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Efficiency Woes
The excitement around artificial intelligence is partly driven by the idea that AI will replace mundane tasks and improve efficiency. In fact, a recent survey by KPMG found that 70% of global bank executives want to use AI to cut costs.
But banks have a hard time improving efficiency. According to a March report from McKinsey & Co., private, nonfarm businesses in the U.S. have seen a compound annual growth rate in labor productivity of 1.3% since 2010. For commercial banks, that figure has declined by 0.02% per year over the same timeframe.
“Banks are acutely aware of their stubborn costs but often struggle to effectively mitigate them due to myriad challenges, including complex operating models, competing risk management initiatives, and patchworks of legacy systems and processes inherited from M&A deals,” McKinsey said. The consulting firm projected risk and compliance budgets will grow 5% annually at global banks through 2028. “These competing priorities have forced banks to focus largely on near-term efficiency solutions, which don’t address the core issues.”
Christopher Wolfe, the head of North American bank research at Fitch Ratings, has found that the industry’s efficiency ratio, which stood at 58.7% at the end of 2023, hasn’t improved much since 1950, when it was 59.4%. The advent of the mainframe computer, the personal computer, ATMs, the internet — nothing made a lasting impact on the ratio.
It may be that the efficiency ratio is the wrong way to measure technology advances. Some of the benefits may be flowing to customers and shareholders, for example. Customers don’t have to pay for access to mobile banking, after all.
So, will the benefits of artificial intelligence flow to customers? Or will AI make banks more efficient in the next decade? “I think that you can't discount the possibility,” Wolfe says. “But if history is any guide, the answer is no.”
• Naomi Snyder, editor-in-chief of Bank Director
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