GenAI: No Magic Fix for Banks' Productivity Struggles
Bank productivity stuggles stem from many factors that GenAI can't fix.
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Bank productivity has been a dumpster fire over the past 13 years, with negative growth of 5% when overall US labor productivity was up 20%, and GenAI will not fix it.
McKinsey has a great paper on simplification at scale for banks. It makes the credible claim that simplification results in high productivity and a better experience for clients and employees.
McKinsey also claims that GenAI can play a crucial role in enhancing banks’ productivity as though it can be a “magic fix” for productivity problems with many root causes.
Bank productivity is generally viewed as being down due to a number of causes, including regulation, technology challenges, mergers and acquisitions, economic factors, and a shift in workforce dynamics.
Banks can realistically use GenAI to improve regulation and the workforce. Still GenAI will have a hard time turning around M&A, economics, or, worst of all, tech challenges brought on by legacy systems.
Considering GenAI's limitations in impacting banks’ root causes of productivity decline, it’s hard to see how it can make that big an impact on productivity.
Yes, it can help, no doubt, but GenAI will also be lifting productivity in other businesses, making closing banks’ 25% productivity gap with businesses overall particularly difficult.
This assertion is backed up by the fact that banks as a group are not big spenders on AI relative to other industries (Exhibit 1), which will likely make banks’ increase in productivity lower than the average for all industries.
GenAI may help banks increase productivity but it’s no “magic fix.”
Banks need to work on the root causes of their productivity problems and not assume that GenAI will be their savior.
👉 How to achieve simplification at scale:
🔹 Gen AI
Banks are ramping up new capabilities such as gen AI models to revamp theiroperations. At-scale use of gen AI and other technologies can significantly boost productivity.
🔹 The technology function.
Technology is a crucial but costly area for banks. To successfully modernize their technology, banks should adopt a more agile and disciplined approach, avoid overcustomization, clearly define the problems they need to solve, and ensure direct ownership and accountability for projects.
🔹 Operations and support functions.
Some areas, including mortgage originations and servicing, custody, asset management, and call centers, need to reach a certain minimum efficiency scale to be profitable and meet the required return threshold. Banks should review and determine how to manage these functions.
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