Banking trends and outlook for 2025

Modernisation and optimisation of the bank value chain as a driver of change

An objective view of developments in the banking sector is essential for the strategic direction of the industry. In addition to economic parameters such as interest rate development, economic growth, employment and investment, regulatory conditions and technological innovations are integral components of a successful business policy orientation for banks. Furthermore, changing market and customer requirements, as well as increasing competition, are driving change and adaptation processes. Technology and innovation in the banking business play a special role here and trigger transformation processes that accelerate change in the industry. In this blog post, I will shed light on the key framework conditions and take a look into the future to see what the year 2025 might hold for us.

The exogenous factors – economic forecasts, growth, interest rates and the like

Economic forecasts and interest rate developments serve as a compass for future economic development. These indicators are important decision-making aids for companies, financial institutions and private households when planning investments, consumption and expenditure. Forecasts of overall economic development are also the most important basis for economic and regulatory decisions. These exogenous factors are also an important part of business development for banks. Whether it's earnings development, risk provisions, interest margins or lending, every activity of a bank is heavily influenced by the development of the relevant economic parameters. Understanding the development of these parameters helps to better understand the banks and their decisions and to stabilise the business model.

According to the ifo Institute, real gross domestic product will stagnate this year after falling by 0.3 per cent last year. Accordingly, German economic output is expected to stagnate on average over the year 2024, with downside risks continuing to prevail. The market consensus indicates a slight recession as a result of this trend. For 2025, the forecast is for a gain of 0.8 per cent, and for 2026, a gain of 1.3 per cent.

2023 is seen as a turning point for the European banking landscape. With the ECB's interest rate turnaround, banks across Europe were able to increase their interest income by 82 percent last year and expand their interest margin by 0.15 percentage points. The general earnings and financial situation of European banks thus stabilised noticeably. For many banks, this development resulted in the further expansion and stability of growth-promoting measures. This also includes the modernisation and digitalisation of their services. The institutes (including the ifo Institute) expect inflation to return to levels close to the ECB target in the current year at 2.2 percent and 2.0 percent in 2025 and 2026.

Despite the current stable employment situation on the labour market, the outlook for private demand is expected to be subdued. The increased economic uncertainty and the declining order situation in key industries are weighing on corporate investment and having a direct impact on the business performance of banks. For 2025, experts predict rising corporate insolvencies and a moderate economic recovery.

For the banking business, this development implies that net interest margins may fall for most banks in the coming year, but that credit growth will slowly pick up again. At the same time, it is expected that the risk costs for loans overall will tend to rise. In general, however, the forecasts indicate that banks will still be able to achieve solid profits in 2025.

Customer and market trends

As financial intermediaries, banks are indispensable for the smooth running and functioning of the economy. Although their demise has often been predicted, they remain the most important pillars for a functioning economy. However, their position in the competitive market, changing customer requirements and their service provision are subject to changes and dynamics that strongly influence the attractiveness and competitiveness of financial institutions. This will not change in the future either. With new technologies and innovations, customer expectations of financial service providers are changing and placing new demands on customer service, personalised services and efficiency. As a result, the banking of the future must be more digital, more personal and more intuitive, and it must meet the new efficiency and cost requirements. Data-based business models and AI-driven use cases will play an important role here. Data analytics, machine learning, open banking and embedded finance will enable innovative business models that create new potential for individual banking services and experiences. User-friendliness, the integration and incorporation of third-party services, the fulfilment of high security requirements and the automation of customer services, combined with tailored financial services, will be the unique selling points in the competition for customers. In particular, the dynamics of developments in the field of AI applications will be significant drivers of innovation in 2025.

The drivers of change in banking

Challenging economic conditions, increasing demands on digitalised financial services, a highly competitive environment and the heavily regulated banking market require banks to continuously optimise their revenue and cost structures. This places high demands on the efficient IT systems and infrastructures of financial institutions. According to BearingPoint's Banking Study 2024, European banks invested 4.9 per cent in modernising their technology, noticeably more than in previous years (2018, 2022 still 3.3 per cent). This development serves as an indicator of the increasing importance of digitalisation in banking and underlines the positive trend of the ongoing transformation of European banks.

The modernisation of sales channels, processes and systems is an important success factor in this regard and serves as a differentiating factor in competition. According to the BearingPoint study, so-called ‘performers’ (CIR < 55 percent) in the banking sector invest twice as much as so-called ‘laggards’ (CIR > 55 percent) in the renewal and optimisation of their system landscape. The future-proof design of IT systems, combined with improvements in data availability, data quality and data processing, as well as the reporting that is built on this, are seen as decisive unique selling points.

The regulatory environment will also require further measures – the implementation of the tightened requirements for risk management, capital adequacy and sustainable financial products requires extensive adjustments in the system and IT landscapes of banks. Increasing digitalisation and regulation will not change the core of the banking business, but they will change the way services are provided. It is to be expected that in 2025 further investments in modern system landscapes will be necessary to differentiate and create revenue and cost efficiency.

The role of AI in banking – momentum is picking up!

The use of generative AI in the banking market is one of the most important technology drivers for innovation in banking. As the applications mature, the penetration and scalability of AI-based solutions in banking is increasing significantly. The number of examples of how banks are using AI is constantly growing. Whether it's credit checks, automating manual and repetitive processes, using AI applications in customer interactions, or AI-supported processes in risk controlling or fraud prevention, there is hardly a banking application for which AI solutions are inconceivable.

This development underscores the trend towards more personalised services, data-driven decision-making and agile processes in the banking business. A global study has shown that almost a third of the budget for investments in the transformation of the customer experience is now being allocated to AI, machine learning and generative AI (GenAI). According to the report, around 42 per cent of banks worldwide are using AI to enable more personalised customer journeys that improve the customer experience and strengthen customer loyalty.

The banks also hope that the increasing use of AI solutions will lead to greater innovation momentum, enabling them to meet new customer requirements, regulatory requirements and the increasing pressure for revenue and cost efficiency. A large proportion of early adopters in the banking sector use AI technologies for transactional applications such as lending, portfolio management, risk analysis, knowledge transfer within the company and customer service. It is becoming apparent that acceptance and penetration are increasing significantly as the benefits of AI applications become more transparent. Banks hope that this will enable them to adapt more quickly to changing market and customer requirements.

Conclusion

2025 will be an exciting year for banks. New customer and market trends, technological developments, regulation and a challenging economic environment will provide important impetus for the business policy orientation of institutions. True to Peter Drucker's quote – ‘The best way to predict the future is to create it’ – banks can actively shape change and align their business policy with growth and stability. The ability to adapt to changing conditions and turbulent times with innovative technologies will help to meet increasing efficiency requirements, regulatory challenges and new customer needs.