McKinsey Report: As AI financial assistants rise, client funds will flow into high-yield products, and the profits of the banking industry will shrink by $170 billion.

The rise of artificial intelligence is posing a fundamental challenge to the global banking industry. According to a recent report by McKinsey & Co., as AI financial assistants that can automatically optimize savings become more popular, customer funds will massively shift from low-interest accounts to high-yield products, potentially leading to a shrinkage of the global banking industry's profit pool by up to $170 billion annually. The report warns that AI technology is breaking the customer inertia that has long protected banks' sources of cheap funds. AI financial assistants launched by tech companies or fintech newcomers can seamlessly search for and transfer funds to higher-yielding savings accounts, money market funds, or other investment tools, eroding the traditional banks' core source of profit - net interest margin. McKinsey estimates that globally, retail deposits of $2.1 trillion to $4.7 trillion are at risk of outflow from low-yield or zero-interest accounts. This shift not only puts pressure on banks' liquidity management but also directly threatens their profitability. For banks relying on low-cost deposits to support their lending business, this is nothing short of a drastic disruption. The report points out that the banking industry is at a critical crossroads. They must make strategic decisions quickly: raise deposit rates to retain customers and compress their profit margins, or watch the outflow of deposits and bear the consequences of rising funding costs. Whichever path they choose, the traditional banks' profit models will face severe tests. AI breaks customer inertia For a long time, traditional banks' profit models have largely benefited from customer "stickiness" or inertia. Due to information asymmetry and the cumbersome process of transferring funds, many depositors tend to keep funds in low-interest current or savings accounts, providing banks with steady and cheap sources of funds. However, McKinsey's report clearly states that generative AI is completely changing this landscape. AI financial assistants can monitor market rates 24/7, automatically identify the optimal fund storage options for users, and complete fund transfers with a single click. The report states, "The friction that has protected banks' low-cost deposits for decades is about to evaporate." This automated and intelligent service will significantly lower the barriers for customers to transfer funds, making price sensitivity the primary factor in determining fund flow. Profit pool faces enormous impact The AI-driven fund transfers have a direct and massive impact on banks' profits. According to McKinsey's calculations, in the most likely scenario, this outflow of deposits will lead to a reduction of approximately $170 billion in annual profits for the global banking industry. This figure is mainly derived from the narrowing of the net interest income (NII). On one hand, to cope with competition, banks may be forced to increase the interest rates on their deposit products, directly increasing their funding costs. On the other hand, if banks fail to retain deposits effectively, they will have to turn to higher-cost funding sources such as the wholesale financing market, which will also erode their profits. The report emphasizes that this impact varies for different types of banks, with those heavily relying on retail deposits and slow in digital transformation facing the greatest risks. Banks need to adapt proactively Faced with the disruptive challenge brought by AI, McKinsey believes that banks cannot afford to remain indifferent. The report outlines several key strategic paths for the banking industry to respond to the upcoming changes. First, banks need to reassess their value proposition. Simply acting as a depository for funds is no longer sufficient to retain customers. Banks must accelerate the development of their AI capabilities, create personalized wealth management and financial planning tools that can compete with or even surpass external AI assistants, and shift their customer relationships from mere rate competition to deep bonds based on value and trust. Second, banks should actively explore diversifying their sources of income. With the net interest margin facing long-term pressure, business models relying on interest income will become increasingly fragile. Banks need to vigorously develop non-interest income businesses such as wealth management, investment advisory, insurance, and payments to hedge against the risks of profit decline in the deposit business. Lastly, investing in technology and talent is the key to success in this transformation. Banks must increase their investment in data analysis, artificial intelligence, and customer experience technology, while attracting and retaining top talents who can harness these technologies. The report concludes that banks that actively embrace AI and integrate it into their core business will have the opportunity to stand out in this industry reshuffle, while those who act slowly may be marginalized. This article is a reprint from "Wall Street See", author: Pan Lingfei; GMTEight editor: Xu Wenqiang.