2024 is almost a wrap and the banking sector ended the year on a high note despite macro-economic challenges.1 Globally, the sector recorded USD 7 trillion in revenue and USD 1.1 trillion in net income with a Return on Tangible Equity of 11.7 percent. It recovered from the pandemic-induced disruption to record high profitability, healthy capitals and liquidity over the last two years, taking it back to its glory days prior to the 2008 crisis. And banks continued to fast track their digital capabilities to unlock innovative strategies and business models.
As we get closer to 2025, we take a deep dive into what the year is likely to hold for the banking sector and the key trends that will shape banking strategies of the future.
The Forces Shaping the Future of Banking
But first, let’s understand the forces that will continue to shape banking in the next one year. According to McKinsey, the profits and revenue growth recorded this year can be attributed to rising interest rates.2 Now, the Federal Reserve is looking at cutting interest rates, while the pace of economic growth is expected to slow down with US GDP growing at 1.5 percent – 1.9 percent in its baseline scenario.3 Other central banks like the European Central, the Bank of England, and the Bank of Canada are also likely to slash interest rates in the coming months. Consumer spending will decrease as debt increases (an unprecedented USD 17.7 trillion by the second quarter 2024) and escalating geopolitical tensions can lead to more sanctions, increased trade tariffs, and supply chain disruptions. Meanwhile, competition for share of wallet will continue to intensify in segments like private credit and wealth management, in addition to payments. Customers will continue to clamor for personalized, relationship-based, and intuitive banking that meets their requirements at every stage of their life journey. Banks must now rethink their strategies to continue their growth trajectory even in these challenging market conditions.
Top Banking Trends for 2025
Here’s what we envision to be the biggest trends in banking in 2025:
- Open Banking and Ecosystems: 94 percent of the world’s financial technology leaders believe that a financial products success depends on its ability to meet customer needs in real time.4 Banks will continue to accelerate their move to open banking models and orchestrating banking ecosystems that can help address customer needs comprehensively. They will continue to expand modular composable architectures, build and expand API integration capabilities in 2025. And they will explore partnerships and collaboration with fintechs and non-banking companies to ensure value-driven offerings for customers without building every service in-house. The ability to orchestrate a diverse ecosystem of different partners will prove to be a strategic advantage for banks as competition intensifies.
- Personalization at Scale: 53 percent of customers are willing to change their financial institutions if the services seem impersonal or don’t meet their requirements.5 While the banking sector has been talking about personalization strategies, they will have to ramp up their game in 2025 to contend with the disruptive macro-economic forces impacting the sector. Pricing, products, bundles, offers, rewards, and even services need to be personalized and based on the customer’s relationship and engagement with the bank. Banks also must consider the customer’s life stage and its unique requirements as well as market conditions to craft dynamic offerings for customers.
- Customer Centricity and Experience: The customer lies at the heart of the bank of the future and the customer expects automated, personalized, and seamless services from their financial institutions. Banks are now re-evaluating service delivery with a focus on seamless omnichannel experiences, secure transactions, and instant support. Over the next year, banks will offer AI-powered tools like chatbots, live chat platforms, blockchain for transparent processes, video chats, and real-time collaboration to ensure a customer-centric and superlative customer experience.
- AI-Enhanced Operational Resilience: Artificial intelligence (AI) can boost banking profits to USD 2 trillion by 2028, marking a 9 percent increase over the next few years.6 Unfortunately, only a quarter of banks say that their data management platforms are prepared to incorporate Generative AI tools and applications. But most bankers are keen to leverage the transformative power of AI to transform the way banking services are managed, delivered and consumed. From AI-powered cybersecurity and risk management to gen AI-powered customer engagement tools, and AI and big data analytics-based hyper-personalization to process automation, the banking adoption of AI will accelerate over the next year.
- Automated Compliance: Regulators are working quickly to meet and offset the disruptions in the global macro-economic environment. Regulations and standards are evolving rapidly with increasingly stringent penalties for non-compliance. Keeping pace with this constantly changing regulatory landscape is challenging and banks cannot afford the financial, and reputational consequences of non- compliance. As a result, over the next year, we will witness increasing investments in automated, AI-powered compliance and governance solutions.
- Exploring New Revenue Streams: Rising interest rates contributed significantly to banking profitability and growth this year. But with the Fed starting interest rate cuts, and other central banks following suit, banks will feel the pressure on deposits and must explore new revenue streams to continue to grow their profits. Improving cash management and transaction banking strategies is one way to go. Banks are also considering transforming existing processes and practices to deliver customer-centric services. Modernized treasury services and digital account analysis, for example, can help banks meet customer demand for real-time visibility into liquidity, and better cash forecasting. In fact, modernized customer-centric transaction banking and treasury services can generate almost than USD550 billion in annual revenues.7 2025 will see more banks exploring new revenue streams like this to offset the impact of declining deposits.
- Core Augmentation: There is no doubt that the future of banking lies in technology-powered innovation. But legacy banking cores, while still powerful and crucial, lack the agility and scalability banks need to drive differentiated banking models and strategies. Modernizing the core is not just expensive and time consuming but also extremely risky. As a result, an increasing number of banks are now considering core augmentation to deliver the flexible and composable architecture they need for modern banking. Core augmentation is the process of improving and adding on to the capabilities of the core banking system to drive the flexibility, agility, and scalability required for modern banking. Banks are already working with specialized partners to deploy powerful, microservices-based, and cloud-native middleware to sit on top of their legacy cores to power customer-centric, innovative offerings and strategies. This trend is likely to continue to gather momentum in 2025.
Modern banks are operating amidst highly disruptive market conditions. They must understand the forces shaping the market and work quickly to meet challenges and capitalize on opportunities. A powerful technology platform coupled with innovative ideas and strategies can help them protect profits and continue to grow in the coming year.
