Activate the Four Performance Pillars That Distinguish Retail Banking Leaders
By David Evans, Chief Content Officer at The Financial Brand
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Despite retail banks’ recent record earnings and returns on equity that exceed pre-pandemic levels, many industry observers fear these performance gains are unsustainable — representing tailwind-driven results rather than fundamental competitive strengths.
A recent report from McKinsey and Co. argues that retail institutions can be divided into four distinct categories, and that each will have dramatically different performance going forward.
Bottom line: Some will thrive, but many will fall behind.
Need to Know:
Financial institutions were segmented by McKinsey based on their strategic responses to four key industry trends, including:
- Customer primacy fragmentation is threatening incumbents. According to McKinsey, the average number of financial institutions per customer increased uniformly worldwide, from approximately 2.5 in 2021 to 3.0 by 2023, unbundling offerings and providing customers with greater options while eroding traditional banking relationships.
- Mobile banking now commands three times the active users and 50 times the touchpoints of physical branches. Meanwhile, technological innovation including open banking and AI is transforming the delivery of financial services, allowing institutions to orchestrate customers’ entire financial lives, embedding finance into retail journeys, and introducing super applications expanding to nonfinance services.
- Rising cost pressures are outpacing inflation by approximately 6% annually. The banking sector faces unique factors that are increasing its costs to serve customers, including higher cost of funding amid structural shifts to fixed-term deposits, as well as accelerating delinquency and fraud, and heightened credit risk.
- Tech-native competitors promise — and often deliver — deeper understanding of client needs. These competitors have the ability to come to market faster and with more innovative approaches while simultaneously enjoying more efficient cost structures.
The Four Pillars of Standout Performers
To understand why and how certain institutions achieve superior performance, McKinsey examined more than 500 variables drawn from both proprietary McKinsey sources and public data including banks’ financial reports and central bank information. McKinsey evaluated institutions based on their ability to outcompete through four strategic pillars.
1. A distinctive value proposition that serves to combat increasing fragmentation of primacy by engaging and enchanting customers, ensuring ownership and monetization. This includes strong brand connection that attracts customers alongside high customer satisfaction that brings in new customers while allowing current clients to fulfill their daily banking needs. The net effect is improving profitability through deeper relationships.
2. Mobile-orchestrated distribution that answers shifts in consumers’ channel preferences and the rise of mobile banking. This includes the ability to orchestrate across both digital and human channels to offer and distribute what clients want and where they want it. A starting point is outstanding mobile user experience that allows clients to undertake daily banking simply and effectively, enabling banks to easily sell products through digital channels and provide specialized services.
3. Operational scalability that maintains efficiency and balance revenue and costs across operations, while addressing cost pressures and enabling profitable growth. Low marginal costs allow banks to attract and acquire new customers and grow cost-effectively. Operational scalability also entails best-in-class credit and fraud management capabilities to maintain low delinquency rates while producing significant revenue for each additional resource invested.
4. “Tech company DNA” that responds to emerging tech-native competition. It requires a cloud-based ecosystem powered by AI to capture data and leverage it for personalized and real-time decision-making. A strong tech base also helps attract talent and foster test-and-learn cultures of innovation that ultimately permeate throughout banks’ entire operating models.
Four Banking Archetypes That Deliver Divergent Performance
McKinsey’s analysis found four universal banking archetypes, with clear differentiation across critical metrics. The first two — digital superstars and rewired leaders — will outperform their peers in growth and profitability, emerging as market leaders compared with incumbent banks and other institutions.
Digital superstars are digital-first banks reshaping the industry by redefining customer experience and value proposition. Their strategy has been targeting key pain points for customers using traditional retail banks, quickly growing customer bases. But opportunities remain for digital superstars to focus on building customer primacy and product portfolios to monetize their distinctive value propositions while continuing to scale without compromising customer experience and unit costs.
The performance characteristics of digital superstars include:
- 30-40% ROE
- 55-65% gross income growth
- 60-80% customer satisfaction scores
- 35-45% cost-to-income ratios.
• Rewired leaders are established banks successfully reinventing themselves to thrive in the digital era, having started their tech and talent transformations a few years ahead of the curve. They are leaders when it comes to having distinctive value propositions and tech company DNA, with spikes in mobile-orchestrated distribution and operational scalability. Their challenge now is considering doubling down on orchestration and accelerating digital transformation to build hard-to-copy distribution advantages.
The typical performance metrics of rewired leaders are:
- 20-30% ROE
- 5-15% gross income growth
- 30-50% customer satisfaction
- 35-45% cost-to-income ratios.
Sleeping giants are large banks that once dominated markets but are now at risk of falling behind in new digital landscapes. While they perform well in terms of operational scalability, sleeping giants are losing ground across other pillars and may need to define clear and compelling value propositions enabling differentiation and market traction.
Sleeping giants deliver:
- 10-20% ROE
- 5-15% gross income growth
- 30-50% customer satisfaction
- 45-55% cost-to-income ratios.
“Question marks” are digital banks still seeking their strategic edge and unique value proposition beyond simply being digital. They have deep tech company DNA and are leaders in terms of mobile experience and cost-to-serve. But these banks need to focus on reprioritizing value proposition strategies around a few anchor advantages that resonate with target audiences, as well as building strong brand identities.
Their performance characteristics include:
- 15-25% ROE
- 30-40% gross income growth
- 40-60% customer satisfaction
- 45-55% cost-to-income ratios.
The Three-Stage Playbook to Drive Sustainable Change
McKinsey recommends a three-step transformation process beginning with comprehensive assessment and continuing through execution and scaling.
1. The value creation plan stage undertakes sprints to identify strengths, gaps, and opportunities across business areas, leveraging strategic distance lenses. The net result is comprehensive views illuminating clear North Stars for institutions’ futures as well as defined workstreams and solutions to make them happen.
This stage requires honest assessment of current capabilities, realistic evaluation of competitive positions, and clear-eyed identification of gaps between current state and desired future state across all four strategic pillars.
2. Frontrunner execution and transformation backbone development charts paths to market leadership by capturing rapid value from low-effort opportunities while laying foundations for long-term transformation. This stage accelerates execution with front-runner initiatives, drives quick wins, evolves capabilities, continues planning subsequent waves, and implements enabling foundations to sustain growth and impact.
3. Full value capture and scale-up ignites sustained growth by driving value creation through structured waves, leveraging robust performance infrastructure, and tracking to deliver measurable results. This stage scales and aligns initiatives to maximize impact across organizations.
Institutions should continuously monitor performance, analyze metrics, and adjust as necessary, recognizing this is not a one-and-done exercise but rather ongoing capability that must be maintained and refreshed over time.
