Retail banking is responsible for roughly half of all banking revenues worldwide. This share is not likely to change dramatically between now and 2022, a period during which industry revenues are projected to rise by 5.5% annually to reach approximately $2.75 trillion.
To be sure, economic benefits are increasing for traditional retail banks that have implemented the most effective digital strategies. Across six major geographic regions—North America, Asia-Pacific, Western Europe, Latin America, Eastern Europe, and the Middle East/Africa—most institutions are about midway through their digital transformations. Many have made progress in digitizing for cost, although they still need to move from pilots to large-scale initiatives to reap the benefits of their investments. Most are less far along in digitizing for value, however. To make further progress in this area, banks must address two emerging imperatives: personalization and continuous delivery.
To enhance personalization, which is emerging as a primary mechanism for increasing both customer satisfaction and economic value, banks should use improved data and technology to get a clear sense of each customer’s financial and behavioral DNA—then develop individualized offers on that basis. Moreover, to remain flexible, banks should build sophisticated routing platforms that ensure continuous delivery of the personalized experience—through digitally empowered relationship managers, automated customer-care centers, and self-service technologies.
Most retail banks assert that they’re “open” to open banking. In several markets, regulations have forced them to be. In other markets, fintech innovation is driving the trend. But what counts for being open varies. Too many banks remain stuck in a tactical mindset focused on compliance and on fending off the risk of disintermediation. Yet, a few retail banks view open banking differently. They believe that it offers more opportunity than risk, so they are embracing it with bold plays centered on strong third-party relationships and innovative business models.
BCG data shows that open banking has the potential to add or erode retail-banking revenues by 15% to 25%. Therein lies the real threat to established players. Although some industry observers point to fintechs’ disruptive potential, the real disruptive force will be generated by incumbents that seize the potential of open-banking ecosystems to create long-term differentiation and growth.
Ten years after the 2008 global financial crisis, the profit margins of banks in advanced economies remain at historically low levels. The reason is simple: costs have been growing faster than revenues. Banks’ average return on equity has fallen to unsustainably low levels, especially in Europe.
Banks urgently need to act if they want to increase their profit margins. Because boosting revenue in the current environment will be difficult, banks must slash their costs. This will require simplifying offerings, digitizing operations, pursuing low-cost organic growth, and building scale through M&A and partnerships.