Banks face potential $170B profit decline due to AI: McKinsey
What's the story
A recent report by McKinsey has warned that banks could suffer a hit of up to $170 billion in profits if they fail to adapt their business models. The consultancy firm predicts that the rise of agentic artificial intelligence (AI) - essentially autonomous bots - could impact the profits banks earn from customer deposits in low-interest accounts.
Impact on banking
AI's potential impact on customer decisions
Pradip Patiath, a senior partner at McKinsey, highlighted the potential impact of AI on customers' financial decisions. He said, "Imagine you have an AI agent that says: 'Hey, you could save $2,000-a-year by moving your money.'" This is where agentic AI comes in. The technology could automate many existing systems and processes in banking today.
Profit decline
$23T in near-zero interest accounts
The McKinsey report reveals that customers hold $23 trillion of the total $70 trillion in accounts with near-zero interest rates. The rest is in low-interest accounts. If customers start using AI agents, it could lead to a 9% drop in profits for banks—around $170 billion—unless they change their business models accordingly. This could push average returns below their cost of capital, the report warns.
Cost benefits
Competition will erode banks' AI gains
The banking sector is expected to save between 15% and 20% from AI adoption. However, these gains are likely to be eroded by competition over time. The McKinsey report states, "Competition will likely erode the gains for banks and most of the benefits will accrue to customers." This suggests that while banks may initially benefit from AI cost savings, they could lose out in the long run due to market competition.
Advantage
First-mover advantage for banks adopting agentic AI
Banks that adopt agentic AI and cut their costs before competitors could have an edge in the market. "Some first mover advantage before the water level resets," said Patiath from McKinsey. This means that early adoption of this technology could give banks a competitive advantage over others in the industry, at least for a while.