Leading Off: Banking update 2024: What leaders need to know

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ESSENTIALS FOR LEADERS AND THOSE THEY LEAD

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Brought to you by Alex Panas, global leader of industries, & Axel Karlsson, global leader of functional practices and growth platforms

Welcome to the latest edition of Leading Off. We hope you find our insights useful. Let us know what you think at [email protected] and [email protected].

—Alex and Axel

Financial institutions have performed relatively well in the past few years, but the good times may not last. The banking sector faces a range of challenges, including mixed levels of labor productivity, global regulatory changes, and the increasing presence of nontraditional competitors. Despite their heavy spending on technology, few banks have been able to capture the benefits. In an uncertain business and geopolitical climate, the leaders of financial institutions should tread carefully. This week, we explore some key trends to watch.

AN IDEA

An image linking to the web page “Global Banking Annual Review 2024: Attaining escape velocity” on McKinsey.com.

Good management matters

It’s often difficult to improve performance in the banking industry. Our latest research reveals that only about 10 percent of global banks have moved as much as five deciles in their return on tangible equity in the past ten years. How did they pull ahead of the pack? According to the authors of McKinsey’s Global Banking Annual Review 2024, the differentiator could lie in a strong “management quotient.” Management teams that can answer five core questions may be better positioned to propel growth in the banking sector. For example, a critical question to ask is whether the organization’s operating model is “set up to translate ideas to actions fluidly,” note the authors. “Does it sometimes feel like you’re wading in mud when trying to get things done internally? What exactly is getting in your way? What can be learned and adapted from more nimble executors?”

A BIG NUMBER

That’s the number of strategies that banks could adopt to attract and keep corporate deposits, according to an article by McKinsey senior partner Nunzio Digiacomo and colleagues. For example, one such strategy involves increasing visibility into deposit pools, inflows, and outflows—which leaders can achieve by setting up customized dashboards that display information about deposits across all corporate client segments and products. Another possible initiative is to revamp sales strategies by focusing on priority clients, an effort that better-optimized data analytics and client management tools can support. “Relationship managers, product specialists, and sales professionals all play a critical role in the effort to increase deposits,” observe the authors.

A QUOTE

“I think the journey to generative AI is really reshaping the banking space.”

That’s McKinsey senior partner Gökhan Sari on how generative AI (gen AI) can add value in banking and financial services. He points to three distinct categories of adoption: deploying large language models to automate back-office operations, using gen AI to improve the speed and accuracy of traditional underwriting systems, and implementing a copilot—a gen-AI-based virtual assistant—to support frontline staff or interact directly with customers. “I think we are only scratching the surface, as we learn more and get comfortable with the limitations of the technology—as well as the risks and regulations,” says Sari .

A SPOTLIGHT INTERVIEW

An image linking to the web page “The new importance of partners in banking” on McKinsey.com.

The rapid spread of embedded finance and banking as a service—wherein nonfinancial companies offer financial services to customers—means that banks may need to partner with third parties in areas that fall outside their core capabilities. In a discussion with McKinsey, banking leaders offer their perspectives on how this trend may affect the industry as a whole. “Customers want a seamless experience in every facet of their lives, and that absolutely relates to banking right now,” says Sabrina Dar, an executive at core banking technology provider Mambu. “They’re demanding personalization and intimacy. And they want speed.” Ray O’Brien, COO of data analytics firm Quantexa, adds, “Banks are thinking more today, ‘We should focus on the things we really care about, and we can get other companies to help us do the rest, weaving it together into one platform.’”

FOLLOW THE MONEY

An image linking to the web page “The cyber clock is ticking: Derisking emerging technologies in financial services” on McKinsey.com.

The notorious bank robber Willie Sutton allegedly said that he stole from banks “because that’s where the money is.” While banks may be much less vulnerable to physical theft today than they were decades ago, digital heists have become rampant, with more than 20,000 cyberattacks—and losses of about $12 billion—occurring in the financial sector over the past 20 years. A single data breach could cost finance firms an average of $5.9 million. In a McKinsey survey of financial institutions around the world, 70 percent of respondents report that they are underinvesting in cybersecurity. As more banks adopt emerging technologies, they may need to enhance their cybersecurity capabilities to handle the potential risks.

Lead by banking on change.

— Edited by Rama Ramaswami, senior editor, New York

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Good management matters﻿

“I think the journey to generative AI is really reshaping the banking space.”

Celebrating 60 years of the McKinsey Quarterly

Good management matters