Re-igniting organic growth in retail banking

The regional bank’s challenge

​During the decade since the financial crisis, many retail banks have played defense. Increased capital requirements, new consumer protection regulations and lost fee revenues have created a focus on compliance, efficiencies, and branch closures.


​Faced with these headwinds, many retail banks underinvested in their franchise (marketing, new technologies, and talent). These banks lost ground in the marketplace with low rates of new household acquisition and lower than market average deposit and loan growth. However, not all retail banks were impacted equally. Retail banking has continued to grow in the past decade with the top 100 retail banks capturing nearly all the market growth in consumer deposits and assets. Many regional retail banking franchises are ready to reverse the decline of the last decade and go on the offense again. This is about re-igniting organic growth and finding the right balance between vis-à-vis profitability. As the balance of power shifted to large, quasi-national retail franchise, regional banks face a different set of challenges and opportunities.

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Retail banks: The organic growth challenge

Since the financial crisis, retail banks have generated equity returns much closer to their cost of capital. In the short-term term, their valuations have become more sensitive to increases in efficiency and profitability, rather than to incremental growth in their capital base.

The majority of their retail banking earnings are concentrated with small business owners, pre-retirees and retirees, who are often older and fairly loyal customers. There are two important reasons to be cautious and avoid any complacency:

  1. Digital preferences are evolving fast, even for older demographics.
  2. Regional banks have typically been slow in building compelling digital experiences.

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Regional vs. mega banks: The balance of power is shifting

Faced with this organic growth challenge, regional banks will have to compete for new customers with their larger peers (i.e., mega banks with quasi-national franchises). While we believe the balance of power will continue to shift towards mega banks, this does not mean that regional banks cannot overcome the structural advantages of their larger cousins.

Technology has become a key differentiator for organic growth in retail banking. This is because

  1. Customers increasingly value compelling digital experiences.
  2. Financial technology companies (fintechs) have set up new customer standards (e.g., mortgages to close within days rather than weeks).
  3. Cyber security has become a major concern for all customers.

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Bold plays for regional banks

1 Seeking scale that matters Going deep or broad
2 Geographic plays ● Doubling down on tier II markets

● Following students
3 Customer plays Focus on small business owners, pre-retirees, and retirees
4 Product play Changing the nature of customer relationships with automated, digitally delivered advice at the heart of every customer relationship
5 Infrastructure plays ● Accelerating the transition from physical to digital

● Outsourcing technology platforms


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It is time for regional banks to play offense again and re-ignite organic growth. This will require bold choices from their management teams to increase strategic focus and defuse some of the competitive advantages of mega banks. This will also require clear and painful trade-offs (across lines of business, short-term vs. long-term).

In the long term, regional banks and mega banks alike will need to face off to competition from non-banks; the mega technology firms (e.g., Amazon, Apple, Facebook, and Google) will vie for ownership of the customer information layer and customer insight generation tools. Fintech vendors will offer compelling point solutions for specific functions (e.g., customer on-boarding) or product solutions (e.g., robo-advice). Technology platform providers (core banking platforms and product systems) will strive to take over most of the banks' middle and back office operations. Banks will need to figure out what activities in their value chain they fight for or if they have a role besides integrating various vendor solutions. This will be potentially a massive transformation that not all banks will be able to manage.

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