As the saying goes, it’s an ill wind that blows no one any good. Still, while a decade of economic expansion boosted many industries, most wholesale banks emerged from the period bruised. Buffeted by high costs and intensifying competition, profitability remains well below precrisis levels for most. Commercial, corporate, and investment banks now face mounting pressures to transform. Customers want banks to offer more personalized advice while a fast-growing array of fintechs, bigtechs, and banktechs continues to raise the baseline for digital service and delivery. Competing in this changing environment will require banks to gain scale in areas like payments or foreign exchange on one hand and specialize in expertise-driven products like leveraged buyouts or M&A on the other. Likewise, they’ll need to cut costs in some areas and invest heavily in others. With the health of the global economy faltering, this balancing act will become more difficult.

In light of these challenges, BCG is embarking on a new publication series aimed at helping wholesale banks assess the risks and opportunities facing them and plot the course to growth. This first piece offers a detailed look at the state of the wholesale banking market and the disruptive forces at play.

Recovery Remains Elusive

Since the financial crisis, the wholesale banking space has seen profitability decline substantially. (See Exhibit 1.) Although returns in the midteens or higher were common before the 2007 to 2009 recession, only a minority of banks have achieved those highs in the years following the downturn. Post-tax returns on regulatory capital (RoRC) remain mired in the 9% to 13% range, according to BCG’s benchmark data, with most banks coming in at the lower end of that band. 1 1 To compare the performance of players in wholesale banking, BCG uses the metric of post-tax RoRC. This proxy for the more usual RoE avoids under- and overcapitalization bias. Regulatory capital is defined as 12.5% of RWA across commercial, corporate, and investment banking segments. Notes: 1 To compare the performance of players in wholesale banking, BCG uses the metric of post-tax RoRC. This proxy for the more usual RoE avoids under- and overcapitalization bias. Regulatory capital is defined as 12.5% of RWA across commercial, corporate, and investment banking segments. While a number of factors are holding down returns, hefty capital provisions have exacted a particularly heavy toll.

As returns ebb, more banks are finding themselves underwater. Our analysis reveals that the average hurdle rate for corporate and investment banks sits at roughly 15%. 2 2 BCG estimates that the hurdle rate in the wholesale banking industry is 15%, on the basis of our review of capital costs for more than 200 banks globally with assets of greater than $50 billion. The indicative capital hurdle rate is based on the typical bank cost of equity of 12% to 14% and capital buffers of 1% to 3%. Notes: 2 BCG estimates that the hurdle rate in the wholesale banking industry is 15%, on the basis of our review of capital costs for more than 200 banks globally with assets of greater than $50 billion. The indicative capital hurdle rate is based on the typical bank cost of equity of 12% to 14% and capital buffers of 1% to 3%. As a result, few of the commercial, corporate, or investment banking divisions in our benchmark generated returns high enough to cover their cost of capital in recent years. 3 3 BCG broadly defines commercial banks as serving smaller corporate clients with annual turnover of less than $250 million, corporate banks as serving upper-midmarket corporate clients with annual turnover of $250 million to $1 billion, and investment banks as serving corporate clients and financial-institution groups with annual turnover of more than $1 billion. Notes: 3 BCG broadly defines commercial banks as serving smaller corporate clients with annual turnover of less than $250 million, corporate banks as serving upper-midmarket corporate clients with annual turnover of $250 million to $1 billion, and investment banks as serving corporate clients and financial-institution groups with annual turnover of more than $1 billion. (See Exhibit 2.)

Bank performance shows some notable standard deviations, however. For instance, we see growing stratification between “the best and the rest,” with top-quartile players delivering RoRC that is more than 10 percentage points higher than the bottom quartile.

Geographic factors are also skewing performance. Favorable economic tailwinds for US players, for example, give wholesale banks in that country a roughly 2- to 4-point RoRC advantage over their European counterparts. Banks in emerging markets, meanwhile, continue to benefit from a lighter cost structure and a cost-income ratio (CIR) that is 20% lower on average than their mature-market peers.

Challenges Cut Across All Banking Divisions

The wholesale banking market features three broad segments. They are commercial banks (for smaller corporate clients), corporate banks (for upper-midmarket corporate clients), and investment banks (for large multinational corporate clients and financial-institution groups). Given that diversity, we wanted to understand the factors shaping performance at the segment level.

Commercial banks have the healthiest returns, but costs are a concern. Thanks to their large deposit base and strong pricing, commercial banks generate higher income per risk-weighted asset (RWA) than other banking divisions—often by 450 to 600 basis points (bps). But they also have higher cost structures owing to their heavy reliance on branch networks to support small-business and smaller-midmarket clients.

We saw these factors play out in our benchmark, with banks pulled in two directions from 2016 through 2018. (See Exhibit 3.) Overall, commercial banking divisions in North America and the rest of the world (with the exception of Europe) managed to deliver strong top-line growth from 2016 through 2018, which allowed them to increase their revenue by 2.7 points and 3.2 points, respectively. But costs, provisions, and negative RWA impacts absorbed a substantial portion of those gains, limiting total RoRC improvements to less than 1.0 point in both regions. Commercial banks in Europe were especially hard hit. Revenue growth in the region was tepid, and from 2016 through 2018, high costs and RWA drove profitability down to less than 10%.

Looking ahead, the shaky economic forecast could pressure banking divisions in all three regions. Because lending makes up a comparatively higher percentage of their portfolios, commercial banks are more exposed to macroeconomic deterioration than other segments are. A downturn could have the combined effect of slowing top-line growth while sending loan losses well above the typical low of 20 bps of RWA that banks have enjoyed over the past decade.

Corporate banks in mature markets feel the sting of rising risk costs. Risk costs eroded profitability in mature markets, lowering RoRC to 7% in Europe (a drop of 2.2 points) and 8% in North America (a drop of 1.2 points) from 2016 through 2018. (See Exhibit 4.) The slump didn’t affect all banks, however. Top-quartile players in mature markets managed to pull away from the rest of the field, gaining a 3-point RoRC advantage over average banks in North America and a 6-point lead in Europe. These top-performing banks share similar characteristics: they are dramatically less credit centric, deliver substantial risk-adjusted lending margins, excel in cost management, and have highly capable sales forces.

The picture is reversed in emerging markets. There, lower provisioning requirements and robust top-line growth drove average RoRC up 2.6 points from 2016 through 2018, taking total returns to 13%.

Looking ahead, the rest of the field is likely to come under increased pressure in core products as direct lenders and nonbanking institutional investors enter the lending and transaction banking market with competing offerings at lower prices. Branching out into other product areas is a challenge. Unlike investment banking clients, which have bigger wallets and more diversified spending, the lower midmarket that makes up the core corporate banking client base tends to buy a narrower range of products, and that can make cross-selling beyond lending and transactions more difficult.

Investment banks face mounting pressures. The past two years show investment banks operating in a multispeed world, with the advantage going to divisions and regions that have deep pockets and greater scale. (See Exhibit 5.) From 2016 through 2018, investment banks globally saw income generation per RWA decline to a level of 500 to 600 bps as a result of deteriorating loan margins and rising capital requirements. Commoditization is also hurting banks as trading electronification becomes more pervasive. To close the digital divide and create new sources of differentiation, banks have to modernize. Yet few banks can afford the significant spending required. Bottom-line pressures are equally stubborn. Despite the cost reduction programs that many banks enacted in the years following the financial crisis, regulations and fines have caused CIR to stabilize to an average of 65% to 70%.

Still, banks in some regions are faring better than others. North American banks continue to maintain stable returns (with RoRC holding steady at about 12%) on the back of more favorable regulations and a large domestic market. Stronger balance sheets and scale have allowed top players in the region to fund their corporate and investment banking divisions, improve their technologies, and enhance their product offerings.

For European investment banks, the picture is more complex. Although the average RoRC rose from 7.3% in 2016 to 8.5% in 2018, that improvement came almost entirely from lower provisions, since revenue shrank. Many investment banks in Europe are optimizing their current portfolios as best they can using existing resources because they either cannot—or do not want to—drive a more significant technology or product overhaul. This optimization game is unlikely to be sustainable. Instead, European investment banks may find more success by focusing on select areas rather than trying to compete in an array of asset classes and across the full value chain.

In emerging markets, revenue gains were not enough to counter an increase in the cost of provisions. Investment banks saw RoRC fall from 12.7% to 10.8%. Unless banks in these markets rethink their business models, margin compression will eventually make more of these divisions unprofitable.

Digitization and Customer Expectations Are Raising the Stakes

Although banks recognize they need to modernize, knowing where to invest and which initiatives to prioritize has proved difficult amid shifting customer expectations and the evolving technology landscape. The wrong bets can lead to wasted resources and missed opportunities—and create an even steeper hill for banks to climb.

Wholesale banking customers are also feeling the effects of a fast-changing marketplace. Effectively managing liquidity and risk requires treasurers and finance teams to look across the banking book; anticipate the impact of rates, currencies, and other variables; and take preemptive action. That tall order is made all the more challenging by an influx of data, greater market volatility, and a more interconnected business landscape.

In light of these challenges, wholesale banking customers are looking for a reliable and experienced partner who is capable of providing personalized advice and convenient service. Corporate banking customers want simple, straightforward transactions and the option of self-service (such as a single login page for all active services and the ability to access information and process requests across multiple devices and touch points). Given the growing set of business and financial risks that they now manage, treasurers are in particular need of help. BCG’s Corporate Treasury Insights survey found that treasurers want a digital and frictionless experience to manage day-to-day transactions, cash flow, and liquidity-related operations as well as a trusted business advisor that can counsel them on long-term strategic business and financial issues.

As corporate clients digitally transform their own businesses, banks face increased pressure to step up their capabilities and provide services such as real-time execution and proactive forecasting. The reality is that banks won’t be seen as effective advisors if they are less digitally savvy than their clients. 

Despite this imperative, BCG’s research continues to show that wholesale banking divisions lag in their digital maturity. Few have evolved their service models rapidly enough to take advantage of advanced analytics and other proven tools. Compared with the digital processes and client-centric experiences offered by technology providers and fintechs, many banks still rely heavily on outdated technologies and service models. Rigid infrastructures, for instance, often result in overly complicated onboarding processes that require treasurers to complete multiple—and, in many cases, manual—steps that feel out of sync with other professional onboarding experiences.

Institutions are increasingly exposed to customer shift because they have not acquired and implemented the right technologies or developed high-value use cases. One corporate treasurer told BCG, “What I’m looking for is someone who can provide me with the best solution. If I cannot have it from a bank, I’ll go to someone else.”

Unfortunately for wholesale banks, the “someone else” category is growing more sophisticated and increasingly influential in the overall wholesale banking ecosystem.

Competition Is Intensifying

The wholesale banking market is no longer as bank centric as it used to be. New players that emerged over the past decade are now well entrenched in key niches, and their service is raising the bar for incumbents. As the playing field expands, commercial, corporate, and investment banks are bumping up against a diverse group of well-funded and aggressive challengers.

Fintechs. Although financial technology players aren’t yet large enough to make a substantial dent in bank revenue, they are taking share around the edges. Niche players, such as MarketAxess, are targeting areas that banks once dominated by developing specialized technology to help bond market participants improve workflow and liquidity management and by providing integrated data aggregation, pretrade information analysis, and execution facilitation. Elsewhere, formerly fringe tech players (such as proprietary trading firms) are gaining market share in a number of asset classes. Pressure from fintechs leaves many banks in an unenviable bind—they must invest heavily to stay relevant while earning less as digitization and commoditization drive down prices.

Bigtechs and Digital Disruptors. Nonbanks with advanced digital capabilities have also introduced disruptive value propositions. Amazon Lending, for instance, provided $3 billion in loans to 20,000 small-business customers from 2011 through 2017, using its vast repositories of transactional, product, and customer data to determine risk scores. Other bigtech powerhouses, such as PayPal, are moving up the wholesale banking value chain. In the space of five years, PayPal increased the cap on its working-capital loan products by a factor of ten, from $20,000 in 2013 to $200,000 in 2018. In the years ahead, these players could pose a formidable threat to banks that serve small and midsize customers.

Banktechs. Some big banks are making bold investments to gain both innovation and scale advantages—with technology spending that exceeds what others earn annually. From 2016 through 2018, for instance, JP Morgan set aside $11 billion a year for technology-related investments. Goldman Sachs announced plans to launch a dedicated treasury management unit in 2020 that will use digital tools and practices to help investment banking clients with their payments and cash management needs. Banktech units like these, which combine the balance sheet strength of a large, global institution with the entrepreneurial culture and agile processes of a digital native, could present a significant competitive challenge to banks with lower levels of digital maturity.

Nonbanking Financial Institutions. Since the end of the financial crisis, funds from NBFIs have accounted for the majority of asset growth in the small-business and midmarket segments. From 2009 through 2018, NBFI assets under management rose by a compound annual growth rate of 12% globally. In the US, where the market is disintermediated, NBFIs now originate 10% to 15% of all midmarket loans. The success of NBFIs in the US and elsewhere could loosen the grip that commercial and corporate banks have had on small-business and midmarket customer relationships.

The Market Outlook Is Worsening

Since the end of the financial crisis, the banking industry has operated in a relatively benign macro environment. From 2009 through 2019, the US economy experienced its longest streak of GDP growth. Default rates on bonds and loans are the lowest in decades, even across emerging markets and niche asset classes that typically see greater exposure.

Policymakers around the world have also been proactive. The US Federal Reserve was quick to pause interest rate hikes and balance sheet runoffs in 2018 when the prospect of an economic slowdown seemed to be on the horizon. The European Central Bank similarly pulled back from plans to reduce quantitative easing. And in China, officials have enhanced credit flows and encouraged debt-financed spending to keep the country’s economy on a stable footing. These economic tailwinds and accommodating monetary policies have driven asset prices to new highs and ensured a steady fee stream for advisory products.

The market outlook over the next several years is likely to be very different, however. GDP forecasts have deteriorated sharply in the world’s largest economies. And while private debt is nowhere near the sky-high level it was before the last downturn, it is growing. BCG’s tenth annual investor survey finds the investor outlook souring. Nearly three-quarters of respondents said they believe a recession is likely over the next two years. Two-thirds of investors believe that markets are over-valued. In response, many wholesale banking clients have begun to take a more defensive, value-oriented approach to their investment decisions.

Volatility is also on the rise. Trade war tensions between the US and China continue to sow uncertainty in the capital markets and have driven third-quarter 2019 profit estimates down for many large US companies. In Europe, the slow pace of Brexit negotiations and concerns about the potentially destabilizing impact of mounting populist movements likewise pose investment risks.

Central banks are poised to act, but they have fewer monetary levers left to use. Whether the coming slowdown will be mild or severe is not yet clear, but what is certain is that wholesale banks should start preparing now to strengthen their balance sheets and improve operational performance.

It’s Time for a New Approach

Given the profound changes sweeping the wholesale banking landscape, business as usual will no longer work. Plotting the way forward will require A Leadership Agenda for the Next Decade that questions traditional assumptions, factors in the shifting basis of competition, and retools their organizations. Plans will naturally differ, but all banks—regardless of size or region—should consider the following reinvention imperatives. (These will be explored in greater detail in the next articles in our series.)

Simplify and focus. The widening performance gap between top- and bottom-quartile players means that not all banks will be able to succeed in the same ways. Those that commit to refocusing their strategy in areas where they can deliver superior value—be it through product leadership, service leadership, geographic leadership, or some combination thereof—can open powerful new avenues of growth. To identify high-value opportunities, banks must take stock of their client relationships, competitive standing, and balance sheet health to see where they can create defendable differentiation. They will then need to find a way to execute on those opportunities end to end while exiting deprioritized businesses, a process that will require unwinding relevant support functions as well as associated IT and operations.

Create holistic experiences. Star relationship managers, investment bankers, salespeople, and traders have long served as the primary owners of the wholesale banking client relationship—and the conduit for all other banking services. While this talent remains crucial, client service is a commercial activity that is no longer confined to the front office.

With personalization at scale becoming increasingly important, top-performing banks will need the combined strength of their product, marketing, and back-office resources. For example, when operations and IT specialists bring critical innovation, they add value to the client relationship. Leading banks will develop new ways of working between the front, middle, and back offices to become more resilient and responsive in the face of changing market and customer demands. By focusing on core customer journeys and creating interconnected teams and processes, banks can provide clients with more satisfying, cost-efficient, and integrated service end to end.

Accelerate the rate of digitization. To remain competitive, banks need to invest in advanced analytics, cognitive computing, machine learning, and other smart technologies that can process vast amounts of data, conduct sophisticated modeling, and deliver highly predictive recommendations at blazing speed. Supplemented with automation, the self-correcting mechanisms built into these analytical engines can help banks respond to risks and opportunities in real time in order to remediate routine issues and enhance operational resiliency. Speed is also critical. The ability to offer rapid client onboarding through seamless processes is fast becoming a “make or break” attribute in winning and retaining high-value customers.

Some institutions are already moving aggressively to gain a commercial edge through digitization. Goldman Sachs, for instance, has 3,000 developers working full-time on a proprietary risk and pricing platform that could give the firm a competitive advantage. Others, like DBS Singapore, are embracing open platforms and application programming interfaces (APIs) and employing distributed-ledger technology to improve core processes such as asset distribution. And still others, like Wells Fargo and American Express, are exploring opportunities to offer nonbanking products that include business planning and tax advice as well as portals and forums that provide networking opportunities.


Wholesale banks are at a critical juncture. With depleted returns, deteriorating market conditions, and mounting competitive and customer pressures, most divisions cannot continue to operate in the same mode as before. Propelling growth and profitability over the coming decade will take new strategies, new business models, and new operating fundamentals. But banks that are willing to rethink their go-to-market approach and reinforce their core can turn adversity into advantage. The next articles in our series will explore how to accomplish that, focusing first on the imperative for reinvention within the investment banking space.

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