We saw a slew of innovations in the commercial banking sector in 2024. Some of the most-reported innovations include:
The buzzword ‘digital transformation’ has become a reality through initiatives like Goldman Sachs’ online banking platform, Marcus, and Santander’s banking platform, Gravity. Customers now expect banking platforms to digitise core functions, using cloud-based technology and parallel processing (allowing banks to update their software without disrupting the customer experience).
For the second consecutive year, global banks have earned greater revenues from green investments – such as underwriting bonds and issuing loans for sustainable projects – than from supporting the oil, gas and coal sectors. According to data from Bloomberg, the world's largest financial institutions amassed approximately $3 billion in fees last year via arranging environmentally-focused debt transactions.
And, of course, collaborations between banks and fintechs continue to usher in new innovative systems, such as HSBC with French fintech Numeral.
Underpinning these innovations are technologies like machine learning/AI, cloud computing and blockchain. John Stumpf, the former CEO of Wells Fargo, says it best by transplanting technology’s importance into an anatomy-related metaphor: “Technological innovations will be the heart and blood of the banking industry for many years to come."
We’re not commercial bankers but work alongside banks like NatWest, Deutsche Bank and DF Capital. Here are our five predictions for commercial banks in 2025.
Commercial banks can diversify their portfolios by conglomerating different activities, income sources, assets and liabilities in their banking operations. For instance, a credit union might raise funds from multiple sources, such as member deposits, bonds, or external loans, rather than relying on a single financing method.
As interest rates plummeted in 2024, it became increasingly important for banks to explore operations beyond traditional lending and deposit services. Diversifying a business mix may not seem like the simplest task. Yet, multi-billion pound banks like Deutsche Bank and Monzo pulled it off. Therefore, it is highly likely that in 2025’s current unstable economic conditions, we might see more commercial banks turn to diversification.
Other potential diversification strategies might include collaborating with fintechs to provide innovative online services, as aforementioned, or investing in sustainable finance.
Open banking allows customers to share their information with their banks via Application Programming Interfaces (APIs). The chief benefit for customers is that they can manage and move their money instantly (and securely). For banks, open banking can be a profitable venture, as it allows them to:
In 2024, nine million people in the UK used open banking. Now, 2025 will likely see the market maturing, with more users exploring how open banking can keep their financial data safe (noted previously by PYMNTS as a deterrent to user adoption).
Using a cloud-native payment platform offers several advantages in comparison to legacy infrastructures, including:
Yet, large banks might be reluctant to sunset legacy infrastructure despite the technical improvements on offer. Potentially merging with smaller paytechs to update cloud payment infrastructures might seem like a technical and/or operational challenge. But, as Chris Davis, Managing Director at Kyndryl (Ireland), notes these payment innovations ‘move financial firms into the future.’
In May 2024, Bloomberg reported that private credit lenders were feeling the pressure of narrow loan margins, partially spurred by competition from banks. The average margin of private credit lenders was 603 basis points over the benchmark, compared to 653 basis points for loans issued between one and two years ago. In other words, lenders are lowering their margins to attract more borrowers.
Lenders can claim a larger portion of the lending market by talking directly to specific buyers about riskier loans – such as high-yield or leveraged loans – before disclosing loan rates to the market. A similar tactic is risk-adjusted loan pricing, where banks assign interest rates based on the assessed risk of each borrower. For instance, higher-risk loans incur higher interest rates.
Implementing risk-adjusted pricing can represent a good use case for machine learning’s analytical capabilities. For example, the University of Bath highlights AI’s potential for boosting lending profits by using analytics models to generate personalised and unbiased pricing. Notably, AI-powered risk-adjusted pricing can help commercial banks achieve their ESG goals, as it can help extend credit to underrepresented groups.
What does ‘responsible’ mean in this context? Many things, but we’ll focus on two groups that would benefit from responsible funding.
One group is UK small and medium-sized enterprises (SMEs), which account for 99.8% of UK businesses. When banks pre-qualify SMEs for loans, they can prevent supply chain disruptions that stymie growth. Loan systems that quickly place loans into the hands of suitable borrowers ensure business continuity, benefitting both parties.
Of course, the phrase ‘suitable borrowers’ might be problematic in light of research showing that minority groups are traditionally excluded from accessing UK financial services. Therefore, responsible business financing solutions might look at ways of quickly funding underrepresented groups. One way to do so is to use alternative data sources like rental history.
Further, establishing rapid and fair loan decisioning systems will be a technical challenge for financial institutions and technology developers. Though machine learning (as a subset of AI) is undeniably necessary for building these models, building unbiased models that don’t discriminate against protected groups requires a sophisticated approach to training data and a proactive approach to overfitting. Not all institutions may be willing to invest the time and resources into developing a machine learning model with the requisite sensitivity.
But in 2025, what better time to try?
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We can expect commercial banks to take an agile approach in the face of 2025’s economic and political conditions. Now that sustainable finance and responsible financing provably induce higher profits, commercial banks have an incentive to chase responsible lending and green initiatives.
While AI technology will propel many of these inventions, we can anticipate some antagonistic moves – increased cyber threats, etc. To quote Cassi Chandler (a former Bank of America executive), “Artificial intelligence is one of the best tools we've seen come along to reshape our society. And it's also one of the best tools ever for a fraudster.”
Combining the technical expertise of banks and fintechs can help sustain the pace of innovation seen in 2024 while minimising risks. One of our predictions/hopes is that banks and fintechs will continue to forge partnerships, making 2025 a year of profitability and innovation for commercial banking.
