Traditional banks are losing their grip on industry growth, according to a new report from Boston Consulting Group (BCG). The global banking industry has grown at a compound annual growth rate (CAGR) of 4% over the past five years, but traditional banks are ceding the most valuable ground to fintechs, digital attacker banks, private credit funds, and nonbank market makers. Incumbent banks have relied on balance-sheet-driven net interest income to contribute roughly 85% of the growth. Yet they struggle to generate capital-light noninterest income: while it grew by 1.8% in absolute terms, the relative amount generated per asset decreased by 18%.  

The report, titled Fit for Growth, Built for Purpose, reveals that these shifts pose a structural challenge to traditional banks and calls for bold transformation and a rethinking of the relationships that link banks, regulators, and wider society.

"Most banks are frustrated with slow value realization from AI and GenAI. The new technology hits the formidable walls of legacy infrastructure and, more importantly, legacy culture," said Saurabh Tripathi, a BCG managing director and senior partner, global leader of BCG's Financial Institutions practice, and a coauthor of the report. "At the same time, regulators must modernize the regulatory context in which banks operate so that productivity is a shared priority—and it is time to ask if the mandate for banks is broader than maturity transformation."

Eroding Dominance of Traditional Banks

In retail banking, challenger banks and fintech platforms are gaining ground in both customer share and investor confidence. In some markets, the customer bases of digital-first banks are now on par with those of traditional players. In corporate and investment banking, nonbank liquidity providers and private credit funds are capturing significant parts of the revenue streams that traditional banks have long dominated. Meanwhile, the rapid rise of stablecoins and tokenized assets signals that a broader realignment of financial infrastructure is looming on the horizon, as stablecoins alone processed roughly $4 trillion in transaction volume in 2024.

Banks also face internal pressures. Despite significant technology spending, many are not realizing expected productivity gains. In several major markets, including Europe and the UK, elevated tech investment has not translated into greater efficiency. And while challengers continue to scale, many traditional banks still use cost-to-serve models that are up to ten times as expensive to operate.

Lessons from the Winning Banks

Looking at leading banks, the report notes three patterns that the market rewards: scale (not size), specifically in terms of domestic market leadership; the ability to generate a superior share of fee income; and market-leading productivity.

The report also highlights four strategic approaches that today's banking leaders pursue: front-to-back digitization; customer centricity; focused business models; and M&A champions. Banks can take more than one of these approaches, but all require strong digital capabilities.

"Banks need to look boldly at their business portfolio and make hard calls to focus on fewer areas where they can win," said Andreas Biffar, a BCG managing director and partner and a coauthor of the report. "Simplification of products and processes with comprehensive front-to-back digitization is a nonnegotiable element in the current context."

In addition, successful strategic implementation of AI could be a game changer, although many banks still struggle on this front.

According to the report, banks need to adopt a vigorous and focused approach to AI implementation. If AI has not yet delivered for all banks, that may be due more to challenges in scaling and lack of holistic adoption by employees and customers than to issues with the technology. As agentic AI and machine voice emerge as even more powerful productivity levers, winners will take effective action to incorporate them. Nevertheless, AI alone may not be sufficient. Much of the potential value may be captured by nonbank players, which are currently better positioned to benefit from its applications.

A New Social Contract Between Banks, Regulators, and Society

The report argues that the banking industry's long-term viability requires banks, regulators, and policymakers to conclude a new grand bargain that fosters bold experimentation, digital asset integration, and access to synthetic scale for smaller institutions.

Download the publication here.