The global and Indian financial sectors are at a critical inflection point, facing what many experts now describe as a "productivity paradox." Despite an era of unprecedented digital investment and innovation, the sector is experiencing a disconnect: operational and technology costs are rising faster than revenue, and productivity is stagnating or even declining.
According to a 2024 McKinsey report, global banking technology spending has increased by an average of 9% annually over the past five years, while revenue growth has lagged at just 4%. Meanwhile, US bank productivity has declined by 0.3% per year since 2010, despite significant efficiency initiatives and digital transformation programs.
In India, the story is nuanced: the sector boasts robust credit growth, world-leading digital payment penetration, and a surging fintech ecosystem, yet faces persistent challenges such as legacy non-performing assets, uneven technology adoption, and a large unbanked population.
This comprehensive analysis unpacks these trends, drawing on authoritative statistics, expert commentary, and industry evidence to provide a roadmap for the future.
Global Financial Sector: Growth, Complexity, and the Productivity Paradox
Cost Pressures and Efficiency Challenges
The global financial sector has seen operating expenses rise sharply, with a 6% increase in 2023 alone, according to the Boston Consulting Group's 2024 Global Banking Report. This surge is attributed to inflationary pressures, higher labor costs, and, most significantly, escalating technology investments.
While efficiency programs have managed to contain some of this growth limiting net cost increases to 1% in 2024 much of the sector's technology budget is locked into "run the business" (RTB) activities. These include regulatory compliance, risk management, cybersecurity, and the ongoing maintenance of complex legacy systems. As a result, less than 40% of IT budgets are available for "change the business" (CTB) initiatives that drive innovation and customer experience improvements.
The average efficiency ratio for banks globally is expected to remain around 60% in 2025, meaning that for every dollar earned, 60 cents are consumed by operating expenses. This is a significant concern in Europe, where, according to S&P Global, 15 out of 26 large banks saw cost growth outpace revenue growth in 2024, compared to just three banks the previous year.
Major institutions are responding with aggressive cost-cutting and transformation programs Deutsche Bank's $2.8 billion Operational Efficiency plan and Standard Chartered's $1.5 billion "Fit for Growth" initiative are notable examples, targeting both technology modernization and organizational streamlining.
"Banks are acutely aware of their stubborn costs but often struggle to effectively mitigate them due to myriad challenges, including complex operating models, competing risk management initiatives, and patchworks of legacy systems" — McKinsey, Global Banking Review 2024
Declining Productivity and Revenue Pressures
Despite these efforts, the sector's productivity gains have been elusive. Most banks achieve only modest cost reductions typically 3 - 5% and even the most successful efficiency programs rarely exceed 10%. These gains are often short-lived, as new regulatory requirements, risk management priorities, and digital initiatives quickly consume any savings.
The average cost to originate a mortgage, for example, has more than doubled over the past decade, rising from $5,100 in 2012 to $11,600 in 2023, according to the Mortgage Bankers Association. This increase is driven by higher compliance demands, more complex risk assessment processes, and the integration of new digital platforms.
Revenue pressures are also mounting. Net interest margins a key profitability metric are forecast to settle near 3% by the end of 2025, down from pandemic-era highs. Noninterest income, such as asset management and investment banking fees, has become increasingly important, now accounting for a five-year high of 1.5% of average assets. However, competition from fintechs and big tech firms is eroding traditional revenue streams, forcing banks to diversify and innovate at an unprecedented pace.
Technology Investments and ROI Challenges
Technology is both a driver of cost and a potential solution. Banks are investing heavily in cloud migration, generative AI, advanced data infrastructure, and enhanced cybersecurity. According to IDC, global financial services IT spending is expected to reach $700 billion in 2025, with cloud and AI accounting for over 35% of new investment. Yet, many institutions struggle to realize a clear return on these investments.
Legacy complexity, fragmented digital strategies, and siloed data architectures dilute the impact of new technologies. For example, while 65% of global banks now use machine learning for credit decisioning, only a minority report significant reductions in default rates or operational costs.
Customer expectations are also evolving rapidly. A 2024 Accenture survey found that 72% of banking customers expect seamless, personalized digital experiences, yet only 38% are satisfied with their primary bank's digital offerings. This gap is putting further pressure on banks to accelerate digital transformation, even as they grapple with cost and productivity challenges.
Perspectives and Evidence
Expert opinion underscores the sector's urgent need for transformation. According to EY's Global Banking Outlook 2024, global banking returns on equity (ROE) are estimated at 11.7% well above the historical average of 9% but sustaining these returns will require a shift from interest rate tailwinds to genuine operational transformation.
The International Monetary Fund (IMF) has warned that emerging markets face the highest real financing costs in a decade, with rising debt issuance at high interest rates increasing systemic risk. S&P Global projects global credit losses to rise by 7% to $850 billion in 2025, highlighting the need for robust risk management and capital buffers.
"The real test for banks will be their ability to deliver sustainable profitability in a world of higher costs, lower margins, and relentless technological change" — EY, Global Banking Outlook 2024
Indian Financial Sector: Rapid Growth, Persistent Challenges
Growth and Digital Transformation
India's financial sector is a paradox of rapid growth and deep structural challenges. Credit growth is projected at 13–14% in 2025, outpacing most major economies, and bank profitability has surged, with gross non-performing assets (GNPA) at a 12-year low of 2.6%. The digital revolution is in full swing: the Unified Payments Interface (UPI) now processes over 12 billion transactions monthly, making India the world leader in real-time payments.
According to the Reserve Bank of India (RBI), digital payments have grown at a compound annual growth rate (CAGR) of 50% over the past five years.
Fintech penetration is equally impressive, with over 58% of urban consumers using fintech services, and India now ranks third globally in the number of fintech unicorns. Private sector banks are at the forefront, delivering return on equity (ROE) of 18 - 20%, compared to 12 -14% for public sector banks. This performance gap is largely due to superior digital capabilities, better risk management, and more agile operating models.
Structural and Technological Challenges
Despite these achievements, significant challenges remain. An estimated 190 million adults in India are still unbanked, according to the World Bank's Global Findex Database 2024, highlighting the ongoing need for financial inclusion. Public sector banks lag behind in digital transformation, with only 35% having full-stack digital platforms, compared to 80% of private banks, according to a 2024 NASSCOM report. Legacy non-performing assets, particularly in infrastructure and power, continue to weigh on balance sheets, with stressed assets totaling ₹1.2 trillion.
Non-Banking Financial Companies (NBFCs) have emerged as key players, now accounting for 25% of the retail credit market. Their success is driven by partnerships with over 300 fintechs, which enable last-mile delivery of credit and financial services to underserved segments. However, this rapid growth also brings new risks, including asset quality concerns and regulatory challenges.
Regulatory and Competitive Dynamics
The regulatory landscape is evolving rapidly. The RBI has revised its Prompt Corrective Action (PCA) framework to enhance real-time monitoring and strengthen bank resilience. There is a growing focus on digital banking, risk management, and financial inclusion, with new guidelines for digital lending, cybersecurity, and consumer protection. Competition is intensifying, not only from private banks and NBFCs but also from fintechs and big tech firms entering the financial services space.
According to the Indian Banks' Association, the next phase of sector growth will depend on the successful integration of technology, robust risk management, and proactive regulatory engagement. The government's push for financial inclusion, through initiatives like Jan Dhan Yojana and the India Stack, is expected to bring millions more into the formal financial system, but will require sustained investment in digital infrastructure and customer education.
Technologies Shaping the Future
Cloud Computing: Cloud adoption is accelerating, with over 70% of global banks planning to migrate core systems to the cloud by 2027, according to Gartner. Cloud enables scalability, cost efficiency, and rapid deployment of new services, but also introduces new cybersecurity and data privacy challenges.
Generative AI: Generative AI is transforming credit decisioning, fraud detection, and customer service. While adoption is growing, especially in North America and Asia, financial services still lag behind sectors like healthcare and telecom in AI investment, according to PwC's 2024 AI in Financial Services report.
APIs and Open Banking: APIs are the backbone of open banking and embedded finance, enabling seamless integration with fintechs and third-party providers. The global embedded finance market is projected to reach $606 billion by 2025, according to Bain & Company.
Cybersecurity: With the average cost of a financial sector data breach reaching $4.5 million in 2023 (IBM Cost of a Data Breach Report), cybersecurity investments are a top priority. Banks are deploying advanced threat detection, zero-trust architectures, and real-time monitoring to protect against increasingly sophisticated attacks.
Green Finance Platforms: Sustainability is moving to the forefront, with green finance products and ESG-linked loans gaining traction. According to the Global Sustainable Investment Alliance, sustainable finance assets surpassed $35 trillion in 2024, and banks are integrating ESG criteria into lending and investment decisions.
Prioritizing What Matters
Cost Optimization: The most effective lever for sustainable growth is shifting technology spend from RTB to CTB, aggressively retiring legacy systems, and adopting platform-based operating models. According to McKinsey, banks that achieve this shift can free up to 50% of IT budgets for innovation, resulting in a 15 - 20% reduction in overall operating costs.
Productivity Enhancement: Simplification at scale rethinking operating models, reducing unnecessary demand, and leveraging AI and automation can deliver lasting productivity gains of up to 15% within two years, boosting ROE by 1-1.5 percentage points (BCG Global Banking Report 2024).
Financial Inclusion: In India, bridging the digital divide and reaching the unbanked is both a social imperative and a significant growth opportunity. The World Bank estimates that full financial inclusion could boost India's GDP by up to 14% by 2030.
Regulatory Agility: Proactive, test-and-learn regulatory frameworks can foster innovation while ensuring stability. The EU's Digital Finance Package and India's regulatory sandbox initiatives are leading examples.
Sustainability: Green finance and ESG integration are not just compliance requirements they are strategic differentiators in attracting capital and customers, as highlighted by the Global Sustainable Investment Alliance.
Imperatives and Recommendations
- Architectural Simplification: Banks must aggressively retire legacy systems and invest in cloud-native, API-driven platforms to reduce costs and enable innovation. This can free up to 50% of IT budgets for new initiatives, according to McKinsey.
- ROI-Focused Tech Investment: Implement total-cost-of-ownership metrics and centralized license management to ensure every tech dollar delivers measurable value. Gartner recommends regular tech stack audits to eliminate redundancy.
- AI and Automation: Scale up AI for credit, fraud, and operations unlocking 10 - 20% capacity for innovation and reducing default rates by up to 25%, as reported by PwC.
- Green Finance Integration: Develop green finance products and digital workflows to meet ESG targets and attract sustainability-focused capital. The International Finance Corporation estimates that green finance could represent a $23 trillion investment opportunity in emerging markets by 2030.
- Financial Inclusion: Leverage India Stack, UPI, and neobank models to bridge the unbanked gap, especially in rural and semi-urban areas. The RBI's financial inclusion index can be used to track progress.
- Strategic Partnerships: Build API-based ecosystems with fintechs and technology partners to accelerate innovation and reduce time-to-market. The World Economic Forum recommends collaborative innovation hubs.
- Regulatory Collaboration: Engage proactively with regulators to shape agile frameworks that support digital assets, cloud migration, and open banking. The BIS Innovation Hub provides a model for cross-border regulatory collaboration.
Conclusion
The global and Indian financial sectors are at a defining moment. The current trajectory of rising costs, declining productivity, and the challenge of extracting value from technology investments is unsustainable. However, as expert analysis and industry evidence show, there is a clear path forward: simplification at scale, disciplined tech investment, AI-driven productivity, and a relentless focus on inclusion and sustainability.
Institutions that can turn today's paradoxes into tomorrow's opportunities by reimagining banking for a digital, inclusive, and sustainable world will emerge as the true leaders of the next decade.
As McKinsey's 2024 Global Banking Review concludes, "The winners will be those who can master both the art of simplification and the science of innovation, balancing operational excellence with bold, customer-centric transformation."
[Major General Dr Dilawar Singh is an Indian Army veteran who has led the Indian Army's Financial Management, training and research divisions introducing numerous initiatives therein. He is the Senior Vice President of the Global Economist Forum AO ECOSOC, United Nations and The Co President of the Global Development Bank.]
