AI is disrupting Global Banking – What is going on?

A Strategic Analysis: Navigating the AI-driven disruption in global banking.

1. A Banking Industry Paradox: Peak Performance Amidst Pervasive Scepticism

The global banking industry is currently defined by a profound paradox. In 2024, the sector achieved an unprecedented level of financial performance, posting record-breaking results that surpass those of any other industry in history. Yet, this peak performance is met with deep and persistent scepticism from capital markets. This disconnect is starkly illustrated by a widening valuation gap, signalling that investors are unconvinced that the industry's recent success is built on a sustainable foundation capable of withstanding the disruptive forces on the horizon.

This paradox is highlighted in a recent McKinsey report, the "Global Banking Annual Review 2025".

The industry's recent financial achievements are, by any measure, extraordinary. Key performance indicators from 2024 paint a picture of a sector at the zenith of its power:

• Global banking net income reached an estimated $1.2 trillion, the highest total ever recorded for any industry.
• Return on Equity (ROE) climbed to 10.3%, a 20-year high for the sector.
• Between 2021 and 2024, the industry generated an astounding $3.36 trillion in distributable capital, far exceeding any other sector and providing substantial resources for dividends, buybacks, and reinvestment.

Despite this remarkable performance, the market's assessment remains deeply pessimistic. This scepticism stems from a belief that recent success is a product of temporary tailwinds rather than fundamental business model innovation. The core reasons for this valuation disconnect include:

• The Valuation Gap: The most telling metric is the industry's valuation relative to others. With an average price-to-book ratio of just 1.0, the banking sector trails the average of all other industries (3.0) by nearly 70%. This gap reflects profound doubts about future value creation.
• Sustainability Doubts: Investors largely attribute the record profits to cyclical factors, such as high interest rates and a peak in the global wealth cycle, which are not expected to last. They see a reversion to the mean as inevitable.
• Encroaching Competition: The most profitable segments of banking are being steadily siphoned off by more agile competitors, including fintechs, private credit firms, and specialized wealth managers, who are capturing high-margin business.
• Future Profitability Threats: Projections indicate that the industry's ROE could fall to between 7.3% and 9.2% by 2030. This anticipated decline is driven by expected margin compression and rising risk costs, which anticipated efficiency gains alone will be insufficient to offset.

This confluence of factors suggests that without a significant strategic shift, the industry's profitability is poised to erode. The most formidable challenge, and the primary agent of this potential disruption, is the rapid advancement of Agentic AI.

2.  The Dual-Edged Sword of Agentic AI

Agentic AI represents the most significant technological shift for the banking industry in a generation. It is a dual-edged sword, offering both an unprecedented opportunity to streamline operations and a profound threat to the core tenets of traditional banking business models. How institutions navigate this duality will separate the future leaders from the laggards.

The Opportunity: AI as a Driver of Unprecedented Efficiency

On one hand, Agentic AI presents a powerful lever for revolutionizing bank operations and achieving dramatic cost savings. The technology enables a future of "zero-touch operations," where a collaborative model of one human employee can supervise 20 to 30 AI agents working autonomously to handle complex, end-to-end workflows.

Based on a central scenario analysis, the implementation of AI across the industry could drive a net decrease in aggregate costs of 15% to 20%, representing a potential cost savings of $700 billion to $800 billion for the industry.

However, it is critical to recognize that these efficiency gains are unlikely to translate into sustained higher profits for most banks. As with previous technological innovations, competitive dynamics will ensure that these cost advantages are competed away over time. The primary beneficiaries of this operational revolution will ultimately be customers, who will see the savings passed on to them in the form of lower fees and better rates.

The Threat: Consumer AI and the Erosion of Customer Inertia

The more significant, long-term disruption from AI stems not from how banks use it, but from how their customers do. The widespread adoption of third-party AI agents by consumers to optimize their personal finances threatens to erode customer inertia—the behavioral bedrock that has long supported profitability in key banking products. AI-powered agents can cut through this inertia by automatically identifying and executing better financial decisions on behalf of users.

The impact is most acute in two of the industry's most historically stable and profitable product areas:

Deposits - AI agents could automatically and frictionlessly move consumer funds to accounts offering the highest yields. This is a material threat, given that $23 trillion in consumer deposits—roughly one-third of the $70 trillion global total—currently sits in checking accounts earning near-zero or very low interest rates.

Credit Card Lending - AI agents can systematically disrupt this high-margin business by automating debt consolidation into lower-rate personal loans or by using a customer's excess cash to proactively pay down high-interest balances. This threat is particularly potent because even financially sophisticated customers are not currently optimizing; in the US, for example, about 75% of revolving balances are held by consumers in the prime or super prime segments, who often have access to far cheaper sources of credit but fail to act on them.

Should banks fail to adapt to this new reality, the aggregate financial damage could be severe. If consumers widely adopt these tools, global profit pools could decline by an estimated $170 billion (9%) in 2030 dollars, using 2030 as a reference year for the potential scale of impact. This would reduce the industry's average return on tangible equity (ROTE) by one to two percentage points, pushing many institutions below their cost of capital and threatening their long-term viability.

This technological disruption is occurring in parallel with fundamental shifts in how consumers, particularly younger generations, make financial decisions.

3. The Modern Consumer: Fading Loyalty and Shifting Expectations

The modern banking consumer is more digital, less loyal, and more deliberate than any generation before. These fundamental behavioural shifts are rewriting the rules of customer acquisition and retention, forcing banks to rethink long-held strategies built for a different era.

The Collapse of the Loyalty Loop

Customer loyalty, once a cornerstone of retail banking, is rapidly eroding. The "loyalty loop"—where customers automatically turn to their existing bank for new products—has all but disappeared. This is starkly illustrated by recent data from the United States:

In 2018, 25% of consumers applying for a new checking account did so with their existing bank without exploring alternatives. A 2025 survey revealed that this figure had plummeted to just 4%.

This trend has a critical strategic implication: it is no longer enough to be a customer's current bank. To compete for new business, institutions must fight to be included in a consumer's Initial Consideration Set (ICS)—the small list of brands they evaluate at the beginning of their purchasing journey.

The Primacy of Mobile and the Enduring Role of the Branch

The modern customer relationship is managed primarily through a screen. Mobile has unequivocally become the dominant channel for daily banking interactions, a trend that continues to accelerate.

• The proportion of global consumers who use mobile for their banking needs rose from 41% in 2020 to 63% in 2024.
• Mobile-active consumers are demonstrably more valuable, generating significantly more revenue for their banks—in some markets, as much as double the revenue of their inactive counterparts.

At the same time, it would be a mistake to discount the continued importance of the physical branch. The strategic implication of the data is that branches are no longer centres for daily transactions but are critical hubs for high-stakes, primacy-establishing moments. In North America, for instance, branches still accounted for 72% of all new checking account openings and an overwhelming 90% of the new balances deposited into those accounts in 2024. This highlights the need for an integrated "mobile-first," but not "mobile-only," model that seamlessly connects digital convenience with human interaction for more complex needs.

Generational Divides

The expectations of younger consumers (Gen Z and Millennials) diverge sharply from those of older generations (Gen X and Baby Boomers), requiring banks to adopt more nuanced engagement strategies.

• Priorities: Younger consumers prioritize great customer service, even if it comes at a higher cost. Older generations, in contrast, are more likely to view cost as the primary driver of their product selection.
• Digital Experience: A poor digital experience is a deal-breaker for younger customers. Approximately 20% of Gen Z consumers would leave a bank due to poor digital functionality, a significantly higher percentage than for older demographics.
• Decision-Making: Younger generations are less comfortable making major financial decisions independently. This suggests a greater openness to receiving guidance, whether from human advisors or potentially from AI-driven tools that can help them navigate complex choices.

These consumer-driven challenges, compounded by the technological disruption of AI, demand a new strategic framework for banks to not only survive but thrive.

4. The Strategic Imperative: Adopting a 'Precision, Not Heft' Framework

In response to the converging pressures of AI disruption and evolving consumer behavior, a new strategic imperative has emerged: precision, not heft. This framework moves away from the traditional scale-driven playbook and instead emphasizes a targeted, data-driven, and highly granular approach to value creation. It is the great equalizer in modern banking, enabling institutions of any size to compete effectively by focusing resources where they will have the greatest impact.

The "precision toolbox" revamps strategy across four core dimensions, shifting from outdated "heft" models to new "precision" paradigms.

1. Technology: The old approach of broad, sweeping digitalization programs has proven insufficient. Precision in technology means surgically focusing investments on high-impact AI applications with proven value, such as zero-touch operations, agent-first customer service, and real-time risk monitoring. This disciplined focus is coupled with a willingness to scale back or stop unfocused programs that fail to improve workflows or customer engagement.
2. The New Consumer: Traditional, broad customer segmentation (e.g., "mass affluent") is no longer relevant in an era of fading loyalty. The precision approach uses data and AI to move toward hyper personalization and the "segment of one." This involves tailoring products, pricing, servicing, and risk management to the individual level, creating seamless and personalized experiences that can earn and retain trust.
3. Capital Efficiency: In the past, capital management often involved sweeping, large-scale reallocations between business lines. Precision demands a far more granular, micro-level discipline. This entails a line-by-line review of capital allocation—product by product, client by client—to identify and free up trapped capital. Tactically, this involves deploying AI agents to run continuous optimization of risk-weighted assets and using risk transfer mechanisms through partnerships with insurers and private credit funds to move risk off the balance sheet while retaining client relationships.
4. Targeted M&A: The era of pursuing large M&A deals for the primary purpose of adding scale is over. The precision model calls for disciplined dealmaking focused on plugging specific capability gaps. Leading banks are already demonstrating the payoff of this approach. DBS Bank and OTP Bank Group, for example, have created substantial value through targeted acquisitions in wealth management and high-growth geographies, respectively, while Royal Bank of Canada realized industry-leading synergies from its acquisition of HSBC’s Canadian operations.

Adopting this framework is not merely a strategic choice but a necessity for survival. The outcomes for banks will diverge dramatically based on their ability to embrace this new model.

5. Conclusion: The Diverging Futures of Pioneers and Slow Movers

The global banking industry stands at a critical inflection point. The confluence of Agentic AI, which is simultaneously revolutionizing operations and empowering consumers, and the rapid evolution of customer expectations is creating a new competitive landscape. In this environment, the traditional advantages of scale are diminishing, replaced by the strategic necessity of precision. The future of the industry will be defined by a stark divergence between two archetypes: the agile "Pioneers" and the reactive "Slow Movers."

Their projected outcomes could not be more different.

Pioneers - These are the banks that move decisively to embed AI and precision strategies into their core operations. By doing so, they stand to gain a ROTE advantage of up to four percentage points over their peers. This will allow them to capture market share, generate superior cash flow for reinvestment, and proactively reinvent their business models to thrive amid disruption.

Slow Movers - These institutions will be those that fail to adapt, clinging to outdated models of heft and scale. They will be left with an uncompetitive cost base, face inexorable declines in profitability and market relevance, and lose share to more agile competitors. Ultimately, they risk being acquired or fading into irrelevance.

The coming era of banking will not be defined by size, but by focus. Leadership will belong to those institutions, regardless of their asset base, that demonstrate the strategic foresight and disciplined execution inherent in the 'precision, not heft' model. For them, the future holds the promise of sustainable value creation; for the rest, it threatens a slow decline.