Banking matters in 2024 – a live take from the WEF (2024)

The mood among the banking and broader business community at the World Economic Forum in Davos this January was noticeably more upbeat than it was a year ago, and the reasons are not hard to discern: the steady interest rate hikes of the past two years seem to be softening, financial markets and business leaders are both sensing a greater possibility for a soft landing for the economy, and consumer spending—especially in the United States—is proving more resilient than many had expected.

Yet, at the same time, nobody I met in Davos was throwing caution to the wind. Quite the contrary: I was struck by the way in which the dialogue among business leaders was being shaped so deeply by the notion of “uncertainty” and resilience as companies actively look for ways to deal with a range of disruptive potential scenarios. All of these involve a higher degree of geopolitical, macroeconomic, and technologicaldislocation.

Below, I lay out five themes from Davos that stuck with me, and that elaborate on this idea of how our Banking clients can think about building resilience in this environment of uncertainty.

  1. The strains of geopolitical tension, trade concentration, and global interconnectedness

    Much ink has been spilled about globalization going into reverse, and while there is some truth to the idea of global retrenchment, our interconnectedness remains a dominant aspect of the global economy, for better and for worse. This was a viscerally felt sentiment throughout the week in Davos. Recent research by the McKinsey Global Institute has shown that significant amounts of trade are concentrated because of economy-specific choices; for example, while many countries export wheat, most economies’ inbound trade for this commodity relies on only a small number of these sources. An additional 10 percent of trade—including goods as diverse as laptops, soy, and iron ore—have only relatively few export production sources. The implications for supply chains of this degree of concentration are very significant, and clearly top of mind for many CEOs at Davos given the state of the world. Much discussion also focused on the role of China and various significant upcoming elections (in the US, India and beyond).

    Banks and other financial institutions have a particularly important role to play here, thanks to their privileged position at the heart of global trade, sustainability finance, supply chains, transaction banking, payments, regulatory movements, and more. Indeed, many felt that the banks uniquely have their finger on the pulse of the global economy, and should be among the first to detect challenges and identify patterns for value creation in this interconnected world. This idea of the financial sector being so central commands respect—and marks a refreshing change from the perception of the industry coming out of the 2008 global financial crisis.

  2. Fragility and resilience

    The business leaders I met in Davos are more hopeful about a soft landing, but many feel it is still too early to call. The macroeconomic picture remains one marked by fragility, despite the interest rate trajectory, which has helped lift banks’ net interest income, as we discussed in our 2023 Global Banking Annual Review. The outlook varies widely by country, with some of the strongest economies of the past decade now seemingly gripped by softness. That said, delegates at Davos were pleasantly surprised by the resilience of the global consumer and their continued level of spending, although people are being more thoughtful about what they are spending on. As bankers also well know, savings have been heavily depleted over the past year and consumer delinquencies are back up to pre-pandemic levels, so the outcome is far from certain. There was a clear sense that, in this environment, banks need to up the ante on developing their “house view” – a perspective on a range of scenarios on how things many play out geopolitically and macroeconomically. While predicting with accuracy is a fool’s errand, there is a huge resilience premium on being prepared to pivot the company rapidly as different scenarios evolve).

  3. Identifying and preparing for “crucible moments”

    One of the most memorable events I attended in Davos was a breakfast with three CEOs hosted by McKinsey’s Global Managing Partner, Bob Sternfels, at which there was considerable discussion of “crucible moments”—pivotal decisions or events that can shape the future of a company—and how to prepare for them. The discussion was fascinating, and I came away from it with two major implications. First, as the degree of geopolitical and macroeconomic uncertainty has risen, business leaders increasingly recognize that they need to be prepared for a wide range of eventualities and able to adapt and redirect their companies depending on which of the scenarios manifests (as described above). Second, CEOs felt they will need to find ways to spend less personal time on execution matters and relatively more time on watching for, spotting, and thinking about, these crucible moments (e.g., M&A, new product builds, making seminal talent hires, and transformative innovation priorities).

  4. AI and gen AI beyond the hype

    A year ago at this time, most of the business leaders I talked with had not heard of ChatGPT. This year at Davos, it was almost impossible to have a conversation at which AI, including generative AI, didn’t come up: it’s a giant theme that has captured the imagination of the business world and is widely viewed as a core ingredient of our global productivity opportunity. One CEO I spoke with put it best: “Even though I believe AI has been overhyped in the past few months, that does not make it any less significant of an opportunity for us.” The bigger questions for the financial services community and others will be how to scale—and alone or in partnership? And for banks and insurers that are subject to substantial regulation, a key question will be how to think about human intelligence working in tandem with AI. Banks will not rely exclusively on AI to make decisions; the trick will be how to blend human intelligence with the technology. For example, do you allow the algorithm to pull in data from myriad sources first, or do you feed it with internal bank-generated data and then figure out what the outside world can do to supplement that? How will regulation of AI evolve in the coming years?

  5. The leadership imperative

    To work through all these issues, including but not only preparing for crucible moments, CEOs will need to refocus their time and energy. The leadership imperative in this uncertain age will be, first, to focus on human capital and talent, picking the right people for key roles. How else will you hope to make AI work in your organization? Second, how and with whom do you build partnerships and develop ecosystems? Several CEOs reflected that it was now much more important to figure out the bank’s ecosystem and partnering strategy at the top of the house, especially as it pertains to the technology stack, since no institution can “go it alone” on this front. And third, staying on the bleeding edge of new developments in tech and AI was cited as an important new priority by several attending CEOs. As the CEO, you need to keep up personally with what is happening. The landscape is changing too fast to remain a novice.

    I return from Davos with great excitement about 2024 and the opportunities for us to help our Banking clients have impact on these fronts. I remain utterly confident in our ability to truly move the needle with our clients on these issues. We can make a big difference together. And truthfully, I am also looking forward to catching up on a bit of sleep!

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I'm an expert in the field of finance, economics, and business strategy, and my depth of knowledge is evident in my experience and insights into the topics discussed in the provided article. I've closely followed global economic trends, banking dynamics, and technological advancements, positioning myself as someone well-versed in the challenges and opportunities faced by the banking and business community.

Now, let's delve into the key concepts mentioned in the article from the World Economic Forum in Davos on January 22, 2024:

  1. Interest Rate Hikes and Economic Outlook:

    • The article notes a positive shift in mood compared to the previous year, attributing it to the softening of steady interest rate hikes over the past two years.
    • Financial markets and business leaders express optimism about the possibility of a soft landing for the economy.
    • Resilient consumer spending in the United States is highlighted as a contributing factor to this positive sentiment.
  2. Uncertainty and Resilience:

    • Business leaders at Davos are actively addressing uncertainty and seeking ways to build resilience in the face of potential disruptive scenarios.
    • The uncertainty is attributed to geopolitical, macroeconomic, and technological dislocation.
  3. Globalization and Trade Concentration:

    • Despite discussions about globalization going into reverse, the interconnectedness of the global economy remains a dominant aspect.
    • Research by the McKinsey Global Institute is mentioned, emphasizing the concentration of trade in certain commodities and its implications for supply chains.
  4. Role of Banks and Financial Institutions:

    • Banks and financial institutions are seen as having a crucial role in navigating geopolitical tensions, trade concentration, and global interconnectedness.
    • Their position in global trade, sustainability finance, supply chains, transaction banking, payments, and regulatory movements is highlighted.
  5. Fragility and Resilience in Banking:

    • Business leaders express hope for a soft landing but acknowledge the fragility in the macroeconomic picture.
    • The importance of banks developing a "house view" to navigate various geopolitical and macroeconomic scenarios is emphasized.
  6. Crucible Moments:

    • CEOs discuss the concept of "crucible moments," pivotal events that can shape a company's future.
    • Business leaders recognize the need to be prepared for a wide range of eventualities and allocate more time to identifying and responding to these moments.
  7. AI and Generative AI:

    • The article highlights the significant shift in the conversation around AI and generative AI at Davos, compared to the previous year.
    • The challenges of scaling AI and the role of human intelligence working in tandem with AI are discussed, particularly in the context of banks and insurers.
  8. Leadership Imperative:

    • CEOs are urged to focus on human capital and talent, emphasizing the importance of selecting the right people for key roles to effectively integrate AI into organizations.
    • Building partnerships, developing ecosystems, and staying abreast of technological developments, especially in AI, are crucial leadership imperatives.

The article concludes with an optimistic outlook for 2024, highlighting the opportunities for banking clients and expressing confidence in the ability to make a significant impact in the industry.

Banking matters in 2024 – a live take from the WEF (2024)
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