New Report from Boston Consulting Group Finds ESG-Related Products in Core Business Lines Could Generate Substantial Revenue for Retail Banks
BOSTON—Interest in sustainability has been rising for several years, and concerns over climate change have become decision drivers for customers, investors, and policymakers. Retail banks are responding by building sustainability into their digital transformation programs. Three-quarters of retail banks plan to increase spending on environmental, social, and governance (ESG) initiatives, almost 20% of them significantly, according to a new report by Boston Consulting Group (BCG) being published today.
The report, titled Global Retail Banking 2022: Sense and Sustainability, reveals that one-quarter of retail banks report that ESG is a primary focus area for their digital transformation, and another 38% say that ESG is a key criterion in selecting and prioritizing digital transformation initiatives. Nearly half of retail banks are primarily focused on environmental sustainability issues, such as reducing energy consumption in offices, and 60% are prioritizing governance issues, including managing critical risk incidents, building cyber-resilience, and developing predictive risk analytics to ensure improved preparedness and mitigation.
“Sustainability has moved up the priority list for all stakeholders, making it the next frontier of competitive advantage for retail banks and a pillar for future growth,” said Thorsten Brackert, a BCG partner and director and coauthor of the report. “In addition to promoting sustainable behaviors by customers, ESG-related products could generate considerable returns for retail banks. A 20% ESG-related share in new retail banking revenues in the next five years, for example, would result in about a 10% share of total retail banking revenues—or about $300 billion—in 2025.”
A “Good Friend” to Consumers
BCG’s 2021 retail banking consumer sentiment survey, which covered 25 countries, found that 20% more people voiced increased trust in their bank during the COVID crisis than at the start of the pandemic in 2020. While most customers say they have two or three banking relationships, a large majority (70%) still secured their last product from their primary bank. Customers want their banks to feel like a “good friend” (31%) that they can turn to for honest advice, and a “school” (11%) where they can obtain financial guidance. When it comes to keeping personal data secure, customers trust their banks even more than their doctors, and four out of five customers are willing to disclose more data to their banks if they value a new service or feature.
Strong Industry Trends Will Fund ESG Investment
According to the report, global retail and private client revenues are expected to grow at more than 6% a year through the 2020-2025 period. Regionally, revenues in Asia Pacific should rise the fastest, at an estimated 7.8% a year, followed by the Middle East and Africa (7.7%) and Latin America (6.9%). North America and Europe will grow more slowly but still at rates of more than 5% a year. While North America generated the biggest share of revenues in 2020, it is in the process of being overtaken by Asia Pacific.
Payments and deposits will be the leading drivers of revenue growth globally, with payments expected to grow at an annual rate of 6.3% as more people opt for online, credit card, and other non-cash transactions. Consumer and other retail loan revenues should rebound to growth rates of around 4% as customer spending increases while COVID recedes. Investments will grow attractively, at more than 5% a year, while mortgage growth will be muted as interest rates rise.
The Sustainable Retail Bank
Banks have many opportunities to innovate sustainable practices and products along the customer lifecycle and to practice good business in the process. One opportunity is through green mortgages, which provide discounts on interest rates or fees to purchasers and builders of energy efficient properties. Banks can also use the daily banking relationship as well as their personalized engagement capabilities to support customers in environmentally friendly and ethical living. In the US and UK, almost nine in ten consumers would like brands to help them become more environmentally friendly.
“Retail Banks have a critical role to play as societies and their institutions address social and environmental challenges,” said Sam Stewart, global leader of BCG’s retail banking segment and coauthor of the report. “As they consider a redirected future, retail banks should ask themselves a couple of existential questions: What will our customers be looking for beyond straightforward financial products and services in the next few years? And how can we align our business goals with meeting those needs before our competitors do so first?”
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