To Seize a $7 Trillion

Opportunity, Banks Need

Bolder Strategies for Serving
Customers and Society
January 2024
By Saurabh Tripathi, Kilian Berz, Andreas Biffar, Aparajit Sudhakar, Kathrin Haubner, Allard Creyghton,
Sam Stewart, Stiene Riemer, Yogesh Mishra, Andy Maguire, Axel Weber, and Mark Wiseman

Amid a multifaceted disruption, they also need

supportive governments and collaborative regulators
Contents
01 Executive Summary • Navigate Strategic Choices in Embedded
Finance and Embedded Commerce

• Retain a Hold on Highly Profitable

03 To Meet Today’s Expectations, Areas of the Banking Stack
Banks Need a Bold Agenda
• Banks Now Have a Window of 19 Regulators Should Collaborate
Opportunity
with Banks
• The Rules of the Game Will Continue to
Change • New Regulatory Approaches and
Capabilities Are Needed
• Banks Are Stuck Between Income
Pressures and Nonscalable Cost • Ensure a Level Playing Field Across the
Structures Entire Stack

• IT Legacies Constrain the Headroom for • Foster Consolidation, Directly and

Bold Modernization Indirectly

• Macro Trends and the Climate Transition • Stimulate Digital Public Infrastructure
Will Increase Demands on Banks and Industry Utilities

• Will Open Banking Intensify the Push • Sharpen Regulatory Clarity on Digital
of Big Tech Companies into Banking? Assets

• Nonbanks Are Threatening to Unseat • Should Regulators Reinforce Banks’

Banks as the Primary Commercial Role in Financial Advisory?
Credit Providers

22 Banks Can Make Productivity

11 Seven Strategic Imperatives Can Leaps of 40% with a Radical
Unlock $7 Trillion in Value Redesign
• Defend Primary Banking Relationships
with a Holistic, Digital Offering • Take Decisive Action on Business
Portfolio Choices
• Reinforce the Role as Trusted Custodian
of Customers’ Financial Well-Being • Optimize the Balance Sheet for Value,
and Excel in Deposits
• Turn Risk and Compliance and Social
Responsibility into a Competitive • Raise Operating Leverage and Delivery
Advantage Excellence

• Boldly Embrace the Climate Transition • Become a Tech Product Company, Not
Challenge Just a Tech Company

• Capture Network Effects and Increase • Strengthen the Foundations of Data

Scale Through Partnerships
• Build New Muscle in Partnerships

33 About the Authors

Executive Summary
Banks must redefine where to compete, who to partner with, and
how to deliver value amid multifaceted disruption in the global
financial ecosystem. They cannot succeed without active support
from governments and cooperative partnerships with regulators.

The So What Now is the time to act and truly embrace radical
change rather than incremental improvements.
Banks are not likely to return to the profitability Currently, many banks benefit from income tailwinds due
levels and valuations that existed prior to the global to rising rates that creates headroom for change. At the
financial crisis. Yet they have the opportunity to earn same time, many newer competitors (such as payments
more than their cost of equity on a sustainable basis and players, fintechs, and even big tech companies) are facing
increase valuations. challenges—in particular, increased attention from regula-
tors (which is expected to slow their growth) and rising
We estimate that at least $7 trillion in value can be scrutiny from investors (potentially complicating their
created. This corresponds to roughly doubling current access to funding for growth).
valuations in the coming five years by taking a fair share of
expected growth and improving price-to-book ratios. Governments will place high expectations on banks
to be role models and catalysts for change on climate
It is critical for banks to set their sights on this target. transition and corporate social responsibility. The
The goal is not only to create shareholder value but also to climate transition will create new business opportunities
meet their obligations to drive economic growth and fi- for banks but will place additional pressure on profitability
nance the climate transition. These aspirations can be in the short term.
reached if banks take a step back, get to the bottom of
their performance issues, and set a bold agenda. This Regulators are expected to place additional capital
agenda needs to promote growth, significantly improve and liquidity requirements in anticipation of higher
productivity, and make them more appealing to investors risks. These demands will mandate significant loan-
to enable additional capital infusion. portfolio optimization and further investments in data
infrastructure for tracking and reporting.
Banks’ share of total financial assets in almost all
economies has been steadily declining. The trend is Regulators and governments across the world can
accentuated in markets where many banks have unsus- embrace complementary ideas. Such cooperation can
tainable financial returns—bank valuations remaining reinforce banking profitability without compromising sys-
below book value for sustained periods—and in high- temic stability. They should adopt new agile approaches to
growth economies where demand for production credit is rules like the test-and-learn paradigm, push for consolida-
rising at a rapid pace. A cross-market review of banks tion, and encourage industry utilities and digital assets,
suggests that those with business models anchored in among other things.
primary customer relationships have high valuations.

BOSTON CONSULTING GROUP 1

Now What Banks need to embrace the paradigm of a “tech
product company” and not just a “tech company” as
If banks want to win competitively, they must drive a foundation for a new organization model and
toward far-higher productivity and radically reduce talent framework. This paradigm places emphasis on
the cost of complexity. Starting with a digital-first deliv- business teams to upskill themselves as “product owners”
ery concept and a detailed cost-driver understanding, it is with expectations of rapid customer centric feature itera-
possible to design a zero-based business model that will tions and prioritizations, continuous test and learn, and
allow a step change in productivity that is 40% higher than collaborative working with technical teams.
what is considered normal today.
It is no longer viable for banks to approach
Banks need to make portfolio decisions that transformation incrementally. They cannot continue to
enhance value. Banks should exit business lines or, at a build, bit by bit, on legacy setups that can actually do more
minimum, reduce capital exposure to low-return asset to hold them back than to propel them forward. Banks
classes and invest in new areas of strategic growth with need to holistically examine their entire organization and
more favorable levels of return on equity. blaze a clear strategic path that enables them to meet
their obligations—not only to customers but also to society
Banks need to design a drastically simplified business as a whole—by driving economic growth, helping to fi-
model. It must be supported by an actively managed nance the climate transition, and creating lasting share-
balance sheet, a modern platform operating model, a bold holder value.
deployment of front-to-back digitization, and a comprehen-
sive re-imagination of functions leveraging AI and genera-
tive AI. The new operating model should help deliver vastly
more impact from data and technology as well as help
build strategic partnerships and capabilities for competi-
tive advantage.

2 TO SEIZE A $7 TRILLION OPPORTUNITY, BANKS NEED BOLDER STRATEGIES FOR SERVING CUSTOMERS AND SOCIETY
To Meet Today’s Expectations, Banks
Need a Bold Agenda

T
he global financial crisis (GFC) marked a turning The largest driver of pessimism about the banking sector
point for the banking industry. Major systemic risks has been the significant drop in profitability. The average
were revealed and a massive government interven- return on equity has declined by more than 450 basis
tion was required to restore a measure of stability. points since the GFC, and many banks do not earn their
cost of equity. Although bank valuations and profitability
Not surprisingly, bank valuations across the globe took a have been under duress across the globe, the situation has
severe hit, and large parts of the sector have never recov- varied strongly across markets. For example, in emerging
ered. In 2022, roughly 75% of bank equity traded below a markets such as Southeast Asia and India, banks have
price-to-book ratio of 1.0. (See Exhibit 1.) On a price-to- benefited from high economic growth expectations. In
earnings basis, multiples were almost cut in half by the relatively smaller markets that are often more consolidat-
GFC. The discount for bank stocks shows an increase from ed and partly shielded by their own currencies (such as
about 20% in 2006 to nearly 60% in 2022, compared with Australia, Canada, and Sweden), banks have tended to
the stocks of other industries. Consequently, the total perform better. Unique market structures (such Germany’s
shareholder return of the banking sector has lagged be- three-pillar system) affect the competitive situation and
hind major market indices since the GFC—a gap that is tend to negatively impact banking returns.
increasing. (See Exhibit 2.)

BOSTON CONSULTING GROUP 3

Exhibit 1 - Seventy-Five Percent of Bank Equity Traded Below a
Price-to-Book Ratio of One

12%
17%
98%
Canada 93%
86%
73%
61% North and
37% East Asia
Europe
US

32% 33%
51% 47%
Middle East South and
59% and Africa Southeast Asia
59%

Latin
America

x% Share of bank equity that traded at P/B < 1, 2022

x% Proportion of banks that traded at P/B < 1, 2022

P/E ratio, industries’ average vs. banks’ average

–23% –58%
Share of bank equity that traded below
~65% the P/B ratio of one in the past ten years

18.0 18.2
13.8
7.7
Share of bank equity that traded
~75% below the P/B ratio of one, 2022
FY06 FY22
Industries Banks

Banking’s P/E ratio has dramatically fallen,

while that of other industries has remained steady

Sources: S&P Capital IQ; BCG analysis.

Note: P/B = price to book; P/E = price to earnings. Europe excludes Russia. North and East Asia is Mainland China, Japan, South Korea, Taiwan, and
Hong Kong. South and Southeast Asia is India, Singapore, Indonesia, Malaysia, Thailand, Vietnam, and the Philippines. The Middle East and Africa is
Israel, Saudi Arabia, United Arab Emirates, Qatar, Kuwait, Bahrain, Egypt, South Africa, and Nigeria. Latin America is Mexico, Colombia, Brazil,
Argentina, Chile, and Peru. Values are derived from the equity and the market capitalization of the largest listed banks (representing at least 80% of
assets in the respective regions).

4 TO SEIZE A $7 TRILLION OPPORTUNITY, BANKS NEED BOLDER STRATEGIES FOR SERVING CUSTOMERS AND SOCIETY
Exhibit 2 - Since the Global Financial Crisis, Banks’ TSR Has Lagged
Behind Major Market Indices
Banks’ TSR (December 2002, index = 100)

1,000
900
800
S&P 500
700
S&P Asia 50
600
Asia-Pacific banks
500
North American banks
400
Euro Stoxx 50
300
200 European banks
100
0
Dec 2002

Dec 2003

Dec 2004

Dec 2005

Dec 2006

Dec 2007

Dec 2008

Dec 2009

Dec 2010

Dec 2011

Dec 2012

Dec 2013

Dec 2014

Dec 2015

Dec 2016

Dec 2017

Dec 2018

Dec 2019

Dec 2020

Dec 2021

Dec 2022

Sep 2023
Before the global Global European sovereign Peak of Normal rate
financial crisis financial crisis debt crisis COVID-19 environment
pandemic
Sources: S&P Capital IQ; BCG’s ValueScience Center.
Note: TSR = total shareholder return. Market data is as of September 2023. TSRs were calculated in US dollars using historical conversion rates.
Regional banks’ TSR represents the median TSR. Banks include the 35 largest banks in Europe, the 45 largest banks in North America, and the 60
largest banks in Asia-Pacific based on market capitalization as of September 30, 2023.

Of course, variation in valuations within markets can also It is critical for banks to set their sights on this target not
be significant. Some banks have benefited from their only to create shareholder value but also to meet their
specific business models (especially those with capital-light obligations to drive economic growth and finance the cli-
income streams). But more generally, the outperformers mate transition. The goal can be reached if banks take a
have been the banks that adjusted their business models step back, get to the bottom of their performance issues,
to the new reality after the GFC. Such banks have em- and sketch out a bold strategic agenda that enables growth,
braced the impact of new regulations and reduced income higher productivity, and adequate shareholder returns.
volatility—as well as demonstrated execution discipline via
strict capital management and stronger operating leverage. Many newer competitors, such as pay­ments
players, fintechs, and even big tech companies,
Since bank valuations are built on future expectations, are facing challenges.
current levels point to a cautious outlook among investors.
Investors are concerned that net income and profitability Now is the time to act and truly embrace radical change
metrics are “capped.” They expect that net interest income rather than incremental improvements. Many banks still
likely has peaked and are instead concerned about future benefit from income tailwinds due to rising rates that cre-
risks (e.g., higher default rates). ate headroom for change. At the same time, many newer
competitors (such as payments players, fintechs, and even
big tech companies) are facing challenges—in particular,
Banks Now Have a Window of Opportunity increased attention from regulators (which is expected to
slow their growth) and rising scrutiny from investors (poten-
To be sure, we do not believe that banks can return to the tially complicating their access to funding for growth).
profitability levels and valuations that existed prior to the
GFC. Nonetheless, banks have the opportunity to earn
more than their cost of equity on a sustainable basis and The Rules of the Game Will Continue to Change
increase valuations. There are multiple ways to gauge the
ambition for an upside—closing the gap in price-to- Following the enormous public investment required to
earnings multiples to other industries, capturing a fair rescue the banking sector from the GFC, governments and
share of expected growth, or improving price to book. We regulators focused on establishing systemic stability—the
estimate that at least $7 trillion in value can be created. most significant measure being an increase in the amount
This corresponds to roughly doubling current valuations in of capital banks must hold given their balance sheet risk.
the coming five years—an exemplary derivation would Ever since, banks have worked to optimize their risk-
correspond to growth at rates comparable to past years weighted assets, but this remedy has only partly offset the
and improving price-to-book ratios to 1.25, on average. requirements. (See Exhibit 3.)

BOSTON CONSULTING GROUP 5

Exhibit 3 - Higher Capital Requirements Have Not Been Fully Offset by
Higher Returns on Assets
Return on equity, ∆ Capital ∆ Risk weights ∆ Return on assets Return on equity,
2006 (%) (change, %) (change, %) (change, %) 2022 (%)

Europe 15.9 –7.0 2.8 –1.8 9.9

North 15.6 –3.4 3.1 –4.0

America 11.3

North and
East Asia 10.1 –1.9 0.0 0.5 8.7

South Asia,
Southeast Asia, 15.3 –4.5 2.2 –1.7 11.3
and Oceania

Middle East 19.4 –2.5 –1.5 –3.5

and Africa 11.9

Latin 19.4 –1.1 1.3 –4.0 15.6

America

Sources: S&P Capital IQ; BCG analysis.

Note: Europe excludes Russia. North and East Asia is Mainland China, Japan, South Korea, Taiwan, and Hong Kong. South and Southeast Asia is
India, Singapore, Indonesia, Malaysia, Thailand, Vietnam, and the Philippines. Oceania is Australia and New Zealand. The Middle East and Africa is
Israel, Saudi Arabia, United Arab Emirates, Qatar, Kuwait, Bahrain, Egypt, South Africa, and Nigeria. Latin America is Mexico, Colombia, Brazil,
Argentina, Chile, and Peru. Values are derived from equity and the market capitalization of the largest listed banks (representing at least 80% of
assets in the respective regions).

Indeed, banks were not able to pass on the implied costs of The second is a more risk-sensitive standardized approach
the higher net-resource needs to their customers in the (for example, through more granular segmentations and
form of higher prices. Only very few adapted to the new risk drivers) that does not disincentivize the use of good
reality by taking fundamental portfolio choices. In fact, the risk management practices (for example, adequate collat-
return on assets declined in almost all markets, with lower eralization levels) and robust risk-based decision making.
fee income being the key contributor. (See Exhibit 4.) Look-
ing ahead, regulations that are already in effect (such as This shift aims to level the playing field among institutions,
Basel IV in Europe and Basel III Endgame in the US) are ensuring greater comparability in performance and pro-
expected to have a significant impact on banks. Two main moting fairer competition. There will, however, be notable
principles are driving this dynamic: differences in the impact of implementation, owing to
different starting points and specific application rules
The first is more stringent caps on the maximum capital (such as variations between the US and Europe). Inconsis-
savings that internal models can generate and less discre- tencies across regions will likely lead to increased complex-
tion in their application (for example, low-default portfolios, ity and higher operational costs for cross-border banks.
operational risk) and on methodological choices (for exam- Since the effects differ across asset classes, a careful evalu-
ple, discount rates for LGD models). ation of balance sheet structure and resource allocation is
more relevant today than ever before.

6 TO SEIZE A $7 TRILLION OPPORTUNITY, BANKS NEED BOLDER STRATEGIES FOR SERVING CUSTOMERS AND SOCIETY
Exhibit 4 - Lower Fee Income Was a Key Contributor to the Drop in Return
on Assets in Most Markets, Despite Improvement in the Cost per Asset
Return on ∆ Fee income ∆ NII per ∆ Cost per ∆ Other effects Return on Asset
assets, per asset asset asset per assets assets, CAGR
2006 (%) (change, %) (change, %) (change, %) (change, %)1 2022 (%) 2006–2022 (%)

Europe 0.7 –0.7 0.5 0.0 0.5

~2.5
0.1

North 1.2 –1.1

America 0.7 0.4 0.9 ~6.0
–0.2

North and
East Asia 0.6 –0.4 0.6 0.1 0.7 ~9.0
–0.1

South Asia,
Southeast Asia, 1.0 –0.3 0.0 0.1 0.0 1.0 ~9.5
and Oceania

Middle East 2.0 –1.4 1.0 0.2 1.3 ~9.5

and Africa 0.0

Latin 2.2 –2.8 3.3 0.3 1.5

America –1.6 ~12.0

Sources: S&P Capital IQ; BCG analysis.

Note: NII = net interest income. Europe excludes Russia. North and East Asia is Mainland China, Japan, South Korea, Taiwan, and Hong Kong. South
and Southeast Asia is India, Singapore, Indonesia, Malaysia, Thailand, Vietnam, and the Philippines. Oceania is Australia and New Zealand. The
Middle East and Africa is Israel, Saudi Arabia, United Arab Emirates, Qatar, Kuwait, Bahrain, Egypt, South Africa, and Nigeria. Latin America is
Mexico, Colombia, Brazil, Argentina, Chile, and Peru. Values are derived from equity and the market capitalization of the largest listed banks
(representing at least 80% of assets in the respective regions).
1Other effects include loan loss provisions, taxes, and miscellaneous items.

Banks Are Stuck Between Income Pressures tively, without focus on process design or cost efficiency.
and Nonscalable Cost Structures While banks’ operating expenses have declined relative to
assets, cost-to-income ratios have not materially improved,
Across most markets and business lines, two main factors and the industry has not seen real progress in operating
are responsible for the persistent decline in fee and com- leverage. The increased complexity affects midsize players
mission income relative to asset volumes: regulatory action in particular, because they must deal with requirements
(such as the outright banning, reduction by fiat, or capping similar to those mandated for large players.
of fees), and more-intense competition spurred by the rise
of new, digital competitors. Consolidation can be a natural way to deal with rising fixed
costs in many industrial sectors, but this solution is not
To address such challenges, over the past decade, banks always applicable to the banking business. There was in-
across the globe have run major cost-reduction programs deed consolidation in several markets after the GFC, nota-
and have invested heavily in digitization and automation. At bly in the US. However, large-scale consolidation would not
the same time, banks have had to develop capabilities and be a panacea because, among other reasons, it can hinder
resources to handle increasingly complex regulatory guard- access to financing for specific segments (such as small
rails, especially for areas such as cybersecurity, financial and medium-sized enterprises, or SMEs). In addition, con-
crime, and climate risk—a buildup often carried out reac- solidation can create players that are too big to fail.

BOSTON CONSULTING GROUP 7

IT Legacies Constrain the Headroom for Bold Some large banks have the scale to invest out of the vicious
Modernization cycle, and some small banks with simpler business models
can turn to extensive outsourcing of applications using
Technology is at the core of banks’ operating models. software-as-a-service vendors. Still, many midsize banks are
Consequently, the share of income that banks spend on IT stuck carrying a level of complexity similar to that of large
is higher than the share spent in most other industries—a banks but lacking the sufficient budget, high-quality tech
gap that is still increasing. (See Exhibit 5.) talent, and resources to embrace outsourcing at scale
(owing partly to data-migration challenges).
Yet banks have struggled both to reap the benefits of their
tech spending and to achieve a step change in their cost
bases. Many institutions are trapped in a vicious cycle, Macro Trends and the Climate Transition Will
particularly in developed economies where large players Increase Demands on Banks
tend to have a complex tech setup of legacy systems that
feature an intricate web of point-to-point connections. New With interest rates apparently returning to higher-for-longer
functionalities can be delivered only via patch solutions norms, most banks—especially those with strong deposit
that further increase complexity. The main challenge with bases—have experienced a strong income tailwind. Yet this
such an infrastructure is that it complicates change, such effect has already reached its peak or is expected to do so
as adopting to new regulatory requirements, due to factors soon. If rates stay at current levels, credit and liquidity risks
like regression testing and integration issues. It also makes that are already emerging will intensify. Accordingly, regula-
this change more expensive. These banks are therefore not tors are exploring a further rise of capital requirements and
able to redirect enough funding to holistic modernization ways of applying more scrutiny on liquidity risks. Anticipa-
that allows for true innovation. tion over how best to manage the balance sheet, along
with the inherent, related risks, will only heighten.
A cross-industry survey conducted by BCG found that de-
spite huge investments, banks are running behind in em-
bracing continuous improvement and building new capabil-
ities at scale. (See Exhibit 6.) This problem will escalate
further in the medium term, given the disruptive technolog-
ical advancements made in AI (such as generative AI).

Exhibit 5 - Banks Are Spending More on IT, but Only a Small Share of the
Total Spending Is on Innovation and Modernization

IT spending across industries as a

IT spending in banking (%)
share of revenue (%)

100

55–65

11
9
8 15–20
6 6 7

2 1 2 1 3 1 20–25

2020 2023 2026E Total Run the Regulatory- True

IT spending bank led changes innovation
Financial institutions TMT

Consumer goods Manufacturing

Sources: Gartner; Oxford Economics; BCG’s Expand Research.

Note: TMT = technology, media, and telecommunications.

8 TO SEIZE A $7 TRILLION OPPORTUNITY, BANKS NEED BOLDER STRATEGIES FOR SERVING CUSTOMERS AND SOCIETY
Exhibit 6 - Despite Huge Tech Spending, Banks Are Running Behind Other
Industries in the Systemic Building of New Capabilities at Scale
Companies (%)
Future built
100 Continuous innovation by systematically
10 4 4 building capabilities at scale
12 17
15 16
14
29 Scaling
50 Successful digital transformation
48 44 37 by pivoting to innovation-led growth
50

39 Emerging
Executed digital transformation, but
40 36 37
33 facing challenges in effective scaling
15
0
Banking Industrial Consumer Payments, Technology,
goods goods asset media, and Stagnating
management, telecom- Yet to create value
and wealth munications
management

Source: BCG’s Build for the Future Survey 2022.

Note: Sample size varies for each industry. Specifically, n = 30 for banking, n = 84 for industrial goods, n = 25 for consumer goods, and n = 78 for
technology, media, and telecommunications.

Moreover, a majority of central banks globally are exploring Will Open Banking Intensify the Push of Big
the launch of central bank digital currencies (CBDCs). Tech Companies into Banking?
According to the Bank for International Settlements, there
could be up to 15 retail and 9 wholesale CBDCs in circula- After a long gestation period with underwhelming impact,
tion by 2030. Such a possibility is capable of shaking up open banking is reaching a tipping point in most markets
the fundamental building blocks of finance for banks, that includes standards, infrastructure, broad-based adop-
which would lose fees to new entrants if nonbanks are tion, and global reach. The US, with arguably the most
permitted to distribute CBDCs. And some balances could widespread adoption, is set to embrace rules mandating
shift away from banks’ books to central banks’ books. open application programming interfaces (APIs) for banks
Ultimately, the outcome will depend on the approach and a central body to ensure standardization. The Europe-
across markets. Europe is likely to pursue a digital euro as an Commission’s proposed guidelines for the Third Pay-
a pan-European digital payment instrument, and emerging ment Services Directive recognize the success of the UK in
markets are likely to leverage the programmability feature enforcing standards across the industry. Emerging mar-
of CBDCs for social payouts and other purposes. kets—for example, India and Brazil—have advanced
frameworks to promote financial inclusion using services
Banks will play a crucial role in the climate transition and such as cashflow-based credit for small businesses.
more broadly in the overall environmental, social, and
governance (ESG) agenda. Governments see them as key Over the next three to five years, we expect that govern-
in steering financial flows to support change. Climate is ments and regulators will press ahead with a concerted
probably the biggest risk the world will face in the next effort to safely push open banking. Their aim will be to
decades. Transition and physical risks may also impact trigger higher levels of consumer-facing innovation and
financial stability, being drivers of risks (for example, credit, digitization, as well as to enhance customer journeys. This
market, operational, litigation) for banks. Regulators are trend could pose a serious medium- to long-term risk to
placing a very important emphasis on how banks are banks that are not fully prepared to leverage their infra-
managing these risks. In particular, the focus has so far structure as a data user, rather than being just a data
been on disclosure and embedding of climate in the over- provider.
all risk management framework. Going forward, we expect
an increased focus also on capital (and accounting) re-
quirements. Managing climate risks requires the ability to
“measure,” which will require structured end-to-end ESG
data platforms and increased data availability.

BOSTON CONSULTING GROUP 9

Apple’s recent announcement that it will use open banking In the aftermath of the GFC, certain high-risk businesses
protocols in the UK to offer customers access to their bank (such as proprietary trading and long-tenor financing) were
accounts through the Apple wallet could well signal an forced out of banks’ books by regulation. The trend of
upcoming complex interplay between the tech players and banks losing share in assets to nonbanks has continued
banks that are active in open banking. The integration of over the past decade, going beyond the intended risk-
wallets with bank accounts could take away rich transaction reduction goal and impacting core areas of their businesses.
information from banks and push them gradually toward The rapid rise of private credit is a case in point: at a 20%
the status of utilities. At the same time, we expect regula- compound annual growth rate (CAGR) from 2017 through
tors to extend their oversight of big tech companies in pay- 2022, private credit is the fastest-growing segment of the
ments domains in order to level the playing field with banks. asset management industry. Direct lending, representing
roughly a third of the $2.1 trillion in outstanding private
The trend of banks losing share in assets to credit globally, has grown at an even faster rate of about
nonbanks has continued over the past decade, 30%. In recent years, the focus of private credit has been
going beyond the intended risk-reduction goal and on leveraged or long-term financing, but recent announce-
impacting core areas of their businesses. ments by the largest players underscore their ambitions to
cover the credit market even more broadly, building their
own origination platforms and leveraging their access to
Nonbanks Are Threatening to Unseat Banks as funding.
the Primary Commercial Credit Providers
To be sure, the diversification of financing sources for the
The crucial role of banks in channeling productive credit real economy is a good thing. However, the regulatory
into the economy is historically well established. In nearly arbitrage with the nonbank world—which has no capital
all markets, small businesses disproportionately depend requirements, price transparency, or price controls—cre-
on banks for funds. Most markets, the US being a notable ates a systemic risk. Regulated bank credit comes, of
exception, do not have sufficiently deep capital markets for course, with higher transparency and prudent safeguards
them to be a credible alternative. However, we find that that no other type of financial institution can match, and
banks’ share of total financial assets in almost all econo- banks have sharp capabilities in assessing commercial
mies has been steadily declining. (See Exhibit 7.) The trend creditworthiness and working out nonperforming assets.
is accentuated in markets where many banks have unsus- Driving economic growth and innovation, as well as sup-
tainable financial returns—bank valuations remaining porting structural transitions such as climate change, will
below book value for sustained periods—and in high- likely require high levels of bank financing. The ability of
growth economies where demand for production credit is banks to generate sustainable returns and attract capital is
rising at rapid pace. therefore critical for the broader global economy.

Exhibit 7 - Banks Are Ceding Ground to Nonbanks in Funding the Real

Economy
Ratio of bank assets to total financial assets (index)1
110

100

90

0
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Regions with an average banking P/B ≥ 12 Regions with an average banking P/B < 12

Regions with an average banking P/B ≥ 1 and high economic growth2 Regions with an average banking P/B < 1 and high economic growth2

Sources: Financial Stability Board report, 2022; BCG analysis.

Note: P/B = price to book.
Total financial assets includes those of banks, insurance companies, pension funds, nonbank financial institutions, and private capital firms.
1

The average is over 2011–2021.

2

10 TO SEIZE A $7 TRILLION OPPORTUNITY, BANKS NEED BOLDER STRATEGIES FOR SERVING CUSTOMERS AND SOCIETY
Seven Strategic Imperatives Can
Unlock $7 Trillion in Value

T
raditionally, most banking-related products and The banking stack both enables and challenges banks to
services have been integrated into the universal bank think about their future business models. It also unlocks
model. They are now being gradually deconstructed complex dynamics between banks and nonbanks: they can
as modern technology permits, allowing for the emergence be partners and competitors at the same time. Banks can
of new business models that focus on specific services. In choose the elements in the stack that they will own and
this context, guardrails have evolved to regulate the ser- outsource the rest to the extent permitted by regulators.
vices according to their risks, a trend that should intensify Overall, what’s required is a rejuvenation of the banking
as the fintech industry continues to mature. One way to value proposition, making choices and leveraging opportu-
think about a potential new landscape is the concept of a nities to remain relevant to customers and operate more
banking stack. (See the sidebar “The Banking Stack.”) efficiently. A number of different strategies can be activat-
ed with the resources and models available to banks. Here,
we highlight seven key imperatives.

BOSTON CONSULTING GROUP 11

The Banking Stack

The framework that we refer to as the banking stack is a For example, the following can result from outward
representation of possibilities, not realities. (See the exhibit migrations:
“The Banking Stack Is a Techno-Regulatory Framework of
Businesses Linked with APIs and Subject to Varying Levels of • Bank products can be originated and distributed on
Regulatory Scrutiny.”) It is a techno-regulatory architecture third-party platforms.
based on application programming interfaces (APIs), and it
allows a breakdown of banking into distinct services that can • Transactions in bank accounts can be initiated on
be offered on banks’ own digital platforms or on external third-party platforms.
ones. Conversely, banks can offer third-party financial (or
nonfinancial) services on their own digital platforms or out- • Credit can be originated by banks and sold to third-party
source certain processes to external providers. Technology has investors.
thus converted the banking ecosystem into a stack of prod-
ucts and services that are seamlessly interconnected through At the same time, banks can benefit from inward migrations:
APIs and subject to varying degrees of regulatory scrutiny.
• They can offer third-party financial services (such as
At a glance, the stack may look like a threat to banks because cross-border remittances) on their platforms.
they lose traditional ties to their customers. Moreover, they
will be required to reposition themselves in the financial • They can provide third-party nonfinancial services (such
services ecosystem. But it’s a two-way street, with services as travel-booking services).
migrating both out of and into banks’ orbits. (See the exhibit
“Banks Will Need to Navigate Complex Strategic Choices on • They can offer fee-based services (such as wallets for
Embedded Finance and Embedded Commerce.”) digital asset custody and secure storage for health data).

The Banking Stack Is a Techno-Regulatory Framework of Businesses

Linked with APIs and Subject to Varying Levels of Regulatory Scrutiny
Business stack
Financial
Consumer SME Corporate institutions
group Support stack

E-commerce facilitator ... Technology service

Marketplace and B2C loyalty platform B2B vertical solutions providers for banks

Wallets, payments, Financial

Transaction and Wealth Investment banking, ...
and transaction infrastructure
advisory management sales, and trading
banking technology

Unsecured consumer and ... Payment

Lending Mortgages
business loans networks

Deposit Custody (data and ... Data

Deposits
and custody digital assets) intermediaries

Digital public infrastructure and interbank infrastructure

(CBDC, credit registry, interbank payments system, digital identity registry, and centralized digital
KYC system)

Regulatory intensity Very low Low Medium Tight Very tight

Source: BCG analysis.

Note: API = application programming interface; SME = small and medium-sized enterprise; CBDC = central bank digital currency; KYC = know your customer.

12 TO SEIZE A $7 TRILLION OPPORTUNITY, BANKS NEED BOLDER STRATEGIES FOR SERVING CUSTOMERS AND SOCIETY
Banks Will Need to Navigate Complex Strategic Choices on Embedded
Finance and Embedded Commerce
1
Parts of the traditional Distribution Transactions Lending 2
bank model is at risk (via embedded (via open banking) (such as Banks can take advantage
finance) private credit) of the banking support
because third parties are
providing bank services stack to create scale

Outsource and
Bank insource
infrastructure and
processing
3
Banks can leverage
access to their customers Third-party Third-party New
to attract partners financial services nonfinancial services services
(such as insurance) (such as airline tickets) (such as custody of
digital assets and
health data)

Moreover, a rich set of operational activities can be in- The economics of business origination on fintech plat-
sourced or outsourced: forms was so compelling for small and midsize banks that
by 2019, we estimate that up to 45% of unsecured consum-
• Business processes (such as the mortgage application er loans (other than mortgages) that were on the books of
process) or services (such as know-your-customer sys- such banks in China were sourced through fintechs. (See
tems) can be outsourced to a tech vendor to help banks the exhibit “Unsecured Consumer Loans in China Sourced
access scale benefits. Through Fintechs.”) This number has come down to about
30% with regulatory intervention and the recognition by
• Technically, banks can insource back-office processes for banks of the hazards of turning into a utility. Still, Ant
other players. Group and WeBank are by far the largest players in the
unsecured consumer lending market.
A market where the dynamics of the banking stack has
been most pronounced is China. The rapid consumer
adoption of fintechs, such as Ant Group and WeBank, has
allowed disintermediation of banks for consumer lending.

Unsecured Consumer Loans in China Sourced Through Fintechs

Banks’ consumer loans (2019 estimates, %)1

55
Some banks
93 even reached
an estimated
80% or more 45
7
Large banks2 Small and midsize banks3

Bank lending (banks originate business) Co-lending (fintechs originate business)

Sources: Expert interviews; BCG analysis.

Excludes mortgages.
1

Large banks refer to large state-owned banks, joint-stock banks, and large-city commercial banks (more than RMB 1,500 billion in assets).
2

Small banks refer to small-city commercial banks and rural commercial banks (RMB 50 billion to RMB 100 billion in assets). Midsize banks refer to
3

midsize-city commercial banks and rural commercial banks (RMB 100 billion to RMB 1,500 billion in assets).

BOSTON CONSULTING GROUP 13

Defend Primary Banking Relationships with a Banking leaders are embedding third-party financial
Holistic, Digital Offering and nonfinancial products into their platforms to
consolidate primacy.
A cross-market review of banks suggests that those with
business models anchored in primary customer relation- There are strong differences in the digital maturity of retail
ships have high valuations. Such banks are able to sell banks. Typically, only a few players in each market have
multiple products across all aspects of banking (for exam- upgraded their propositions holistically, and the others are
ple, deposits, lending, transactions, and investments), lagging behind. (See Exhibit 8.)
providing access to rich transaction data for risk manage-
ment and marketing, as well as for attracting external A similar trend applies to corporate and investment bank-
partners—enabling banks to sell third-party products on ing. Players will need to build digital self-service platforms
their own platforms. This holy grail of value is true for that give institutional investors multichannel access to
banks across all segments—including retail, SME, and trading solutions and offer corporate treasurers a full
corporate—and has long withstood the test of time. Com- spectrum of offerings to manage cash and liquidity.
petition for deposits is currently increasing amid rising
rates, and studies show that diversifying deposit wallets Overall, providing a superior experience will permit banks
increases the risk of attrition in primary relationships. both to defend existing relationships and to win over cus-
tomers from nontraditional competitors—recapturing
Moreover, we have seen a step change in the complexity of business across the stack from digitally savvy customers
primary relationships because transactions have increasing- who have branched out to different platforms.
ly been conducted on nonbank platforms. Especially for
retail and SME customers, in order to maintain relation-
ships across varying products and services, offering a high-
quality, 360-degree digital experience delivered through
multiple channels has become table stakes. Banking lead-
ers are embedding third-party financial and nonfinancial
products into their platforms to consolidate primacy.

Exhibit 8 - Only a Few Banks in Each Market Have Pushed the Frontiers
of Digital Distribution Excellence
Digital capabilities (maximum score = 100)

Banks with best-in-class digital 360° scores have

two to seven times more customers per branch
Best in
class
>60

Global
average
32

Turkey Asian Poland India US UK France Canada Australia Saudi

super apps1 Arabia

11 key capability areas benchmarked

Daily banking and servicing Engage Offer and sell

• Money insights and liquidity • Product research • Marketing and engagement capabilities
• Product application and fulfillment • Login and security • Assisted sales and support
• Transfer and payments • Usability and customer • Third-party products
• Self-service features delight
• SME-specific features
Source: BCG’s 360º Diagnostic, September 2023.
Note: More than 300 mobile banking applications were assessed in more than 40 markets; not all banks and markets are shown. SME = small and
medium-sized enterprise.
Asian super apps include select players from Mainland China, Indonesia, Japan, Singapore, and South Korea.
1

14 TO SEIZE A $7 TRILLION OPPORTUNITY, BANKS NEED BOLDER STRATEGIES FOR SERVING CUSTOMERS AND SOCIETY
Reinforce the Role as Trusted Custodian of A related capability is to understand the spirit of regulation
Customers’ Financial Well-Being and anticipate its direction, foresee likely adjustments, and
embed options in strategy, technology, and process de-
There are limits to a purely digital experience in a trust- sign—rather than simply react (often with manual inter-
based product such as banking. Using high-quality engage- ventions) after new rules are enforced.
ment on the basis of expertise, reliability, and integrity
must be a key differentiator for banks when competing Risk management becomes a particular advantage when it
against more tech-driven players. Indeed, since selling is introduced at the mouth of the funnel in the strategic
products and administrating processes can now be easily and operational processes of a bank. Considerations of
carried out digitally, the role of bankers must shift toward risk, compliance, and social responsibility need to be on
trust-enhancing touch points and advice. Such touch points the table when a new strategy is articulated, a new product
can be created by embedding the option of human interac- is designed, and new customer journeys are being envis-
tion at any point in a customer’s digital journey—especially aged. Banks must embrace the mantra of compliance by
the high-anxiety moments. Traditional branches serving indi- design and aim to future-proof their processes.
vidual and business customers should give way to the avail-
ability of meeting rooms for consultations and complex It’s important to note that most banks do not sufficiently
problem solving. Contact centers, augmented by video call- leverage the regulated nature of the business as part of
ing and agent-enablement tools, need to manage digital their value propositions—as is more common in other
channels to provide the critical human assurance on demand. industries. This is especially true when competing against
nonbank rivals from the technology world. For example, in
The role of bankers must shift toward a situation where a bank is embedded in a third-party
trust-enhancing touch points and advice. platform, it should insist—with support from regulators, if
needed—both on full transparency regarding the underly-
Banks also need to build strong internal design capabilities ing service provider and on its right to own the customer
to ensure that messages regarding safety and transparency relationship.
are as prominent as convenience in the customer experi-
ence. Moreover, banks’ brand association must be unam- Banks must embrace the mantra of compliance by
biguously linked to trust and further reinforced by regulato- design and aim to future-proof their processes.
ry association.

Advisory, for its part, will include nudges on financial well- Boldly Embrace the Climate Transition Challenge
being for the mass market, personalized investment adviso-
ry for high-net-worth individuals, and tailored solutions for As we approach the monumental task of transitioning to a
the advanced needs of corporate and institutional clients. net zero future, we foresee a staggering investment re-
Such clients can include insurance companies and pension quirement of $100 trillion to $150 trillion—or a yearly
funds that look for market diversity, regulatory expertise, investment of $3 trillion to $5 trillion—from now until
and structuring capabilities. They can also include large 2050. Moreover, safeguarding nature and biodiversity will
corporations that seek solutions to challenges related to likely contribute to an additional annual financial need of
changes in their business models. Such challenges can $1 trillion for the global economy. Banks are poised to
include financing a takeover; executing a large, cross- assume a pivotal role in this capital mobilization, acting as
currency hedge; or customizing global cash management or intermediaries between issuers and investors and serving
equity issuance. Advisory must always focus on deepening as lenders, investors, asset managers, and providers of risk
relationships with clients and creating additional revenue management solutions. Winning banks will need to excel
streams—ideally, recurring ones that generate fees. in three dimensions. (See Exhibit 9.)

Managing Climate Risks and Requirements. Identify

Turn Risk and Compliance and Social sources of physical and transition risks eminating from
Responsibility into a Competitive Advantage climate change, and integrate those considerations into
credit, finance, risk management, and business planning.
Banking, at its core, is a risk-taking business, and excel-
lence in managing risk and compliance is central to value Delivering on Net Zero Commitments. Establish a
creation. Banks can consolidate their advantage by leverag- robust mechanism to track financed emissions, set targets,
ing their risk and compliance capabilities as reusable and monitor commitments. The entire organization—in-
digital services that are embedded in customer journeys at cluding sales, credit underwriting, risk management, fi-
scale. nance, and technology—needs to be mobilized. A data
platform is critical.

BOSTON CONSULTING GROUP 15

Exhibit 9 - The Capabilities Required to Support the Climate Transition
Have Three Key Objectives
• Upskill and equip the workforce, primarily
employees in the front office and on risk • Assess the transition, physical, and
teams Enabling clients Building nature risks of clients
• Build the capability to assess the • Embed climate risk within the
to accelerate advanced climate
robustness of clients’ transition pathways bank’s policies and models
their own risk management (including credit, market, liquidity,
and plans
• Align incentive schemes and governance transition capabilities and litigation)
• Adapt the bank’s risk appetite
framework

Core capabilities
required to embrace
the climate
transition
challenge

Leveraging
accurate • Integrate climate data into the bank’s overall
data to inform data setup
• Partner with relevant data providers across
strategic
sectors and regions in an open ecosystem
decisions • Consider cross-industry partnerships within the
financial services ecosystem and beyond

Accelerating Clients’ Transition. Act as an advisor to Notably, some small, regional bank networks have demon-
accelerate the climate transition of clients’ businesses and strated that they can be cost competitive, more so than
supply chains, using technical inputs, financial product large incumbents, by creating a shared, back-office utility
innovation, and risk management solutions. Sustainable for technology and operations. Cooperative or savings
finance is to become a core element of banking strategies. banks in Germany are a prime example of such collabora-
Projections indicate that leading global banks could gener- tion. Moreover, several technology service providers in the
ate more than 10% of their total revenues from sustainable banking stack can be tapped to secure scale benefits,
finance in the medium term. reducing operations and technology costs related to com-
plex processes (such as mortgage and KYC processes) that
can be outsourced.
Capture Network Effects and Increase Scale
Through Partnerships We expect a rapid rise in so-called enabling fintechs, which
provide services to banks to enhance customer value
Banks can create jointly owned entities to gain network propositions or improve operational excellence. By proac-
effects and scale in a number of areas. These areas include tively partnering with these companies, banks can benefit
payments (for example, interbank real-time payments), from the scale created by multiple players sharing services
credit and risk (which could have online fraud and credit globally.
registries), climate change (which could have a data utility),
and commerce (which could have shared e-commerce
platforms). Such entities can help banks capture network
effects and scale benefits.

16 TO SEIZE A $7 TRILLION OPPORTUNITY, BANKS NEED BOLDER STRATEGIES FOR SERVING CUSTOMERS AND SOCIETY
Navigate Strategic Choices in Embedded platforms by 2030. Banks, therefore, need to carefully
Finance and Embedded Commerce evaluate where they decide to embed their offerings. Some
banks that have embraced embedded finance for consum-
Digital platforms with significant customer traffic often er lending on e-commerce portals have acquired huge
embed banking in their customer journeys—a practice numbers of digitally savvy customers rapidly. But such
known as embedded finance. Conversely, banks with signifi- single-product lending relationships that are acquired
cant customer bases and quality digital assets embed through embedded finance are difficult to convert to full
third-party services (such as e-commerce and travel booking banking relationships unless the bank has a truly distinc-
services) on their digital properties, enhancing the end-to- tive cross-selling engine.
end value proposition for customers—a practice known as
embedded commerce. A complex set of choices must be Only a few banks have been able to take significant advan-
navigated using a strategic and value-focused compass. tage of embedded commerce so far. (See Exhibit 10.) A
prerequisite is for the bank to have its own strong digital
Single-product lending relationships that are acquired proposition. Further, banks with large customer bases have
through embedded finance are difficult to convert to an advantage in negotiating customer offers on their own
full banking relationships unless the bank has a truly platforms—thus deepening client relationships. The sim-
distinctive cross-selling engine. plest form of embedded commerce is the distribution of
third-party financial products such as insurance, and 25%
It’s key to note that embedded finance options are not of banks in a BCG study had a solid offering in this area.
always strategically beneficial for a bank. If the third-party
platform has ambitions to eventually build financial ser- Banks have both consumers and merchants on their plat-
vices relationships with customers, the bank is relegated to forms, positioning themselves to create two-sided market-
the role of a utility. An estimated 45% of SME banking places with merchant-funded offers that enhance banks’
revenue pools in the US and Europe will be addressable value propositions. BCG’s study showed that only about
through finance embedded in industry vertical software 10% of banks have taken steps forward in this area.

Exhibit 10 - A Small Number of Banks Have Taken Significant Advantage

of Embedded Commerce
Third-party financial services Merchant offers and loyalty programs Third-party nonfinancial services

Banks (%) Banks (%) Banks (%)

Best offerings 2 Best offerings 2 Best offerings 1

A good variety, Personalized choices, up Personalized choices, 7
all integrated in an to moderate discounts, 9 attractive pricing, and
app for purchasing auto fulfillment, easy webpage fulfillment
22
searching, and
geo-alerts
18

Good offerings Good offerings 40 Good offerings

A single choice of one Personalized choices, A good variety of
or more products 29 moderate discounts, choices and attractive
and only one option redirected fulfillment, pricing, but impersonal
for an in-app purchase and reasonable offerings and
searching redirected fulfillment

Poor offerings Poor offerings Poor offerings 74

Static, nontargeted Impersonal choices, Impersonal choices,
generic products and traditional points, limited variety,
redirected fulfillment and difficult standard pricing, and
47 searching 49 redirected fulfillment

No offerings No offerings No offerings

Source: BCG’s 360° Diagnostic, September 2023.

Note: n = 233 across 35 markets.

BOSTON CONSULTING GROUP 17

Retain a Hold on Highly Profitable Areas of the It is important for banks to be aware of such models and
Banking Stack invest to retain their positions. While volumes will be
small, compared with those in the overall banking revenue
The disaggregated businesses in the banking stack demon- pool, they can boost banks’ profitability and recapture lost
strate different economics, operating at different valuations fee income.
that reflect varying profitability and growth prospects.
So-called disruptive fintechs (which create services that
compete with banks), enabling fintechs (which provide
services to banks), payments players, and standalone
wealth managers often have significantly higher multiples
than banks. (See Exhibit 11.) These are some of the
high-profitability elements in the banking stack, notably in
payments and wealth management, that generate fee
income (and valuable data) with little or no capital. Fintech
competitors and big tech companies are actively pursuing
a weightier presence in these spaces.

Exhibit 11 - Businesses with Higher Fee and Lower Capital Requirements

Receive Higher Multiples Than Banks Do

P/E ratio, FY 2022

43.5

22.0 14.1 17.1

7.7

Disruptive fintechs Nonbank wealth Banks Enabling fintechs Traditional payments

managers players

First quartile
Average
Third quartile

Sources: S&P Capital IQ; BCG analysis.

Note: P/E = price to earnings. The analysis is based on only publicly listed companies. Disruptive fintechs are customer-facing fintechs, while
enabling fintechs are fintech players that provide services to other financial institutions and act in the back end.

18 TO SEIZE A $7 TRILLION OPPORTUNITY, BANKS NEED BOLDER STRATEGIES FOR SERVING CUSTOMERS AND SOCIETY
Regulators Should Collaborate with
Banks

G
overnments and regulators try to strike a balance Regulators and governments can embrace
among systemic stability, consumer protection, complementary ideas to reinforce banking
market development and innovation, and the main- profitability without compromising systemic stability.
tenance of a competitive industry with sustainable returns.
(See Exhibit 12.) There will always be tradeoffs, but a bal- In the fifteen years since the GFC called the resilience of
ance can be achieved. the banking industry into question, regulators in much of
the Western world have focused on bolstering systemic
Given the challenges to macroeconomic stability that are stability, reducing bank risk, and protecting consumers.
on the horizon, there is reason for the stricter capital and Although much progress has been achieved, issues—such
reserve requirements that have been proposed. However, as insufficient liquidity for some regional US banks and
regulators and governments across the world can also weak financial performance for some eurozone institu-
embrace complementary ideas to reinforce banking profit- tions—remain.
ability without compromising systemic stability.

BOSTON CONSULTING GROUP 19

Exhibit 12 - An Optimal State Is Possible Among the Four Key Priorities
That Governments and Regulators Try to Balance

Systemic stability
and growth

Competitive industry Consumer

with sustainable returns protection

Market development
and innovation

New Regulatory Approaches and Capabilities • Adopt a regulatory portfolio-management approach,

Are Needed since regulation may suddenly become outdated owing
to advancements in technology or rapid changes in con-
There is a clear need for a sharper focus on banks’ risk sumer behavior, or both.
culture to improve resilience. Risk management should be
embedded even more forcefully into day-to-day decision • Apply stronger metrics to measure and foster competi-
making and live at the core of business models. tiveness and growth in the banking industry and in the
economy.
Regulators should further embrace market development by
taking a strong hands-on role in steering the direction of Regulatory stances can vary widely, given the unique con-
the industry. Technology-driven disruption and the resulting texts and priorities in different jurisdictions. And as we’ve
changes in consumer preferences and habits call for this seen, some regulators, notably those in Europe and the
new approach. Regulators should adopt a mindset of part- UK, have emphasized the primacy of overall stability and
nering with banks on certain initiatives, including the fol- consumer protection. Others (for example, those in Cana-
lowing ones, to keep the industry on a positive trajectory: da) have also focused on sustainable bank profitability as a
high priority. Yet another set of regulators in certain finan-
• Strengthen platforms that facilitate a dialogue among cial hubs—such as Singapore, Hong Kong, and Dubai, as
banks, regulators, and other related industry participants well as in emerging markets such as India and Brazil—
to ensure collaboration and enable banks to proactively have embraced a proactive and hands-on role in market
align their business models and practices with regulato- development. Many have achieved positive results in fos-
ry guidelines. tering innovation and ensuring adoption at scale.

• Build capabilities for rapidly adopting new regulations

(such as pricing guidelines that can have indirect and
unintended effects on consumer behavior), taking a test-
and-learn approach.

20 TO SEIZE A $7 TRILLION OPPORTUNITY, BANKS NEED BOLDER STRATEGIES FOR SERVING CUSTOMERS AND SOCIETY
Ensure a Level Playing Field Across the Entire Stimulate Digital Public Infrastructure and
Stack Industry Utilities

Regulators need to secure a level playing field by creating Digital public infrastructure can contribute significantly to
a framework of consistent guardrails that progressively the banking system’s profitability by creating platforms that
lighten as one moves up the stack, layer by layer. Across enable strong network effects. Such platforms are most
the banking stack, institutions need to connect seamlessly often utilities, jointly owned by a corsortium of banks. The
with a multitude of partners for distribution (through utilities either own assets (such as digital or infrastructure
embedded finance, for example), for data services (such as banking assets) or enforce standard protocols for interaction
personal financial management), for product collabora- between industry participants. Examples of utilities include
tions (such as co-lending arrangements using private debt), an interbank real-time payments system, a shared credit
and for tech services (including cloud-based services). registry, a shared fraud registry, shared transaction-monitoring
Regulators must find a way to provide sufficient accredita- platforms, and shared merchant-loyalty platforms. In the
tion to all participants from a risk and compliance perspec- future, a shared utility for climate and ESG-related data could
tive, so that integrations are quick and that the onboarding enable banks to cost-effectively manage climate risks and
of new fintech services does not become an onerous, support the disclosure and management of carbon footprints.
bank-by-bank, due diligence process. This implies that big
tech companies in financial services need to be suitably Such utilities can benefit banks by reducing costs and
and proportionally regulated. enhancing value propositions—partly countering the net-
work effects that favor the platforms of big tech companies.
Moreover, given the trends in consumer behavior, banks For instance, real-time interbank payments systems in India
need to offer customers a more end-to-end proposition in and Brazil have led to widespread adoption of digital pay-
order to stay relevant and competitive. For example, daily ments by consumers. Similarly, in the UK, open banking
banking should be integrated with e-commerce, mortgages has demonstrated that implementation backed by a shared
connected with property searches, and SME lending avail- industry body with a hands-on role in setting standards can
able on industry vertical platforms. Regulators need to accelerate adoption. It is imperative that such infrastruc-
acknowledge an enhanced definition of banking that in- ture is managed along commercial lines with strong incen-
cludes transaction and trade facilitation. tives for adoption and economically viable pricing.

Foster Consolidation, Directly and Indirectly Sharpen Regulatory Clarity on Digital Assets

Considering all the current industry challenges, it will be BCG, the Global Financial Markets Association, the law
critical for regulators to help banks create scale that allows firm Clifford Chance and others outlined in a report how
for sustainable returns. Further consolidation is an obvious the adoption of distributed ledger technology (DLT) and
and important consideration, especially in the US and digital assets ecosystem could enhance the efficiency,
Europe, but regulators must also consider the tradeoffs resilience, and effectiveness of money flows and capital
between the level of competition and banking stability. In markets. But regulators need to accelerate internationally
some cases, market consolidation is helpful to stability consistent regulatory clarity in digital assets to unlock this
because weak players in a fragmented market are more value. Combined with central bank digital currencies
susceptible to a sector-wide crisis. Yet consolidation is only (CBDCs), the tokenization of real assets (such as property)
beneficial up to a certain point; too much can lead to a as digital assets can trigger a phase of radical digitization
decrease in the amount of lending overall and create in secured credit. CBDCs, currently in active design phases
institutions that are too big to fail. with a majority of regulators, will capture immediate value
in payments in advanced economies and open up use
During the coming years, regulators should carefully evalu- cases for purpose-bound money in emerging markets.
ate third-party service providers that could manage signifi-
cant end-to-end processes to help multiple banks collec-
tively achieve scale. Such providers should be regulated to Should Regulators Reinforce Banks’ Role in
ensure easy onboarding and to permit careful oversight on Financial Advisory?
operations risk and resiliency in the system. While regula-
tors must increase oversight on critical third parties, a It is crucial that financial advice, especially for the mass
framework for partner accreditation could be helpful for market, is rendered by a well-regulated industry. The frame-
lower-risk service providers to foster wider collaboration. work needs to encourage, enable, and incentivize banks to
Such a framework should not create antitrust implications be trusted financial advisors, and regulation on the pricing
by benefiting a few dominant, accredited suppliers in of advice needs to be carefully structured by the observed
particular markets. Yet such a model can permit small impact on consumer behavior. With the soaring relevance
regional banks—often crucial to small business credit—to of data today, new business opportunities are emerging for
stay competitive and provide diversity in the banking land- banks that build on this principle and emphasize the need
scape. to provide secure custody of their customers’ sensitive data,
digital assets, health records, and digital identities.

BOSTON CONSULTING GROUP 21

Banks Can Make Productivity Leaps
of 40% with a Radical Redesign

L
ocal market structures, the degree of adoption of However, given the expected intensity of competition and
innovative business models, and regulatory direction future regulatory demands, growth alone will not suffice as
are fundamental, contextual parameters of any bank’s a path to delivering adequate returns. While scale in bank-
strategic options. Any selected portfolio needs to anticipate ing is indeed alive, many banks have allowed the benefits
regulatory evolution and competitive disruption—and to dissipate into a nonproductive variety of offers and
must remain robust in order to deliver attractive share- services, all across a growing array of channels that have
holder returns. Banks, therefore, need to make portfolio often been seen as a mere cost of doing business. Banks
decisions that enhance value: exit business lines or, at a cannot afford such business complexity any longer. If they
minimum, reduce capital exposure to low-return asset want to win competitively, they must drive toward far-
classes and invest in new areas of strategic growth with higher productivity and radically reduce the cost of com-
more favorable levels of return on equity. plexity. Starting with a digital-first delivery concept and a
detailed cost-driver understanding, it is possible to design
a zero-based business model that will allow a step change
in productivity that is 40% higher than what is considered
normal today.

22 TO SEIZE A $7 TRILLION OPPORTUNITY, BANKS NEED BOLDER STRATEGIES FOR SERVING CUSTOMERS AND SOCIETY
Overall, banks need to design a drastically simplified busi- Only the building blocks that meet all criteria should be
ness model that is supported by an efficiently managed pursued, while others should be scaled back or exited. To
balance sheet and a modern platform operating model. be sure, many banks have held onto some businesses for
The business and operating models should transform the too long, such as subscale markets activities that were
bank from front to back, deliver vastly more impact from significantly challenged by regulations after the GFC. And
data and technology, and help build strategic partnerships simply identifying the building blocks for focus is not
and capabilities for competitive advantage. Banks should enough; establishing a right to win will require creating a
take these steps regardless of the archetype of their busi­ competitive value proposition. Critical to these decisions is
ness model. (See the sidebar “Six Banking Archetypes.”) full transparency on the status quo, such as capital alloca-
Here, we detail some key initiatives. tions (considering the full capital base of the bank), cost
allocations (across the entire value chain), and contribu-
tions to the funding base (considering the full implications
Take Decisive Action on Business Portfolio for the funding model, including costs and stability).
Choices
The regulatory intensity and the valuations for certain
Transformation efforts are often limited to the incremental financial services differ quite strongly from the traditional
optimization of the existing business model along the banking business. Given this, banks may investigate op-
individual value chain, rather than a full analysis of the tions to leverage a holding company framework—the
business portfolio aimed at identifying where a bank lacks “banking business” being a ring-fenced entity and subsidi-
a competitive edge and at trimming historically grown ary—to reveal the true value of the franchise. (See the
complexities. With capital, funding, and investment re- sidebar “Could a Holding Company Structure Help Unlock
sources remaining challenged, an objective review of cur- Value?”)
rent allocations along with bold decisions on future ones is
mandatory. Such a review may trigger decisions to exit
entire businesses or markets, or conversely, to invest in cre- Optimize the Balance Sheet for Value, and
ating scale or amending current capabilities, or both. Excel in Deposits

Strategic discussions are all too often anchored along Any business portfolio must settle on a clearly articulated
historically grown business lines. Yet, the discussions balance sheet structure, which must define where capital is
should focus on building blocks—which may be specific allocated, how the bank is funded, and the level of returns
products, client segments, or markets—that represent, in a that are expected. While capital must obviously be allocat-
sense, interchangeable parts of the business model. While ed to businesses that possess the tools needed to succeed,
the split will differ within the context of each bank, the the funding mix must be carefully steered toward
questions to be answered in deciding where to compete cost-competitive and low-volatility sources.
should be uniform:
A new wave of regulation can be expected that will
• Is the overall market outlook attractive, considering the increase scrutiny over the stability of the balance
growth prospects and the impact of future regulation sheet—the liability side in particular.
(including ESG considerations)?
Given recent events, a new wave of regulation can be
• Can the bank achieve sufficient scale to operate at expected that will increase scrutiny over the stability of
competitive cost levels and to keep up with investment the balance sheet—the liability side in particular. In most
demands? business models, access to sticky deposits will be a critical
competitive advantage. The impact of higher rates on
• Is the building block core to the strategic goals of win- the liability side, therefore, needs to be carefully evaluated
ning customers’ primary banking relationships and to identify the potential need for action. Many banks
positioning the bank as a trusted advisor? should consider pursuing a dedicated deposit strategy.

BOSTON CONSULTING GROUP 23

Six Banking Archetypes

We have identified six banking archetypes: the consumer Domestic universal banks stand out as the largest in
and small and medium-sized enterprise (SME) franchise, terms of total assets, given the historical predominance of
domestic universal bank, multimarket universal bank, this model in banking. Having a strong consumer and SME
universal bank with a global corporate and investment franchise is a prerequisite. The technology stack for corpo-
banking arm, global leader in a specific sector or product, rate business is typically very different from a consumer
and finance specialist. (See the exhibit “Six Banking and SME franchise, offering few synergies. However, win-
Archetypes Have Strong Differences in Complexity and ning models demonstrate synergies in the cross-selling of
Valuations.”) retail and SME products to the ecosystem of corporate
clients. Winning corporate bank franchises require aspects
Consumer and SME franchises historically operated on such as sector-specific solutions (with risk management
a regional level, with proximity to their clients as a key embedded at the mouth of the business funnel), a
differentiator. More recently, with branches becoming less transaction-banking offering that generates strong fees
relevant in step with digitization, it has become easier to and float, relationship manager enablement with advanced
cover entire markets. Today, winning consumer and SME analytics (including generative AI applications), and light
banks typically feature front-to-back digitization of value balance sheets with strong capabilities to originate and
streams (including extensions to relevant nonbank ser- distribute to capital markets or private capital.
vices) and extensive leveraging of customer transaction
data to create high levels of personalization. In terms of
valuation, this is clearly among the preferred archetypes of
investors.

Six Banking Archetypes Have Strong Differences in Complexity and

Valuations

Players with P/B < 1 (%)

~40 ~55 ~80 ~85 ~10 ~75

1.4

1.1
1.0
0.4
0.7 0.7
0.5
0.4
3.3 0.1
0.4
0.9
Consumer and SME Domestic Multimarket Universal bank Global leader in a Specialist finance
franchise universal bank universal bank with global corporate sector or product player
and investment
banking

First quartile Bar width = market capitalization (log scale)

Median x Sum of market capitalization in sample ($billions)
Third quartile

Sources: S&P Capital IQ; BCG analysis.

Note: P/B = price to book; SME = small and medium-sized enterprise.

24 TO SEIZE A $7 TRILLION OPPORTUNITY, BANKS NEED BOLDER STRATEGIES FOR SERVING CUSTOMERS AND SOCIETY
Multimarket universal banks need to take a hard look Global leaders in a specific sector or product are
at their business models, since the banking stack and active in areas that allow for global synergies across mar-
regulations differ in subtle ways by jurisdiction. These kets, such as ultra-high-net-worth wealth management and
differences impede international cross-border standardiza- custody. They focus on asset-light and fee-heavy products
tion that global banks traditionally aimed for to achieve that do not require broad access to deposits and primary-
scale. The successful multimarket universal bank arche- customer transaction accounts beyond their own concrete
type of the future must either be at scale in a few chosen offering. The businesses are fee-based and offer high re-
markets (with select horizontal capabilities leveraged for turn on equity, and given the low capital requirements,
scale across jurisdictions) or operate with a disproportion- they often lead to robust valuations. To be successful, a
ate share in select business lines and customer segments market-leading product capability and a trusted brand is
with distinct positioning, compared with the share for local needed. In the long run, we expect still more consolidation
market leaders. in this archetype.

Universal banks with a global corporate and invest- Specialist finance players focus on a niche that has a
ment banking arm will likely attract the most scrutiny specific product (such as credit cards, mortgages, or com-
from investors. Most players lack the scale to be globally mercial real estate). Focusing on such niches can provide
competitive in corporate and investment banking after the a competitive advantage owing to specialization, but they
global financial crisis, and players must be among the top can also carry higher risks because of less diversification
three to five in a certain product category to be profitable. and limits to size. Such a position can subdue valuations
This is particularly true for certain markets businesses of the group as a whole. The winners in this archetype
(especially flow equities) and for areas of origination and demonstrate extraordinary skills in managing risks in their
advisory. financing category. Many players are collaborating with
investors and private credit firms because funding their
Those banks that have achieved scale are performing very businesses at scale is difficult, owing to the lack of custom-
well, while there is a long tail of subscale players that is er primacy and access to deposits.
falling behind. One reason is that the cost of constantly
keeping pace with technological developments is often too
high for subscale players. Nonetheless, several thoughtful
banks have recognized the challenges in scaling high-
frequency businesses by entering partnerships with stron-
ger players or by finding profitable ways to exit the risk side
of the equation (while continuing to serve clients). The
successful players build on a strong domestic franchise in
their home market that provides access to cheap funding
while aiming for leadership in corporate and investment
banking. Newly proposed capital regulations, particularly
the Basel III Endgame measures introduced by US regula-
tors, possess the potential to again significantly alter the
financial dynamics of the business. Banks need to carefully
evaluate the impact on their portfolio and review their
strategies accordingly.

BOSTON CONSULTING GROUP 25

Could a Holding Company Structure Help
Unlock Value?
To stay competitive and offer an end-to-end experience to Holding company structures have already been used in
customers, banks need to amend their value propositions many markets, and more banks are embracing them to
by offering services that go beyond traditional definitions of incubate technology-based businesses in their portfolios.
banking. But the human resources policies and financial (See the exhibit “Some Banks Are Experimenting with a
resources that are needed to deliver on innovative, tech- Holding Company Structure for Greater Strategic and
heavy services are not always suitable for regulated bank- Operational Flexibility.”)
ing entities, given their risk profiles, compensation struc-
tures, and the need for third-party partnerships.

To overcome this challenge, banks can consider applying a

holding-company framework in which their regulated
businesses are housed in a ring-fenced entity, along with
other entities engaged in developing and offering adjacent
nonbank services. The holding structure should be lever-
aged to reveal the true value of the businesses and to
provide full financial transparency to investors.

Some Banks Are Experimenting with a Holding Company Structure for

Greater Strategic and Operational Flexibility

ANZ Group Holdings Limited Siam Commercial Bank X

100% 100% 100%

ANZ Bank ANZ Service ANZ Non-bank

Holding Company Company Holding Company
Digital
• .Banking • .Shared services • Adjacent Digital
Digital assets Climate Technology
businesses Bank lending
• .Insurance • .Property assets ecosystem and future technology accelerator
(payments, technology
venture capital,
and asset
management)
• Digital
SCB
ecosystem
bank SCB nonbank group
group
ANZ bank group ANZ nonbank group
Ring-
fenced Not tightly
Ring-fenced Not tightly regulated regulated entities
regulated entity regulated entities entity

Sources: Investor presentations; BCG analysis.

26 TO SEIZE A $7 TRILLION OPPORTUNITY, BANKS NEED BOLDER STRATEGIES FOR SERVING CUSTOMERS AND SOCIETY
Financial planning, budgeting, and daily steering are very A Platform-Based Operating Model for Front-to-Back
often focused on volume and the income developments of Redesign. The pursuit of innovation in banking is as much
individual segments. To further push the productivity of the an organizational challenge as a technological one. Banks
balance sheet, a forward-looking and action-oriented ap- can learn from the way tech product companies are organ-
proach should be applied. Specific initiatives include: ized. The key is to leave behind traditional setups related
both to businesses and functions and move to what is
• Steer governance and processes (for example, real-time called a platform operating model.
positioning and dynamic scenario-based forecasting) to
enable a forward-looking perspective on the resilience of In this model, the organization is structured along the
day-to-day business beyond regulatory requirements— following lines: business value streams for channels and
thus permitting better-informed, fully risk-aware decision products (for example, checking accounts and mortgages),
making. shared platforms that jointly develop services (such as
KYC processes) that can be reused in designing multiple
• Ensure full transparency on the performance of both customer-value streams, and enterprise-wide platforms (for
sides of the balance sheet. Assess the profitability of instance, finance and tech platforms) that enable univer-
assets, accounting for true capital consumption and sal, shared capabilities. (See Exhibit 14.)
using an effective funds transfer pricing model to enable
the efficient allocation of resources and to set the appro- This way of organizing enables the rapid buildup of tech-
priate hurdle rates for different asset classes. In addition, nology assets, leveraging reusable components. It also
assess the attractiveness of funding sources, taking into forces deep collaboration among business, functional, and
account their impact on regulatory ratios (for example, technology groups to jointly manage the buildup—finding
the liquidity coverage ratio and net stable funding ratio) the right tradeoffs between meeting business needs and
as well as their pricing. Reinforce a strategic approach avoiding a burdensome level of customization. Moreover,
toward long-term funding resilience, including measures since the platforms are horizontal, they cut across the silos
to support deposit growth and to optimize the treasury of business lines and functions.
setup.
The key to unlocking a step change in efficiency has been
• Provide a toolkit that enables active management of and will always be the optimization of processes. This
the credit portfolio—divesting assets, for example, by requires vigilance and persistence and must be carried out
collaborating with private credit players and establishing across all parts of the platform operating model—all with
effective governance to support execution. full transparency from the front to the back office. In the
past, many banks have digitized their processes or near-
Raise Operating Leverage and Delivery shored/offshored activities, but they often failed to achieve
Excellence the efficiency increases they targeted. The reason? They
did not follow a front-to-back approach that enhances
On the heels of the large cost programs carried out over efficiency and value creation across the entire spectrum of
the past decade, most banks are still confronted with poor a product’s or service’s life cycle, all the way from inception
cost efficiency, and most activities do not scale. The elimi- (the front) to delivery and beyond (the back). To truly excel
nation of subscale or nonstrategic activities, identified as in delivery, existing processes must be transformed with
part of a portfolio review, will typically enable a major cost data, AI, and technological possibilities (and limitations) in
reduction if the associated complexity reduction is carried mind. To be successful, the change delivery teams must be
through front to back. organized along the platforms, transitioning from a tradi-
tional project-delivery mindset to a product-delivery mind-
For the core to successfully achieve operating leverage, set. By forming persistent cross-functional teams of busi-
banks will need to more fundamentally question the way ness, risk, and technology talent, banks can achieve
they operate. Significant efficiency improvements are superior results. This approach transcends organizational
possible. For example, we observe productivity gaps of up silos and delivers holistic solutions that are more closely
to 65% among retail banks of the same size (5 million to aligned with banks’ priorities.
10 million customers), comparing the full-time equivalents
scaled to the respective bank’s customer base. (See Exhibit
13.) Banks need to simplify and replace variable operation-
al costs with scalable platforms, using technology to
achieve a leap in productivity. To address this, banks must
re-evaluate change delivery, particularly technology-driven
transformational change, through a platform-enabled,
front-to-back product delivery structure. The required
elements include the following ones.

BOSTON CONSULTING GROUP 27

Exhibit 13 - Efficient Retail Banks Have Demonstrated the Ability to
Operate at Significantly Lower Cost Levels
Three comparable retail banks of similar size (5M–10M customers)

Full-time equivalents, scaled to bank 3’s retail customer base (indexed to 100 for bank 3)

100

Branch

Contact center
50 Online and mobile banking
Sales, product, and channel
management
35 Operations

Risk and compliance

IT1
Other support functions2

Bank 1 Bank 2 Bank 3

Branches (number) ~100 ~150 600

Digital sales (%) ~75 >50 ~30

Source: BCG’s Retail Banking Excellence Benchmark.

Note: Data is for the retail banking units of global, market-leading banks.
IT includes internal and external full-time equivalents.
1

Other support functions include HR, finance, and legal.

2

A successful implementation hinges on having a robust Leveraging AI and GenAI Together for Reimagining
and agile technology infrastructure and purpose-built data Functions. Applications and process transformations that
platforms in place. Banks should consider a shift from combine predictive AI and generative AI can enable signifi-
monolithic core systems that house ledger, account, and cant efficiency gains. At the same time, these solutions will
transaction data and have complex interconnections to allow for an individual client and employee experience,
decoupled systems that separate transaction processing, thereby supporting personalization, customer primacy, and
ledger management, customer accounts, and channel improved decision making.
capabilities. Adopting technology infrastructure hosted on
private or public cloud environments allows for scalable AI is particularly well suited for working with large amounts
solutions with an optimal expense profile, enabling quicker of data—and banking is a particularly data-heavy industry.
sharing of capabilities with delivery teams. The granular transactional data of a bank’s customer base
can provide precise insights in ways that few other compa-
nies’ data sets can.

28 TO SEIZE A $7 TRILLION OPPORTUNITY, BANKS NEED BOLDER STRATEGIES FOR SERVING CUSTOMERS AND SOCIETY
Exhibit 14 - Platform Operating Models Can Unlock Far-Higher Efficiency
and Growth
Traditional organization Platform operating model

Business units
and functions
determine structure Business value streams
1 for channels and products

Shared platforms that

Processes and
activities are
2 jointly develop services
bespoke and siloed
Enterprise-wide
3 platforms that enable
shared capabilities

Change is prioritized along reporting lines Horizontal prioritization cuts across

business units
Change is delivered in projects and capabilities
are partly shared Platforms, shared capabilities across multiple
business units, are permanent project teams
There is limited reusability of assets
Reusability is the primary requirement of new assets

Source: BCG analysis.

AI is set to change the banking sector. Banks have already Capability Hubs in Strategic Roles. Global capability
been leveraging AI for a decade, but generative AI opens centers in offshore locations have evolved over the past
up a new opportunity to truly transform the industry. This decade from being a source of low-cost talent for back-of-
is not about small tweaks to existing processes; it’s about fice activities to being strategic centers to house advanced
fundamental reimagination. We are seeing the largest capabilities as well. Capability and innovation hubs (CIHs)
impact in use cases where predictive AI and generative AI are centers with access to high-quality talent at scale,
are used together—for example, when replying to a cus- typically at offshore locations. CIHs host four distinct capa-
tomer inquiry. Generative AI can analyze and classify the bility areas: operations, technology, support functions, and
customer’s question, and predictive AI can then select a advanced skill sets (such as expertise in data, blockchain,
mode and route to reply. On the basis of that decision, and, more recently, generative AI). CIH’s have been deliver-
generative AI can formulate a response. Such scenarios ing 30% to 40% in cost efficiencies by transforming pro-
have the potential to substantially increase productivity cesses through an end-to-end lens. Access to advanced
across all parts of the banking value chain if deployed talent pools is accelerating the digitization agenda for the
proactively and boldly. (See Exhibit 15.) They can also help banks, with annual benefits of about 20% being seen in
deliver better outcomes for customers—such as deeper, many operational processes.
personalized communications across all channels, faster
and more effective responses from customer service Mature CIHs have an expanded portfolio of services that
teams, and better product offerings at the right time. include front-end, customer-facing business operations and
capabilities in emerging technologies, led by centers of
Banks with large investment appetites and the ability to excellence. More than 30% of talent across large CIHs
attract solid talent will have an advantage in the short focus on advanced digital capabilities. Most CIHs also
term. However, the possibility of off-the-shelf solutions house global process and product owners who have shared
available on software-as-a-service platforms could reverse business goals and outcome metrics. (See Exhibit 16.)
this dynamic in the medium term.
In the past 24 months, 88% of CIHs have added AI and
Banks will never be run by AI, but the roles of bank em- machine language capabilities and have set up centers of
ployees are likely to evolve over time to increasingly lever- excellence. A strategic deployment of the CIH model can
age the technology. Moreover, there are clearly roles for the not only enhance a bank’s cost productivity but also be a
skills that only human beings have. We foresee employees catalyst for bold front-to-back digitization of functions.
interacting with AI in four ways: building, shaping, using,
and governing AI.

BOSTON CONSULTING GROUP 29

Exhibit 15 - Together, AI and Generative AI Can Increase Productivity,
but Realizing the Full Potential Requires a Coordinated Focus

Legacy workflows can be transformed end to end...

Human
assistance
20%
Critical enablers
GenAI enables
50% new, creative
automation Full C-suite attention

Predictive AI Generative AI
Simple Bold end-to-end
RPA transformation
30% sufficient1 of entire processes

Predictive AI steers
New talent strategy
Legacy workflows the process into
and reimagined
undifferentiated by different lanes GenAI can assist automation
ways of working
• Customer • Predicting (e.g., risk, • Extending automatable tasks far
• Transaction client needs, complexity) beyond the reach of traditional
• Channel • Routing simple cases robotic solutions Cross-disciplinary
• Product straight through to • Bringing human-like capabilities investment (data,
• Context platform, people)
automation into automated processes
• Routing ambiguous or • Utilizing text, images, and voice
tricky cases to human
experts

Source: BCG analysis.

Note: Numbers are indicative.
1RPA = robotic process automation.

Become a Tech Product Company, Not Just a An often-overlooked pitfall of such transformations is a
Tech Company tendency to focus solely on pure technology, missing the
opportunity to transform the tech organization structure
Legacy tech setups continue to impede business transfor- that is aligned to the legacy setup. It’s important that the
mations. Capabilities developed presently will be crucial in new organization structure supports, rather than hinders,
the future, because today’s cutting-edge technology will be modernization efforts. Potential options include adopting
tomorrow’s legacy. the DevOps model, restructuring data organizations, and
establishing data domain-based delivery teams. A reimag-
Modernizing legacy setups requires reimagining the archi- ined technology organization and human resources func-
tecture, creating a clear transition pathway to connect tion are key enablers, along with redesigned processes.
current and future states. This pathway should incorporate In-house engineering talent will also prove to be critical in
staggered modernization strategies, such as hollowing out this journey.
the core, decoupling product processors from process
automation, and extracting data to develop separate data Only a portion of the required technology talent can be
platforms. Such approaches help replace critical compo- provided by strategic partners. Core engineering needs to
nents while isolating parts of the legacy setup for future be housed within the enterprise, presenting a challenge for
transitions, preventing modernization efforts from becom- many banks because financial institutions have not typical-
ing unwieldy and lacking clear impact. ly been able to attract top engineering talent. It’s critical
for banks to pursue innovation, and this will require new
incentive models and talent development processes.

30 TO SEIZE A $7 TRILLION OPPORTUNITY, BANKS NEED BOLDER STRATEGIES FOR SERVING CUSTOMERS AND SOCIETY
Exhibit 16 - Banks Have to Leverage Global Capability and Innovation
Hubs as Strategic Units with the End-to-End Scope of a Function

Global CIH Evolution of CIH Benefits of CIH1

• Enables access to high-quality talent at High-speed

Experience and
Cost benefit from the transformation
scale, typically at offshore locations. innovation outcome led 40% and from shifting to global locations
2020s onward

• Hosts four distinct capability areas:

Digitization
operations, technology, support functions, and resilience Annual productivity benefits from
and advanced skill sets Value 2015–2020 18% digitization across processes
delivery
Standardization
• Includes global process and product 2005–2015
owners who drive business priorities Customer satisfaction improvement
and accelerate digitization 10% from scaled operations and seamless
Global Cost arbitrage processes
at scale 1990s–2005

Sources: BCG’s survey of capability and innovation hub leaders, 2023; World Economic Forum; BCG analysis.
Note: CIH = capability and innovation hub; AI = artificial intelligence; ML = machine learning; CoE = center of excellence. Number of survey
respondents was 50, with a 50-50 split across Indian and global leaders.
Benefits are based on the performance of advanced hubs.
1

We further believe that the idea of banks having to become Strengthen the Foundations of Data
tech companies hinders identifying the right priorities and,
eventually, leads to disappointments. Banking is a risk- Compared with most other industries, banking has better
taking business, with customer trust at its center. A key quality data and better systems to manage it. Yet despite
requirement is to embrace tech as a core capability that heavy investments, most banks have not been able to
can help create customer propositions and journeys that realize their data’s full potential, owing partly to legacy
support deep, long-lasting relationships. The tech capability processes and technologies, as well as to data privacy
should also balance cutting-edge digital capabilities with a concerns. Next-generation data capabilities remain elusive,
highly personalized human touch that is offered on demand a gap that has become ever-more critical with the advent
at the right moments of truth in customer journeys. of AI and generative AI initiatives.

The tech capability should balance cutting-edge To unlock data’s potential, banks should focus on four
digital capabilities with a highly personalized areas:
human touch that is offered on demand at the
right moment in customer journeys. • Data Ownership. Implement a domain-centric frame-
work for data product ownership to centralize account-
In order to bring this experience to life, the business staff ability and drive both business and technical transfor-
has to act as so-called product owners and partner with mations. This framework should establish an end-to-end
the tech function to build the right customer experience mechanism for creating reliable data assets that are
iteratively. The lack of product owner capabilities is an usable for commercial, analytical, and regulatory pur-
equally large, if not larger, legacy to address. Banks need to poses. It also should enable banks to take a risk-reward
create reskilling programs and talent frameworks to attract approach to governing data: establish strict standards
and train personnel in diverse job categories, such as for activities such as financial crime management and
product owners, full-stack engineers, data scientists, and credit decisions, and create looser guardrails for com-
data engineers. mercialization use cases, such as customer analytics
and cross-selling.

BOSTON CONSULTING GROUP 31

• Data Management. Most banks have data deeply Build New Muscle in Partnerships
embedded in multiple applications and distributed
across different systems and locations. Banks need a To complement their offerings, banks will need to broaden
systematic process to retrieve data and to consolidate their partnerships with other players in the financial eco-
it onto specific data platforms. Data must be organized system, such as fintechs. There is a wide spectrum of
according to domains and ensure easy access through a opportunities, reflected in the following action steps:
user-friendly data catalog. While large banks may employ
multiple data platforms with purpose-built solutions, a • Seek innovative software services to be embedded on
well-defined data strategy that guides these platforms the bank’s platform, or outsource entire processes to
remains difficult to implement—but it is of utmost access scale and capabilities.
importance to capture the full value of data and leverage
breakthroughs in AI. • Gain access to external balance sheets to conserve cap-
ital (for example, through co-lending arrangements with
• Data Governance. Many large banks lack a true leader third-party lenders that can provide private debt).
for data, or if they do have a dedicated role, it does not
have the right level of empowerment and organizational • Take advantage of embedded finance by distributing
support. In our view, a chief data officer (CDO) should bank products on digital platforms that have heavy cus-
be fully authorized and have the budget to set the data tomer traffic.
standards for the bank, execute the required data trans-
formation, and unlock the value of data. The CDO must • Embrace embedded commerce by distributing synergis-
formulate clear policies, roles, accountabilities, and tic third-party products on the bank’s platform.
robust data governance processes for enterprise data to
derive value from AI breakthroughs. Adopting advanced The traditional partnership models of banks have been
analytics and generative AI to rapidly scale key data geared toward large-vendor relationships that involve
governance processes (such as metadata management, complex and sometimes frictional onboarding processes.
data quality measurement, and data lineage) is essential Winning banks need to create a new organization unit to
to creating data products in weeks, as opposed to years. scout, integrate, and manage partnerships in an agile
Given the burgeoning significance of data governance, manner—one that rapidly escalates and resolves prob-
banks should adopt a cross-functional outlook (that is, lems, uses joint teams, adopts value-sharing-based terms
one created by the risk, finance, and business functions) and flexible commercial terms, and simplifies onboarding.
when addressing regulatory initiatives, as well as in-
crease the level of coordination driven by the CDO. Banks should also act with confidence. Owning access to a
strong franchise of primary customer relationships makes
• Data Risk Management. The increase in the impor- banks attractive partners for other types of players that
tance of data, especially given game-changing technol- focus on select areas of the banking stack—players that
ogies such as generative AI, is introducing significant are often confronted with high costs to win customers.
associated risks related to managing sensitive data, Many new players have competitive offerings but struggle
cybersecurity threats, and regulatory issues (in areas to reach scale. Banks can offer them an easy pathway to
such as privacy and bias). As banks think about data scale—in return for fair compensation.
assets, organization structure, and leadership for sup-
porting data assets, they need to keep risk management
front and center. Banks should adopt a clear framework
for managing data risk to enable the sound steering of
U ltimately, now 15 years after the GFC, the world is
facing a myriad of new challenges, and banks are at
center stage. It’s simply no longer viable for banks to ap-
their data-risk appetite. In parallel, they should create proach transformation incrementally, building bit by bit on
an effective responsible AI framework and continue to legacy setups that can actually do more to hold them back
partner and engage vendors to ensure that the highest than to propel them forward. Banks need to take a deep
standards are met. breath, holistically examine their entire organization, and
blaze a clear strategic path that enables them to meet
their obligations not only to customers but also to society
as a whole—driving economic growth, helping to finance
the climate transition, and creating lasting shareholder
value. In order to reach these goals, banks must dramati-
cally reduce the complexity of their business and operating
models and sharply raise overall productivity. Fortunately,
there are ways to get such things done.

We believe that banks, along with the entire financial

industry, are up to the task. But each day spent lingering,
without taking real action, can represent significant lost
opportunity.

32 TO SEIZE A $7 TRILLION OPPORTUNITY, BANKS NEED BOLDER STRATEGIES FOR SERVING CUSTOMERS AND SOCIETY
About the Authors

Saurabh Tripathi is a managing director and senior Kilian Berz is a managing director and senior partner in
partner in the Mumbai office of Boston Consulting the firm’s Toronto office. He is also the vice chair of BCG’s
Group. He is the global leader of the firm’s Financial Financial Institutions practice. You may contact him by
Institutions practice. You may contact him by email at email at [email protected].
[email protected].

Andreas Biffar is a managing director and partner in Aparajit Sudhakar is a senior director at BCG’s
BCG’s Munich office. You may contact him by email at Mumbai office. You may contact him by email at
[email protected]. [email protected].

Kathrin Haubner is a project leader at BCG’s Allard Creyghton is a managing director and senior
Munich office. You may contact her by email at partner in the firm’s Amsterdam office. You may contact
[email protected]. him by email at [email protected].

BOSTON CONSULTING GROUP 33

Sam Stewart is a managing director and senior partner in Stiene Riemer is a managing director and partner in the
BCG’s Sydney office. You may contact him by email at firm’s Munich office. You may contact her by email at
[email protected]. [email protected].

Yogesh Mishra is a managing director and partner in Andy Maguire is a senior advisor at BCG’s
BCG’s Dallas office. You may contact him by email at London office. You may contact him by email at
[email protected]. [email protected].

Axel Weber is a senior advisor in the firm’s Mark Wiseman is a senior advisor in BCG’s
Frankfurt office. You may contact him by email at Toronto office. You may contact him by email at
[email protected]. [email protected].

For Further Contact Acknowledgments

If you would like to discuss this report, please contact one The authors are grateful for the contributions of Tushar
of the authors. Agarwal, Inderpreet Batra, Amine Benayad, Andrea Castoldi,
Jungkiu Choi, Roy Choudhury, Matteo Coppola, Tijsbert
Creemers-Chaturvedi, Stefan Dab, Florian Dahl, Cristina
Espinosa, Dean Frankle, Sreyssha George, Norbert Gittfried,
Joe Grundy, Kshitij Gupta, Max Hauser, Kunal Jhanji, Justine
Kerriou, Oliver Kude, Gwenhaël Le Boulay, Bingbing Liu,
Akanksha Maheshwari, Federico Muxí, Alexander Paddington,
Michal Panowicz, Ella Rabener, Benjamin Rehberg, Jürgen
Rogg, James Sattler, Sebastian Schloissnik, Mark Schofield,
Yann Sénant, Juliana Sguerra, Yagya Sharma, Tjun Tang, Steve
Thogmartin, Juan Uribe, and Leonhard Vollmer.

34 TO SEIZE A $7 TRILLION OPPORTUNITY, BANKS NEED BOLDER STRATEGIES FOR SERVING CUSTOMERS AND SOCIETY
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36 TO SEIZE A $7 TRILLION OPPORTUNITY, BANKS NEED BOLDER STRATEGIES FOR SERVING CUSTOMERS AND SOCIETY