Commercial Banking Industry Report

The trillion-dollar commercial banking industry is always evolving, dealing with constant regulatory adjustments, scrutiny, and competition. Numerous factors impact the sector, such as changing customer behaviors and preferences, macroeconomic cycles, data protection, cybersecurity and privacy, and the current political climate.

Growth in this particular market is usually attributed to increasing economic stability, integration into global markets, more need for business loans and financial services, changing interest rates, the increasing need for financial services, and more demand for online banking.

KEY INDUSTRY TRENDS

Commercial banking companies focus on developing innovative fintech platforms that broaden their service offerings, improve operational efficiency, and offer customers more seamless digital banking experiences.

On a global scale, traditional commercial banking is seeing increasing competition from online banking services. This is forcing banks to get creative in finding ways to improve customer experiences in order to stay relevant and competitive.

Interest rate cuts have a direct impact on the commercial loan pricing landscape. For example, the 100 basis points in rate cuts between September and December 2024 resulted in a more shallow inverted yield curve, with short-term rates declining while mid-term rates spiked.

Fraud continues to be a serious priority for banks. Through collaboration, adoption of advanced technologies such as artificial intelligence (AI), and a centralized approach, banks can help protect customers in the ever-evolving battle against fraud. The spending by banks on AI is expected to lead all other industries in the coming years, as it has become a top priority that reshapes banking business models.

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Another trend in the banking sector is the emphasis on sustainability and corporate social responsibility. Companies are becoming more concerned about their environmental and social impact and are looking for banking partners who share the same values. Banks are developing sustainable finance products, such as green bonds and sustainable investment funds, and integrating environmental, social, and governance principles into their lending and investment decisions. 

Open banking is another key trend in the banking sector. It offers consumers a broader range of options to support their financial health by giving them access to personalized digital platforms, helping them monitor spending, stay on budget, and achieve financial milestones. Open banking enables banking institutions to harness consumer-approved financial data in order to deliver more adaptable and innovative services. It’s important to note that almost 90% of Americans are actively engaged in open banking, routinely linking their different accounts to various financial apps that span payments, financing, and buy-now-pay-later services.

Small and medium-sized businesses are often underserved when it comes to data and digital technology, which drives acquisitions and growth. This presents an opportunity for banks to grow their deposits.

M&A

We can expect M&A activity in the banking industry to continue to significantly focus on improving technology, product offerings, and overall customer satisfaction. 

Banks and financial institutions have identified a strong need to enhance their technological features, and this has become a major focal point for M&A activity in this industry.

More fintech disruptors are competing head-to-head with more traditional financial methods. As this relates to M&A activity in the finance industry, a combination of financial services and technology would make for an attractive acquisition or merger opportunity.

Customer service remains a high priority for all banks and financial institutions. However, customer service can theoretically split into two parts: The first part involves people and relationships, which smaller banks tend to tout as an advantage over larger banks. The second part is more strategic, involving product offerings that will better keep customers satisfied. Larger banks tend to win out with more product offerings over their smaller counterparts based on economies of scale and access to significantly more resources. M&A opportunities allowing a bank to enhance its product offerings is an attractive feature, as well as acquiring talent and relationships through acquisition. For smaller banks and financial institutions that find it harder to keep up, being acquired by a larger bank may be an attractive strategy to explore as we look toward the future. 

Additionally, M&A transactions typically involve some form of debt financing, which often makes up most of the cash at closing. Interest rates can severely impact an M&A transaction from a funding perspective and certainly the economy. Some private equity firms are financing their M&A transactions with nonbank debt. In comparison, other groups are using cash reserves, which end up lowering the dependency on debt financing. A movement in valuations, rates, and funding can cause a shift in M&A activity either way. When interest rates rise, causing equity market volatility, buyers are forced to focus on consolidating their strategic positions more than pursuing opportunistic acquisitions.

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