A slowing global economy, coupled with a divergent economic landscape, will challenge the banking industry in 2024. 

In 2024 banks’ strategic choices will be tested as they contend with multiple fundamental shifts in a divergent economic environment. They must demonstrate greater conviction and agility to thrive.

The Banking & Capital Market Outlook discusses multiple disruptive forces such as the exponential rise of generative AI, acceleration in climate change, seemingly intractable geopolitical tensions, and a more assertive regulatory agenda, how industry convergence, embedded finance, open data, digitization of money, decarburization, and digital identity and fraud are influencing how banks operate, and approaches institutions may take to pursue new sources of value in an increasingly capital-scarce environment.


In the aftermath of the economic meltdown, banks are finding customers behaving more warily towards them. As well as the public bail-out of the banks, four years of ‘bank-bashing’ in the media and changing perceptions about the banking industry in general, mean that banks’ reputations have never been lower. Customers are less trusting, less forgiving and have higher expectations about how banks do business.

Adding to the skepticism is the misselling in many countries, including the UK and the US, of products such as payment protection insurance and consumer investment products. Customers will feel further disenfranchised by the additional fees many banks will expect them to pay to offset the squeeze on banking profits.

At the same time, cross-selling of products to existing customers remains the most effective way of increasing sales and retaining customers. Somehow, the trust lost during the global banking crisis must be won back, which could take four or five years.



Given the unprecedented challenges, it is not surprising that the universal banking model is teetering on the brink of collapse. We believe the changes revolutionizing the banking sector will impact traditional banking operating models in four fundamental areas, triggering a chain reaction which will leave its mark on every area of the current banking model.

The end of universal banking

The financial crisis demonstrated that large, complex and interconnected financial institutions can generate disproportionate risks to financial stability (and tax payers’ money). As a result, regulators and other policy makers have agreed that systemically important financial institutions (SIFIs) must accept a broader and more in-depth range of measures to mitigate these risks and avoid such wide-ranging impacts in the future. One of the main tools to address this is to forcibly separate basic banking activities from more complex and more risky corporate and investment banking. Although there are still some grey areas, especially in the realm of commercial/ corporate banking, one thing is certain: this is just the beginning of a long and painful surgical operation to separate ‘conjoined twins’ who for decades have shared the same funding resources, liquidity and capital base.

What will be the impact on operating models?

For the last two decades, universal banks have almost without exception pursued the same strategy:

Economies of scale through centralization of services on a national, regional or global level plus-emoji Exploitation of internal synergies through consolidation of core systems and horizontally- integrated operations centers heavy-equals-sign-emoji Increased efficiency

We believe that the era of centralization and single-platform strategies is drawing to an end. Increasingly, shared services entities will be decentralized, either by disbanding them altogether, or by restructuring. One major SIFI in the UK is considering disbanding its central operations and putting the activities back where they belong – into individual business units. Additionally, one US bank has recently disbanded a centralized IT group and installed mini-IT units within its lines of business.

Banks will also come under pressure to repatriate core activities from regional or global shared services to their respective domestic jurisdictions. For instance, two Nordic banks trying to establish cross-border shared services have struggled to get a green light from regulators in their primary jurisdictions.

Disintegration of the value chain

Splitting the universal banking model into retail and investment banking is not the end of the journey, however.

Banking regulators are keen to destroy the concept of banks ‘being too big to fail’.

One way to achieve this is to divide ring-fenced banks into smaller components along product lines, spreading the risk between separate locally-resolvable entities. For example, in the UK, the FSA has identified 25 components, so-called economically critical functions, including retail deposits, payments and retail mortgages.

The aim is clear. If a bank gets into trouble, these components can be ‘unplugged’ and transferred to another entity. For example, if RBS encounters difficulties again, the regulator could take all its current accounts and transfer them to Lloyds instead, or even protect them as a standalone entity. This could be done quickly, almost overnight if necessary, and customers themselves would suffer relatively little inconvenience. It would in essence be the same product, but with a different badge.

Such a system would require fundamental changes, not only in bank operating models but also in the way the industry operates. For example, it’s likely that a sector-wide payments entity will be necessary and, by default, all customers would automatically be on the system. So if one bank failed, it wouldn’t affect the whole payments system – their customers could simply be ‘reassigned’ on the central system. If a customer wanted to move banks, they could be assigned to their new bank on the central system, rather than having to go through the current bureaucratic and time-consuming process of opening a new bank account.

What will be the impact on operating models?

New operating models need to be flexible enough to function successfully in this new environment. Banks therefore need to consider componentized operating models supported by flexible and configurable architectures. Each component should be able to operate independently, or at least only loosely connected to other components and industry hubs.

This is a very long journey and will fundamentally define pacesetters and laggards in the new banking era.


equity and debt capital markets
securities financing
third-party services
long-term capital investment
corporate lending
credit cards issuance and underwriting
corporate advisory services
life, pensions, investments and annuities
payment services
custody services
cash services
credit card merchant acquiring
unsecured personal loans
mortgages/other secured
corporate deposits
asset management
general insurance
trading portfolio
retail current accounts
retail savings accounts
clearing services
prime brokerage


Cost efficiency is key in developing new operating models

The consistent theme that underlines many of the challenges facing the universal banking model in the coming years is cost reduction. However, traditional downsizing strategies are unlikely to be enough to deliver the cost base reductions needed. We believe that banks should start thinking about implementing longer-term sustainable cost reduction measures, such as straight-through processing, first-time resolution and self-service channels. There is some movement along these lines in the US, as banks strive to eliminate paper, automate processes and retire physical infrastructure to right size their operating environments.



The severity of the banking crisis has to be matched by the severity of the response. It is not simply a case of fixing the banks and then getting back to business as usual. The repercussions have been so wide and so deep that banking as we know it – or have known it for the past half a century will change dramatically.

New business and operating models Will emerge; banking value chains will be disintegrated; new industry structures will arise. Classical performance measures, such as RoE or EPS will no longer be the only measure of success. And shareholders will not be the only stakeholders to which boards are accountable – they will be responsible to taxpayers, too.

In this ‘new normal’, banks should not only optimize RoE and EPS. They must also focus on regulator-driven strategies, such as delivering minimum capital and liquidity ratios and increasing their flexibility to comply with resolvability requirements. Indeed, it may be the first time that regulators have taken an active part in the formulation of new business strategies. We believe such strategies may include:


We believe that the new regulations are here to stay and they will change the sector for good. Banks that adapt quickly to this shift – those that see challenges as opportunities and can transform their business and operating models accordingly will emerge as winners.

Banks should mobilize all parts of the business (sales, marketing, products, operations, risk, finance, IT, compliance and more) to make this transformation the number one priority on everyone’s agenda, starting from the members of the board.


Existing approaches to the development of operating models are based on traditional, linear problem solving techniques. This type of approach can be very effective when uncertainty and complexity are low and when the new design doesn’t need to be radically different than the current one. However, they can not address the needs of the current highly fluid, uncertain environment, where banks need to radically change their operating models in order to survive.

All the traditional levers, such as economies of scale, single platforms and shared services, must be cut back, or at least can’t be exploited as before. So, banks really need to find new ways of reducing costs, coping with a complex and disintegrated value chain and addressing new data requirements, while at the same time delivering excellent customer service. We believe therefore that a new approach is needed for designing innovative operating models to address all these challenges.

One way of doing this is to look at the field of design, and borrow proven practices to foster innovation and creativity. This approach should encourage creators of new operating models to think laterally and to accelerate the process, crucial to the new world in which we find ourselves.

    Iterative approach   Where design is done
KPMG Rapid Target Operating Model (TOM) Design Approach

Design process starts
right from the beginning



Develop potential OM concepts  
Understand need & shape
design requirements
double-right Assess current state double-right Evaluate & engineer
best concept
double-right Develop business case &
implementation roadmap



We believe banks should find new ways of reducing costs while increasing the quality of their customer service. We have identified three cost reduction strategies that can also make bank operating models more scalable while dramatically improving customer service.



On average, more than 50 percent of banks’ costs relate to staffing – the sheer number of people necessary to process customer transactions. This is mainly due to a lack of complete automation of the service processes.

STP, therefore, is about paring back to an absolute minimum the human input required to process transactions. For example, if a customer creates a standing order online, with STP the whole process is automated from start to finish and no human input is required. Banks should identify their STP throughput rates and try to dramatically increase them.

Reducing Costs
Straight Through Processing (STP) – in other words, minimizing human input to make staff savings, which currently represent more than half of a bank’s costs.
Greater self-service channel usage – specifically, more customers carrying out their own banking transactions without staff intervention.
First-Time Resolution (FTR) – because fewer points of contact between customers and staff translates to lower costs.


By giving customers more power and responsibility for carrying out their own banking activities, there will be less need for human input from the bank, with obvious cost implications. However, banks should remember that moving a process to a self-service channel without adequate planning risks inadvertently increasing the cost. Inviting customers to bank online increases the number of transactions carried out. If you don’t automate these processes, eventually you will need more people simply to handle the increased number of transactions.



This means that processes are resolved immediately at the first point of contact with the customer, whether it is a branch or a contact center. For example, if a customer wants to open an account, they are able to do it there and then in one go, without needing multiple contacts with a bank employee or contact center to complete the transaction. This contrasts with the current centralized model, where the vast majority of transactions end up in central operations. Again, FTR will only work effectively if the underlying costs if the underlying transactions abide to STP principles. Otherwise the three Otherwise, the same strategy can increase costs.

By pursuing these three strategies, the need for shared centers will fall. Middle and back-offices will handle only exceptions, fewer people will be needed, customer service levels will increase, and costs will dramatically drop.



The transformation of universal banks into banks fit for this new environment involves new business models, new operating models, new legal structures, regulatory constraints and new financial and non-financial measures. Changing one without considering its impact on others may result in ineffective solutions or unforeseen consequences elsewhere in the business.

Many of the leading banks have already started along this transformational path, beginning the gradual process of restructuring their operational models to suit the ‘new normal’. The vertically integrated model that until very recently held sway across the industry was developed around individual product business units, such as mortgages, banking, savings, investments and insurance, largely due to legacy product-centric IT platforms. Each business unit was responsible for its own activities, such as sales, marketing, servicing and support.

Faced with the new environment they operate in, banks are now restructuring their operations around a horizontally-integrated model based on common services and activities, rather than products. So the model would be based on service-led business units responsible for a particular part of the value chain across the whole product range (where possible), such as customer proposition management, product development, strategic marketing, or distribution, with non-core products, such as investment products, being outsourced.

Evolution is a
phases are
snapshots in
product BUs
product BUs
with product
with activity
Full horizontal

Few clients have ever undertaken transformation projects on such a scale. Understandably, many experience challenges in coordinating their activities and delivering real value. Banks should transform themselves by simultaneously redesigning their business models, operating models and legal structures. Each element needs to be considered through five distinct ‘lenses’:

strategy, operations, legal entities, regulatory constraints and financial outcomes, with all parts of the puzzle being addressed simultaneously. The advantage of this approach is that it unites all parties and drafts a holistic roadmap for progress. They can start their journey by asking a series of strategic questions through the five lenses.


  • Strategic

    What will your business model look like in the new world and how does this fit with your strategic goals?

    • Understanding the impact on customers and changes to the way in which you do business with them in the future.
    • Assessing the extent to which regulatory change presents new strategic opportunities that can be exploited and where it leaves you versus your competitors.
  • Operational

    How will you continue to drive operational efficiency whilst meeting regulatory requirements?

    • Developing an operating model through which you are able to demonstrate certainty of continuity of support during periods of stress.
    • Building compartmentalization into new legal entity structures whilst maintaining economies of scale.
  • Regulatory

    How do you align your approach with the broader regulatory agenda?

    • Determining a best-fit solution in the context of the continually evolving and multi-jurisdictional regulatory agenda.
    • Ensuring the right balance between maximizing the regulatory dividend (i.e. reducing regulatory capital surcharges) and extent to which the firm crosses the regulatory threshold.
  • Structural

    How will you balance the need for structural separation with the commercial need for an integrated and efficient global group?

    •  Working out whether or not the ‘Group’ or ‘Center’ has any future role in the business.
    • Establishing where synergies in the various interactions across the Group exist currently and which may disappear.
  • Financial

    How do you build a financial model that supports regulatory requirements whilst delivering a compelling equity story?

    • Determining how to create an acceptable return for investors.
    • Maintaining an efficient tax profile throughout the changes to the business’s structure and financial arrangements.



Developing a new operating model will not, in itself, position a bank to succeed in the new market. The operating model is only part of the challenge. No matter how robust or sophisticated the operating model may be, if the implementation process does not have an effective governance framework, driven by strong, central design authority, the operating model will never fully achieve what it was designed for. The real test is in how effectively the operating model is implemented – and this is an area where FORFIRM can add substantial value. FORFIRM’s target operating model methodology has effective, coherent implementation at its heart.Implementing a new operating model might mean introducing a new technology infrastructure, moving towards new processes, or changing the operational structure of the business – major changes that need to be pushed through the organization effectively, without compromising the objectives of the operating model.To help achieve this, FORFIRM’s approach is to work with clients right from the design stage through to implementation.It does this by co-opting senior members of the operating model design team – from the business, from the technology side, from the TOM design team at FORFIRM – onto a central design authority. The role of the design authority is to oversee not only the governance framework, but the practical implementation of the operating model.All changes are reported back to the design authority. It reviews what is being implemented at each stage to verify it is in line the new operating model – is this implementing what the design specifies, or has it changed? If it has changed, was there a good reason? The main objective of this method is to not be a policing authority but be a guiding light that drives towards ‘zero defect’ during implementation.This consistent, end-to-end approach is what makes FORFIRM different. Our involvement does not stop with the design of a new operating model. We work alongside the client on the governance and, crucially, the implementation, capitalizing on our specialist knowledge and industry insights to ensure the theory is actually translated into practice.

It would be unwise to underestimate the impact of the banking crisis on the industry. It would be equally short-sighted to underestimate the necessary response. It is not simply a case of finding a quick fix then returning to business as normal. The face of banking has changed forever. New business and operating models will be needed, and indeed should be embraced. Traditional value chains will disintegrate. New industry structures will emerge.

How quickly will banks adapt to this new landscape? And how effectively will these new models then be implemented? How readily will they adopt new business and operating models? These questions will determine which banks emerge from the current crisis as winners, and which fall to the wayside, unable or unwilling to adapt to the new reality.