2023 Banking and Capital Markets Outlook

The global economy remains fragile going into 2023. Uncertainties abound due to an unprecedented confluence of factors—Russia’s invasion of Ukraine, supply chain disruptions, the meteoric rise in inflation, and tightening monetary policy across the world. And the potential for a mild recession or stagflation in certain economies is high.

The ripple effects from a more fragile and fractious global economy will be felt disparately across the global banking industry (figure 1). Large, well-capitalized, diversified banks should weather the storms reasonably well.

Over the long term, banks will need to pursue new sources of value beyond product, industry, or business model boundaries. The new economic order that will likely emerge over the next few years will require bank leaders to forge ahead with conviction and remain true to their purpose as guardians and facilitators of capital flows. Banks should be bold and stay ahead of the curve, proactively shape emerging forces, and envision the possibilities beyond the current fog of uncertainties.

Here are some of the key highlights from Deloitte’s 2023 Banking and Capital Markets Outlook:

In the near term, retail banks will have to deal with higher rates, inflation, and lower growth. Net interest income should grow at many banks globally, although housing market stress could temper earnings in Asia Pacific. In the United States, challenges in the mortgage and auto loan markets and increased scrutiny of “junk fees” could also dent banks’ balance sheets.

Meanwhile, retail banking customers are also expecting more from their banks. In particular, they are clamoring for a superior cross-channel experience and hands-on guidance during challenging times. These heightened demands will require banks to go beyond a product lens and create customer experiences that are data-driven, consistent across channels, and complete with personalized advice.

In the long term, banks should develop inventive new applications for ESG, embedded finance, and digital assets. These efforts should prioritize empowering customers with initiatives targeting racial equity, decarbonization, and data security.

In the short term, the macroeconomic picture for 2023 portends mixed fortunes for consumer payment players. Higher rates should boost banks’ net interest margins for card portfolios, but persistent inflation, depletion of savings, and a potential economic slowdown could weigh on consumers’ appetite for spending.

Moreover, digital payments should accelerate and transform the payments experience on multiple fronts. Yet, where money goes, so could fraud. Digital identity is expected to evolve as a counterbalancing force to mitigate fraud risks in the long run. Meanwhile, the way money is created, stored, valued, and exchanged via digital currencies could have profound implications for consumer payments in the long term.

Issuers, card networks, acquirers, and fintechs across the value chain need to demonstrate an unwavering commitment to elevate their roles and become the top-of-mind choice among consumers and merchants.

The wealth management industry is at an inflection point. Market dynamics are being shaped by multiple forces, in addition to macroeconomic conditions. Other trends, such as the democratization of advice and demographic shifts, including generational wealth transfer, are also upending established business models and existing ways of serving customers. Customers are increasingly expecting holistic advice, prompting a shift from a product focus to client-centricity. These changes, however, are coming at a time when the industry is in relatively good health.

Wealth managers need to be bold in reshaping their business models and building a franchise that’s defensible, scalable, and cost-efficient. For instance, delivering holistic advice, especially to mass affluent clients across the bank, is an efficient and effective way for wealth managers to win greater wallet and mind share. Further, product optimization strategies are becoming increasingly important to win the war for assets.

Inflation, higher rates, persistent supply chain shocks, and a potential recession portend a more stressful environment for corporates. While commercial bank net interest income should improve as central banks raise rates, banks may also be forced to raise rates on deposit products to retain clients seeking higher interest–earning opportunities.

Despite a loyal client base, commercial banks will likely face fierce competition to win a greater share of corporate clients’ wallets. They are demanding bespoke digital, data-rich solutions, and tailored advice. These will likely require banks to excel at a new client service model.

Meanwhile, the fight against climate change presents a massive opportunity for banks to mobilize finance to aid corporate clients’ transition to net-zero carbon emissions.

Transaction banking businesses are standing firm despite recent market uncertainties. For many banks, these divisions have been a steady source of revenues and profits. In the near term, however, macroeconomic uncertainties and geopolitical risks are expected to test their resilience. But there are some bright spots, including migration to the new ISO 20022 standards that should help banks with richer data to achieve their digital aspirations.

In the long term, banks would have to contend with new fragmentation risks to their revenue pools and operating model. Meanwhile, the relatively slow pace of digitization can diminish future potential.

Transaction banks should focus on building a modern, efficient, scalable technology platform to provide a holistic, real-time view of client transactions, and enable insights and innovation to serve clients better.

Investment banking businesses will likely face a unique set of challenges in 2023. In the near term, banking institutions will likely be preoccupied with how best to react to macroeconomic conditions, including divergent interest rate trajectories across the globe. Volatility across asset markets may bode well for the Fixed Income Clearing Corporation (FICC) and equities divisions. Yet, the same market unpredictability could create headwinds for prospective deal-making and underwriting and also stress capital and liquidity buffers. These dynamics are in sharp contrast to the last two years, when investment banking divisions posted record profits.

Investment banks should preserve their role as capital market intermediaries in the wake of deglobalization, the rush toward a green economy, and the rise of private capital. As client demands evolve, they should also bolster customer experience by enabling front-to-back modernization. Accelerating digitization will remain key to unlocking future sources of value. Banks should also be agile and decisive in responding to the new talent dynamics and rising cost pressures. These challenges will likely test most investment banks’ patience and ingenuity.

Market infrastructure providers are increasingly being asked to provide more than the best execution, low latency, and competitive costs. Buy-side and sell-side customers now demand a bundle of services across the trading life cycle to simplify their workflows and give them a competitive edge.

The most urgent priorities for large exchanges include bringing new technologies to scale, such as cloud-enabled microservices, market data tools and analytics, and digitized trading processes. In the near term, they should work to differentiate their offerings from specialist providers through mergers and acquisitions or by developing new capabilities internally. They also need to address heightened calls for fee transparency from global regulators and prepare for the transition to a faster securities settlement cycle.

Exchanges should also seize medium- to long-term opportunities in carbon trading, crypto markets, and the mass tokenization of financial assets.