AI Powered Growth, Profitability in 2024 Retail Banking

Retail Banking Report | Oct 16, 2024

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Artificial Intelligence is Helping Retail Banks Remain Competitive as Interest Rates Trend Downwards

McKinsey’s recently dropped an October 2024 report called “The State of Retail Banking” breaking down how banks are adjusting to lower interest rates squeezing profits by using digital tools and AI to cut costs and improve customer service. More than half of retail banks are investing in AI to stay competitive. This post highlights the key trends, insights, and opportunities for fintechs and investors.

1. Current State of Retail Banking in 2024

• The recent rate cuts have tightened profit margins after a period of higher interest rate gains. Banks are adapting by reducing costs and focusing on more fee-based revenue from areas like wealth management and insurance services, credit card and payment/transfer transaction fees.
  
• More than 50% of retail banks now use AI in customer service, fraud detection, and operational efficiency.  They are aiming to reduce costs by up to 20%.
• 70% of banks have invested in upgrading digital platforms including mobile and online banking to meet rising customer expectations and stay competitive.

2. Funding and Market Insights

• As interest rates decline McKinsey sees that profit margins could decrease by 10-15% in the next 12 months, so banks are pushing to diversify revenue streams.
• AI and automation are viewed as critical to cutting costs with some banks already reporting 25% cost reduction in routine tasks.

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• Investment in digital banking tools reached $15 billion globally in 2023 and is expected to continue to increase in 2024 as banks focus on digital customer engagement in digital lending, wealth management and personalized customer services.
• The report highlights a 30% increase in M&A deals focused on acquiring digital capabilities, especially in North America and Europe.
• Strategic partnerships with fintechs have increased by 20% compared to last year, as banks look to acquire new tools.

3. Regional Insights

• U.S. banks have increased their spending on AI by 15% since 2023 to focus improving fraud detection systems and customer personalization tech.
• European banks face challenges from a stricter regulatory environment but are leading in digital compliance and customer data security investments.
• APAC banks are pioneers in mobile banking with over 60% offering fully digital banking services that tech savvy customers interact with on smartphones.

Key Takeaways

• By 2025, banks that use AI effectively could improve customer satisfaction by up to 40% and boost profits by 15%.
• With interest rates down, banks are focusing more on services like wealth management and insurance to earn fees.
• Banks are set to spend around $20 billion on digital tools, giving those with strong online services a competitive edge.
• Banks using AI and automation can cut costs, making them attractive for investment.
• Partnering with fintechs can help drive longer term growth.
• Banks that use AI to deliver personalized services can keep more customers and offer a competitive advantage (for the time being).

Outlook

The future of banking looks digital, with partnerships and tech investments shaping the path forward.

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