and monitor (how dashboards are updated in near real time).

1. Leaders in the industry use predictive analytics, machine learning, and big data (augmenting survey data with operational data) to overcome the well-known limitations of customer feedback. For example, only 7 percent on average complete surveys, 25 percent believe surveys provide timely insights to act on, while just 4 percent allow banks to quantify ROI. Banks can leverage the analytics-driven customer feedback system topersonalize the experience by identifying unique customer needs and trends at scale that may go unnoticed with one-off surveys.

2. They can also proactively resolve issues by ensuring that drivers of customer experience are updated in real time from all available data-as opposed to the limited survey questions that are only updated sporadically to quickly resolve trouble areas.

3. Banks can predict with confidence the satisfaction for 100 percent of customers with a "single source of truth" versus the 7 to 10 percent in typical survey responses.

4. Lastly, they can improve "hidden" customer interaction points; that is, quickly see how customer experience changes along a customer's interaction with various parts of a given journey.

For example, a global bank is building a capability that scores the experience of every customer based on data such as transactions, balances, recent branch and contact center experiences, and location. It then uses machine learning to predict customer satisfaction for each customer based on their individual experience. This new capability allows the bank to dramatically improve its follow-up with customers immediately after poor service experiences and identify opportunities to deepen relationships.

Ingrain the philosophy of "customer success" in every part of the organization

Customer success is a proactive, data-led, and client-centric approach that seeks to understand client priorities and help B2B customers optimize their outcomes. The customer-success discipline is well developed in high-tech companies and the software-as-a-service (SaaS) industry but is still only slowly finding relevance in banking. Customer success equates to understanding existing B2B customers' needs and helping them achieve their objectives (which often includes improved outcomes or experience for an end consumer or user). As a result, customer success can be successful in driving growth and reducing churn, while also increasing adoption and usage of products and services.

To implement an effective customer success model, banks can consider taking the following steps:

Build customer success capabilities: Like sales, customer success is a discipline with established practices. Setting up a customer success function requires dedicated capability building, especially if a bank is converting a team of existing client-relationship executives (such as bankers or account managers) to become customer-success managers.

Create capacity for high-value activities: In many organizations, an existing account or relationship manager is inundated with servicing requests and has limited capacity to be proactive. To create space, banks could find a way to reduce the demand on these teams to react to client "problems", through product improvements, automation, or off-loading servicing activities to lower-cost teams.

Define the operating model with sales: Successful customer success representatives will uncover upsell and cross-sell opportunities as they work with clients to help them achieve their objectives. Therefore, it is critical to have a defined operating model and success-to-sales motion, which may differ based on the customer segmentation and coverage model (for example, teams of customer success and sales reps working together on accounts or using a model that "passes on" customer success opportunities to the sales team).

Measure customer health: A deep understanding of customer health is beneficial to customer success as it helps indicate likely-to-churn customers and assists customer success teams to prioritize how to invest their time across their customer portfolio. Banks can use all the data they have available for a customer-such as financial performance, industry trends, engagement with product and digital journeys, customer satisfaction (for instance, NPS, CSAT), product performance, and the ability to meet customer service level agreements-to develop a predictive measure of "customer health" as a key enabler of customer success.

For instance, a large wealth management player is moving to a customer-success model for its B2B business. It has introduced a "teaming" coverage model, in which large customers each have a dedicated representative for sales and customer success. The company has also defined an operating model for how sales, customer success, and sales operations will work together throughout the customer's lifecycle. This new model has helped it better understand the needs of its customers and increased the opportunities to pursue new products and services with its existing customer base.

Bringing it all together

So how can banks achieve CX success in a competitive environment where customers want more, quickly? The good news is that we have seen companies attain leading positions by addressing three core building blocks of customer experience: a clearly defined, strong aspiration; a disciplined transformation journey; and thoughtful deployment of new capabilities such as analytics (Exhibit 5).

McKinsey research shows that this approach has delivered powerful results: a 15 to 20 percent increase in sales conversion rates, a 20 to 50 percent decline in service costs, and a 10 to 20 percent improvement in customer satisfaction.

By using these building blocks to achieve successful customer-centric transformations, and embedding the five bold moves described above, banks can take gold in the customer-experience race and attain a competitive advantage that boosts growth, lowers costs, and provides superior customer satisfaction.

# data[].attributes.attachment_link.title
Five ways to drive experience-led growth in banking

# data[].attributes.attachment_link.description
As today's customers demand more from their banking experiences, banks are upping their game and delivering stronger customer experience.

# data[].attributes.attachment_link.readable_text
The attack begins with confusion. Traders, accustomed to shouting themselves hoarse about prices and interest rates, begin barking instead that transactions are taking forever to complete. Emails asking for help go unanswered, partly because the system's down, partly because Bob in IT is more concerned about the wiper malware that seems to be rampaging through the institution's databases than the integrity of the grain derivatives market. Within hours, swathes of data on loan agreements, hedging models, current account balances and other, more arcane parcels of financial information are lost - and the boardroom is left hoping, praying that even just a fragment of these records exist somewhere, anywhere, on paper.

This is the waking nightmare of IT security professionals in the financial sector: the idea that a major bank can be brought to the brink of collapse by a well-planned cyberattack. Fleshing out the consequences of such a disaster has mainly been the province of film and television writers - see series two through four of Mr Robot - but now central banks have lately got in on the act. Last autumn, the Bank of England (BoE) underscored the importance of its occasional cyber security wargames by pronouncing that cyberattacks constituted the greatest threat to the integrity of the UK's financial sector. Similar exercises have been conducted everywhere from Australia to Bahrain.

Such wargames are not uncommon, with central banks regularly chiding their retail brethren for neglecting this or that aspect of their cyber security position. But the threat environment has changed rapidly in recent years. Russia's invasion of Ukraine shone a spotlight on its attempts to hack not only Kyiv but all of its allies, while other rogue nations like North Korea and Iran are also perfectly capable of mounting sophisticated cyberattacks to advance their national goals. These nations are usually in league with what are often described as cybercrime cartels - the Lazarus Gang, Darkside, REvil and Trickbot's of the world, all on the lookout for juicy targets.

Banks are increasingly tempting in this respect. For years, financial institutions have defined good practice as making sure their own systems are well-protected. Meanwhile, banks have overlooked the fact that so many of the systems they outsource to third parties are increasingly vulnerable to subversion. "I suspect that central banks globally are under pressure from their governments to say, actually, our financial instructure is now critical infrastructure and that we need to approach it as we would gas and electric," says Buck Rogers, professor of cyber security at the University of Gloucestershire and the former CISO for the BoE. "I think that the concern would be, at what point does this stuff crystallise so that it has an impact on US Plc, UK Plc, or Europe?"

Not every central bank shares these concerns. A recent study by the IMF found that more than half of the 51 financial jurisdictions it surveyed 'do not have a national cyber strategy for the financial sector,' while 64% do not mandate cyber security testing or even guidance on what banks should do if they're hacked. What's more, those countries that do organise wargames are often concentrating on the wrong type of threat, says Tom Kellermann, senior vice-president of cyber strategy at Contrast Security. "They're really focused on denial of service attacks," says Kellermann. "I don't think that's the worst-case scenario."

Cyber security 101

Classifying the financial services sector as vulnerable to cyberattack seems, at first, counterintuitive. Most banking, after all, now takes place online: ensuring the lines of communication between the firm and its customers remain secure, therefore, has become the sine qua non of doing business. That attitude has helped keep the sector at the forefront of cyber security practice, says Rogers, primarily "because they're happy to throw money at the problem - rightly so - to make it better".

A recent survey by the BoE found that 74% of banking executives believed cyberattacks constituted the greatest threat to their businesses. What worries Rogers, though, is that many of these same executives don't fully understand the advice they're being given on how best to prevent them. "Do they understand the risk management around that, and have mitigations and processes in place to manage that risk?"

The consequences of not understanding will likely result in a warping of the decision-making process about cyber within the institution. "If you're not careful, security decisions are going to be made by non-security people," says Rogers. A CFO, for example, may decide to outsource a portion of the HR department's operations to a third-party software provider. "Unless you are a well-versed and senior CSO, this decision may pass you by. And so, suddenly, you've got a supply chain risk."

This, adds Rogers, is the hidden threat that not enough people inside and outside the industry truly appreciate. While banks have invested countless millions in shoring up their cyber security and, by extension, the confidence of retail customers in their operations, a great deal of this has involved outsourcing key services to third parties. "They're embracing fintechs, APIs, modern applications, multi-cloud [strategies]," says Kellermann. "As a result, their attack surface has gotten greater."

A judiciously planned attack on a managed service provider (MSP) a la Solarwinds, for example, could paralyse operations at multiple financial institutions overnight. One such breach at Ion Cleared Derivatives, which supplies the software used to process millions of futures trades every day, resulted in swathes of that market being paralysed for several days. The same could be achieved by hacking the APIs that form the connective tissue between multiple banking systems, affording them multidirectional access. " No one's paying attention to API security!" Kellermann laments, despite the fact that such hacks rose by 257% year-on-year in 2022.

There are also more insidious ways for hackers to work their will on banks, he continues. "Most of the cybercrime conspiracies today don't just involve wire transfer, fraud or ransomware," says Kellermann. "They really focus on targeting non-public market information, and hijacking the digital transformation of the institution to use it to attack their constituency." These so-called watering hole attacks, where perfectly legitimate online infrastructure is poisoned with malware by cybercriminals, haunt Kellermann, especially now that so many banks are now deeply enmeshed in decades-long digital upgrades.

These kinds of cyberattacks are undoubtedly complex - but not beyond the capabilities of rogue nations that see the Western financial sector as an especially vulnerable target. "They could leverage attacks with their cybercrime communities that could turn the financial sector on itself," says Kellermann. Russian groups have already attempted over a dozen destructive cyberattacks against major Western financial institutions, he adds, thwarted only because UK and US intelligence services shared critical intelligence at the right time.

"That's the only reason we haven't seen [it] occur," says Kellerman. "But they tried 14 times."

In short, banking executives need to ditch the mental image they have of would-be hackers in hoodies chugging energy drinks all night long. The threat they face is much more sophisticated than that. "We're against professionals with a HR department, with objectives, with money they've got to earn, a family to support," says Rogers. "And we need to match that."

Stress-testing the best

What happens when these groups target another MSP - or worse, use that as a springboard into more lucrative parts of the bank, perhaps with the goal of holding an entire institution or three to ransom, or leaking sensitive information into the wider market? As far as the consequences go, explains Rogers, the worst-case scenario would be a general sapping of public confidence in the financial sector itself. While the initial consequences might be patched up easily enough with the deployment of IT security teams and the odd bailout, the political contagion could be massive and long-lasting.

Indeed, this prospect was demonstrated recently with the collapse of Silicon Valley Bank, explains Rogers: "You've got a tech bank in the US [collapsing], and suddenly it gets the UK prime minister stepping in and looking at how HSBC, in this case, would buy it."

Any stress-testing of a bank's cyber security resilience needs to take into account that the attack surface has fundamentally changed - and that reliance on third-party software providers "is not going to go away," says Rogers. "I'm sure the big ones will have thousands and thousands of critical third parties." Future stress tests, he continues, should involve the central bank quantifying and raising awareness about that risk and whether "they have a plan B, and a plan C".

That should involve reaching further down into the supply chain than ever before. Most big banks, says Rogers, "are really good on their top, critical suppliers, wherever they may be. My concern would be the ones below the threshold". Financial institutions should be honest about how bad the impact could be if even these smaller services were subverted by hackers. "If something happened to them," says Rogers, in the voice of a former central banker, "will it make you wobble?".

Some legislative action has already been taken on this front: the European Parliament, for example, recently passed the Digital Operational Resilience Act, which makes banks responsible for the cyber security of their third-party security vendors. Joining up all the different stress-testing standards for cyber security might also help, argues Rogers, echoing a similar call from the G20's Financial Stability Board. For the multinational banks, at least, international agreement on commonalities between these rules could make an enormous difference in how they position themselves when a breach occurs in one country but impacts on their operations on a completely different side of the world.

Banks also need to fundamentally rethink how they devise their basic cyber security strategies, Kellermann stresses. It's no longer the case that institutions should only be thinking about defending their own premises, or that they can always succeed in preventing hackers from snooping inside their systems. "They really need to invert the security paradigm to defend from within, and to really focus on intrusion suppression," says Kellermann.

That necessarily involves increased investment in runtime protection for applications, the micro-segmentation of networks and infrastructure, extended detection response services, and above all people. If banks can't get good personnel - there is, you might have heard, a global IT security skills shortage - then the next best thing they can do is hire a managed detection and response firm specialising in financial cyber security, argues Kellermann. And they shouldn't be afraid to look for attackers in places traditionally considered off-limits to most security teams, like the computers used daily by senior leadership.

Rogers also thinks that information exchange also needs to improve. Forums do exist where banks can converse all the live-long day about threat actors and attack vectors, but these need to be harnessed by the industry in a more systematic way. Banks, says Rogers, "just need to use them properly".

Overall, though, the former central banker is hopeful that the Western financial institutions can and will get their acts together. Rogers is especially encouraged by the attitude of UK regulators, who he argues have been "laser-focused" when it comes to the City's cyber security. And if the industry gets this right, he explains, it can only serve as a positive example for other corporate managers of critical infrastructure to begin re-evaluating their threat landscape. In the meantime, though, banks need to get talking to one another about where the threats lie.

"My call would be, let's talk more and exchange information," says Rogers. "Because if we want to be taken as a profession, then we need to act like one."

# data[].attributes.attachment_link.title
Big banks badly need a cybersecurity overhaul

# data[].attributes.attachment_link.description
Central banks are getting nervous that their retail cousins are neglecting cyber security protections that might prevent a financial meltdown.

# data[].attributes.attachment_link.title
How Analytics Can Deepen Banks’ Customer Relationships

# data[].attributes.attachment_link.description
Activating high-value customers beats pursuing raw retention goals.

# data[].attributes.attachment_link.description
Find new ideas and classic advice on strategy, innovation and leadership, for global leaders from the world’s best business and management experts.

# data[].attributes.attachment_link.readable_text
LONDON-Jan. 27, 2022- By targeting markets that are underserved by traditional banks, neobanks and fintechs are quickly gaining ground on incumbents, one strategic segment at a time. Many traditional banks now find themselves playing catch-up, but they are often hampered by complicated IT architectures and conflicting business priorities.

A new report by Bain & Company and cloud banking platform, Mambu, reveals that for traditional banks to compete in this shifting arena, they will need to pursue digital transformation, addressing an even broader call to action: augmenting legacy systems to accelerate growth and aligning their tech strategies to the most promising emerging markets.

"With disruption being greater, faster and more unpredictable than ever before, incumbent banks-possessing outdated roadmaps and weak tech strategies-stand at a great disadvantage among their competitors," says Philipp Baecker, an expert partner in Bain & Company's EMEA Financial Services practice and lead author of the report. "Customers' wants and needs have been completely reshaped by the pandemic and an increasingly digital lifestyle. Failure to keep pace with these changing market needs will mean that banks wage the risk of being overtaken by nimbler, neobank competitors, who are laser-focused on creating high quality, hyper-relevant solutions and experiences for their customers and are already reaping the rewards from their efforts."

"The rise of new players in finance has put the challenges faced by incumbent banks squarely in the spotlight," said Jeff Tijssen, Bain & Company's global head of fintech. "To compete effectively, banks will need to adapt an agile approach to operations, scaling customer-centric propositions that will allow them to create highly personalized solutions and regain their position in the market."

As incumbent banks are quickly learning, banking is no longer a one-size-fits-all solution. Customers are increasingly overlooking generic, mass-marketed products, but traditional banks have failed to recognize that personalization is quickly becoming a marker of banking agility. Neobanks and fintechs, however, are currently winning on customer centricity, using it as the basis for all their significant decisions-from product development and marketing to investment allocation.

For digital banks, this laser focus on personalized solutions and experiences has led to a 4% to 8% growth in revenue over competitors, as well as a dramatic increase in membership. In fact, according to the report, US digital-only banks are projected to service nearly 20% of the population by 2025, reaching more than 53 million account holders and nearly doubling their 2021 total of members.

"To offer personalized services and be truly customer-centric, banks must be agile and adaptive at their core, meaning they must learn to respond, iterate and pivot quickly, as business and customer needs fluctuate," says Mambu's Regional Director of Advisory Services, Kunal Galav. "That means unlocking new segments, such as gig-workers, or developing new products, such as buy now, pay later, to fulfil existing customers' needs and secure growth."

More insights from the full report, Banks' New Growth Path: From the Customer to the Cloud, here.

Editor's Note: To arrange an interview, contact Aliza Medina at Aliza.medina@bain.com OR +44 20 7969 6480.

# data[].attributes.attachment_link.title
For banks, deeper digital customer connection will drive new growth

# data[].attributes.attachment_link.description
Banks' new growth path: New report by Bain & Company and Mambu highlights opportunities to win over customers by augmenting legacy technology with cloud-based platforms