The current banking climate is facing a lot of changes and challenges that banks need to address urgently. Credit Suisse was recently acquired by UBS for $2 billion, while Silicon Valley Bank was split over First Citizens and HSBC. Additionally, the FED and ECB have raised interest rates, and the global workforce is shifting towards being mostly made up of digital natives. While banks saw large profits in 2022, there are still serious concerns about the long-term profitability of banks due to an unstable macro-economic environment, increased competition, the rise of fintech, and regulatory pressure.

McKinsey's Annual Banking Review 2022 notes that the banking industry faces a valuation gap of 70% compared to other industries, with reduced profitability and an impaired-growth outlook being the main reasons for this gap. As the economy slows down, the gap between banks will likely widen further. Nonetheless, around 15% of banks outperform their counterparts by having focused business models, greater geographic diversity, and concentrations in specific sectors.

Banks need to urgently rebuild their business models and reset their growth strategies to become strategic outperformers like these successful banks. This can be achieved by accelerating their growth and profitability with new business models and strategies driven by advanced technologies like artificial intelligence, blockchain, and cloud computing. The author of this text, who has 20 years of experience in the boards of banks, investors, fintechs and insurtechs, will be posting a series of blogs on this topic in the run-up to Money 20/20 Europe, the world's largest fintech event for payments and financial services innovation. I am doing this to share my vision on how banks can concentrate on constructing resilience while establishing novel sustainable growth engines. This is essential to remain competitive and successful in the ever-changing banking industry.

Building resilience

In the next five to ten years, changes in the market, including technological advancements that disrupt traditional banking, will result in significant structural shifts. To prepare for future profitability, growth, and higher valuations, banks must improve their short-term resilience and invest in the long term by innovating new business models and growth engines. Four strategic objectives can help boost resilience in the near term:

1. Financial resilience: Banks should have a net income structure that is less sensitive to interest rates and risk costs, and aim for a cost-to-income ratio of 35 to 40 percent.
2. Operational resilience: Banks should reduce or eliminate their presence in high-risk countries and implement excellent risk management practices.
3. Digital and technological resilience: Banks must have a well-protected and future-proof technology infrastructure, along with superior data security to protect against cyberattacks.
4. Organizational resilience: The best banks should have a rapid reaction time and invest in attracting, reskilling, and retaining top talent.

To achieve higher profitability, banks must look beyond traditional revenue streams and shift towards fee-based services. Goldman Sachs recently reported that 300 million jobs could be affected by AI. Banks that invest in digital channels and advanced technologies like AI can on the other hand capture new customers and achieve higher growth rates. Fee-based services, such as wealth management, insurance, and advisory services, can diversify revenue streams and help banks capture a larger share of their customers' financial lives.

For the longer term, banks will need to move from traditional business models to more future-proof platforms, potentially decoupling business units such as everyday banking and complex financing or advisory services. Advanced banking technologies like artificial intelligence, blockchain, cloud banking, and digital currencies are critical areas where banks must focus to leverage their growth strategies. For instance, AI can be used to improve customer experiences, automate processes and reduce financial and operational risk, while blockchain can secure transactions and reduce fraud. Cloud banking can help banks reduce costs and improve customer experience and efficiency, while digital currencies offer an opportunity for banks to expand their offerings and capture a share of this rapidly growing market.

Developing new growth engines in an experience oriented industry

It is crucial for banks to understand that customers today are increasingly seeking out experiences. As a result, they must find ways to accelerate customer base growth with fee-based value propositions and reduce the vulnerable impact of interest rates in their current intermediation business model. One area where banks can focus their attention to develop new growth engines is in the experience-oriented industry. 

Mobile banking

Mobile banking is the key growth area for banks serving the 3.8 billion people in the connected next generations. The rise of mobile devices has led to a significant shift in customer behavior, and banks must adapt to this trend by developing mobile financial assistants. Customers expect their mobile banking apps to turn into smart financial assistants, and big data and AI are used to deliver these kinds of experiences. Financial institutions that invest in intelligent mobile banking solutions will have a better chance of attracting the next-generation customer base and are therefore in a prime position to benefit from financial inclusion.

Embedded finance

Embedded finance is another area where banks must focus their attention to engage with the connected next generations. This involves integrating financial services into other products and services, such as e-commerce platforms and mobile apps, to offer customers a more seamless experience.

Next gen wealth-tech

The next era of wealth tech is also a critical area for banks. With the rise of robo-advisors and other advanced technologies, banks must invest in these technologies to stay competitive and offer their customers the best possible investment options.

Small business banking

Small business banking is the fourth opportunity for banks to build new growth engines. Banks must leverage technology and dynamic data to reach the 400 million small business customers globally and offer them tailored solutions to meet their unique needs, from streamlined account opening processes to more personalized lending experiences and support.

Sustainability at the heart

As upcoming generations give more importance to sustainability while making purchases, banks should prioritize sustainability in their business models and strategies. The European Central Bank (ECB) has introduced regulations to promote innovation and digitalization in a transparent and sustainable manner, while also protecting customers. The Payment Services Directive 2 and General Data Protection Regulation, for example, promote competition, consumer protection, and privacy. The EU taxonomy provides a framework for sustainable finance by classifying environmentally sustainable activities.

Fintechs understand the importance of sustainability in business better than banks, as they bring a purpose to their business models from inception. For example, our company, AdviceRobo, has a mission to combat poverty by offering access to finance to people all over the world. To achieve this goal, the platform provides advanced customer screening solutions, and for instance, the dynamic credit scoring tool now also includes ESG factors. In short, developing new business models and strategies to grow as a market outperformer cannot be achieved without making sustainability the core of the business.

Conclusion

To conclude, to the best of my knowledge, I strongly recommend that banks reset their business models and strategies urgently in response to the current climate. It is crucial for them to quickly build resilience while also developing new growth engines that will accelerate profitability and help them grow their customer base. To outperform their peers, banks must adopt advanced technologies like artificial intelligence, blockchain, cloud computing, and digital currencies. I also strongly recommend exploring different growth opportunities that arise from the upcoming connected generations, such as mobile banking and assistance, embedded finance, the next era of wealth technology, and small business banking. Furthermore, sustainability must be at the heart of a bank's growth strategy in the current climate. But remember to make bold, data-driven decisions to concentrate on specific areas, as top-performing banks have focused business models, greater geographic diversity, and concentrations in specific sectors.

As we approach the future with both uncertainty and excitement, it's crucial to stay ahead of the curve and equip ourselves with the necessary tools and knowledge to succeed. Therefore, I am excited to announce that in the upcoming weeks, I will be publishing a series of thought-provoking blogs that will offer insights into how boards can navigate the constantly changing landscape with intelligence and strategic foresight. These blogs can serve as brain candy for readers seeking to enhance their understanding of this field. They will delve into the latest trends and insights to help you stay ahead of the game. The blogs will cover innovative approaches to customer experience that boost base growth and fee-based services, as well as leveraging advanced technologies such as dynamic data, artificial intelligence, blockchain, and cloud computing. So if you're eager to take your business to the next level and embrace the challenges of the future head-on, stay tuned for this blog series. Together, let's pave the way towards a brighter and more prosperous future.