2023 Banking top 10

Digitization of banks’ operating models is fundamental to growth and efficiency, and it is essential to the timeliness and accuracy of regulatory compliance demands along with the ability to create defenses against unabated cyber threats. We expect even more banks to take on core system replacement programs, along with leveraging cloud technologies and artificial intelligence projects as part of holistic transformation efforts. Banks’ primary focus is on creating integrated, scalable digital operating models. Going forward, we expect an expansion of the foundational digitization elements as a means to realize a meaningful — and measurable — return on investment. In the coming months, look for significant efforts being placed on modernization to help with product innovation, real-time processing, and an array of customer needs. We are witnessing a new dynamic, where banking executives increasingly are embracing programs to digitize the enterprise — in the front, middle, and back offices — and building strategies and employing tactics that create new digital capabilities that benefit customers and the business.

With a recession in the United States remaining possible (perhaps likely) in 2023, top-line revenue growth will become more challenging for most banks. Banks will focus on maximizing their net interest margin as interest rates stabilize and competition for deposits increases. Managing credit will also be at the top of most bank executives’ agendas going into 2023 as the economy slows. Given the significant growth in costs we expect banks to look hard at cost reduction and efficiency improvement in the coming year. Banks are pursuing three distinct types of efficiency-related initiatives, sometimes in tandem: First, institutions looking to close earnings gaps in the nearterm are reexamining the “low-hanging fruit” of cost reduction, including optimization of spans and layers and staff capacity, and reductions in procured costs. Second, institutions are investing in digitization and automation of core processes, transformation and cloud-migration of core infrastructure, and development of “digital-first” business models for segments such as commercial and small business. These initiatives will require up-front capital expenditures and have longer payback periods but will yield more efficient and scalable business models over time. Third, we also see banks working to break out of “boom and bust” cost management cycles by developing more disciplined and proactive continuous performance management approaches, including supporting metrics, incentives, and cultural change. Finally, while we expect significant near-term focus on cost, forward-looking banks will also be positioning to deliver strong revenue growth when the economy recovers from its anticipated downturn. One important consideration to that end is ensuring that any near-term headcount or capacity reductions will not impair the institution’s ability to originate and service new business in the early stages of the recovery. Missing out on revenue opportunities due to overaggressive capacity management and being forced to re-add capacity in a hot labor market, are serious potential risks to earnings growth in the latter half of 2023 – or whenever an economic downturn reverses. A second important consideration is continued investment in alternative, innovative business models. API-led open banking, embedded finance, open platform, and banking-as-a-service strategies are, for most institutions, nascent at best, but likely to drive significant earnings growth in 2024 and beyond for institutions that invest and execute decisively now.

Core infrastructure modernization through the leverage of advanced payment platform technologies is at the heart of banks’ desire to speed up payments in banking in 2023. Customers would benefit through user-friendly, quicker transactions; banks would improve customer relationships and reduce costs by limiting process redundancies and speedier operations. We expect more alliances with nonbank and third-party organizations, enhancing agility and bringing aboard more technical talent to traditional banks. Additionally, we believe banks will place great emphasis on their progress toward adherence to ISO 20022, the global standard meant to enable interoperability among financial institutions and eventually eliminate today’s plethora of proprietary payment formats.

Bank deal activities, especially among mega- and large regionals, is likely to remain subdued into the first quarter of 2023, and perhaps beyond, because of rising interest rates, inflation concerns, and regulatory “overhang.’’ Still, there are indications that activity among midsize and smaller institutions could be steady or even pick up in 2023, especially if some of the economic uncertainty and potential political gridlock issues are clarified in the months ahead. The steady pace in that sector we expect will continue to be driven by the need for scale and access to improved digital technologies, which remain essential for a litany of financial and business-process reasons. Further, brisk activity among banks of all sizes and nonbanks (fintechs) could increase due to an expanding need for better customer interaction and relationships, reduction in process costs, and the drive for increases in revenue and profitability. Some areas of uncertainty across almost all potential deals are technical debt and talent availability.

Anticipate a rise in banks’ risk management profile if credit conditions deteriorate, driven by a contracting economy, continued supply chain challenges and pressure to maintain profitability levels. Certain industries will be more susceptible to economic pressures requiring earlier attention than others; early warning signs will be key. Concurrently, as banks leverage more digitized processes as a cost-reduction strategy and in order to reach customers more efficiently, risk management strategies should be embedded as part of the development of these emerging areas. High among the possible risks in 2023 due to a contracting economy are increased bad debt reserves, more writeoffs, tightened liquidity, and the need to determine whether current models match current economic conditions. Bankers will be under pressure to not only embed risk management capabilities into their newest digital tools in order to maintain appropriate oversight but also to eliminate risk management redundancies. Should economic conditions worsen, bank executives will need to increase vigilance over risk taking as some employees may be tempted to cut corners in the pursuit of business results. Vendor-risk management should rise as banks increase the number of third parties they use as part of their efforts to cut costs and offer new digital products and services to customers. These matters are further complicated by the evolving capital regime being adopted by regulators around the world, prompting organizations to reconsider asset composition, structuring options, and customer profiles. Further continuing evolution of business models to digital platforms, heightened geo-political risks, and climate concerns have elevated the focus on and importance of operational risk and resilience, including thirdparty risk management and dependency.