Canada’s banking industry is coming through yet another challenging period. Capital requirements, evolving risks, regulatory changes, technological disruption and macroeconomic volatility continue to complicate Canadian banks’ growth agendas as they navigate the early months of 2024.
For those looking ahead, there are few signs these deep forces of change will abate any time soon. Indeed, banking executives polled in our latest Global CEO Survey told us they expect many of the trends that have been impacting their businesses will only accelerate in the coming year. Notable among them are technological change, which 72% of banking and capital markets CEOs predict will impact their businesses to a large or very large extent over the next three years. That was higher than the 64% who told us technology has had a significant impact over the last five years. And as the chart below shows, banking executives expect a wide range of key trends to accelerate as they look ahead.
Question: Please indicate the extent to which the following factors have driven/will drive changes in the way your company creates, delivers and captures value in the last five years/next three years?
Showing only those who answered to a large/very large extent
While Canada’s banks have been taking action to stay ahead of disruptive trends for some time, the accelerating pace of change means they need to pursue further opportunities to reinvent not just their business models but also the operations and technologies that enable them. Importantly, they need to do so continuously while pursuing and combining a broader range of transformation initiatives to accelerate change. The good news is that while many of the challenges facing Canadian banks relate to external forces of change, they also have opportunities to overcome adversity by focusing on what they control. Read below to learn about key steps leaders can take to build a stronger bank as trends like regulatory complexity, financial pressures, technology-enabled transformation, generative artificial intelligence and climate change reshape the banking industry in 2024 and beyond.
Adding even more impetus to look for ways technology can help streamline and improve risk management are the ongoing impacts of Basel III reforms to capital requirements. While Canadian banks have been working through this for some time, the rules place a greater emphasis on being able to quickly understand their capital positions and allocate capital accordingly. This makes it important to invest in more flexible and agile capital management systems and technology.
As Canadian banks come out of a challenging year in which cost efficiency programs throughout the business were the focus, many are looking at opportunities to strengthen their business models and sharpen their strategies to deliver improved financial performance and growth. With further business pressures on the horizon, now is the time to take a step back to identify the bank’s core areas of focus and be more targeted in managing costs while reallocating resources to its top priorities for growth.
Strengthening profitability likely means getting ahead of newer, more technology-enabled market entrants by further digitizing key areas of the business, including banks’ retail operations. While Canada’s banks have invested in digitizing self-service channels in recent years, many have yet to transform processes throughout the business. This means they still have fragmented, paper-based processes that require customers to go to branches in person for some of their banking activities, highlighting opportunities for more investment in simpler, automated and technology-enabled experiences that differentiate the bank with both current and potential new customers.
One segment banks will need to target for growth is commercial banking, which tends to be underserved—although new entrants are eyeing this area as well—and offers significant opportunities to provide more digitized and self-service capabilities across treasury and cash management, deposits and lending. In pursuing growth in this segment, banks will need to focus sharply on client-level profitability so they can identify their core customers, allocate capital accordingly and deliver more cost-efficient services and experiences. Another area of growth is in asset and wealth management, which is also an underserved segment where banks have an opportunity to create a wider suite of products, also with more seamless self-service capabilities, targeted at the growing cohort of affluent retail investors in Canada.
It’s not for a lack of trying that Canada’s banks still have some way to go in harnessing the full potential of technology to improve profitability, attract and retain customers, navigate regulatory complexity and strengthen business models. After a series of attempts, they’ve been frustrated by technology investments that have taken longer, cost more than planned and fallen short of delivering expected results. While legacy infrastructure is part of the challenge, other issues at play are holding transformation efforts back.
Amid growing pressure on technology budgets and evidence from industry benchmarks that up to 75% of large bank technology programs fail, it’s even more important for industry players to pursue not just innovative technologies but also the bolder aspiration of flawless execution. With billions of dollars in technology investments at stake, even a modest improvement of 5% or 10% in delivery outcomes could materially separate a bank from its peers in terms of operating efficiency. By following four key principles, banks can increase their chances of success:
Canadian banks can also benefit from looking at the practices of the world’s largest technology companies, which focus not just on the latest innovations like generative AI but also the fundamentals of engineering and delivery. It’s no coincidence that these companies have technologists at the highest levels of their organizations advocating for the highest standards in engineering practices. We believe Canadian banks can take inspiration from their successes by elevating the role of the chief information officer to report directly to the CEO. This would put greater weight on technology as a critical business imperative, improve board oversight of the bank’s transformation and execution capabilities and empower the CIO to pursue innovations that enhance execution outcomes and turn technology delivery into a true source of competitive advantage.