Three Key Challenges for the Banking Industry in 2025

1. Consumer power faces difficulties

Consumers have always played a key role in the development of the economy and the banking industry, but in 2025, this power will face serious challenges. One of the most worrying factors is the record high consumer debt, reaching $17.7 trillion by the end of 2024. While excess savings from the pandemic period once fueled strong growth, by March 2024, much of this savings will have been depleted, leading to a decline in consumer spending power.

In addition, the job market is likely to weaken, making consumers face more financial difficulties. This will directly impact their spending behavior and borrowing needs. When consumers feel worried about their financial situation, they may be more cautious in spending, especially with consumer loans. This not only affects the consumer market but also puts pressure on banks to maintain loan growth and interest income.

An important factor affecting this situation is the policy of the US Federal Reserve (Fed). The Fed is expected to cut interest rates three to four times in 2025, especially when inflation is close to the 2% target. Although interest rate cuts can help ease the financial burden on consumers and stimulate consumption, this adjustment can also lead to changes in the way banks approach loans and their financial strategies. Lowering interest rates will help lower borrowing costs, but at the same time reduce income from loans, forcing banks to look for other alternative sources of revenue.

2. Challenges from deposits and revenue

Another challenge that the banking industry will face in 2025 is the issue of deposits and revenue. Although interest rates are expected to decrease, banks' funding costs may not decrease at the same rate. Industry experts forecast that the cost of deposits will remain high at around 2.03% in 2025, well above the average of the previous five years (0.9%). This could put pressure on banks’ net interest margins, making it harder for them to maintain profitability from lending.

In addition, loan demand may also change, with different impacts on different types of loans. While mortgage lending may grow as interest rates fall, consumer lending is likely to slow due to financial pressures on households. With consumer debt levels already high, it will be difficult for consumers to continue borrowing when faced with financial uncertainty.

In this context, banks will need to focus on increasing revenue streams from activities other than lending. One notable trend is that banks are looking to optimize their fee income, especially in areas such as M&A and debt issuance. This could help banks to partially offset the decline in interest income. At the same time, banks are also looking to increase fees in services such as investment advisory, equity appraisal and other financial services, to offset the challenges of falling interest rates.

In addition, a new growth opportunity that banks can tap is wealth management. Although fees are compressed and competition is fierce, this is still an untapped potential market. Banks are expanding their wealth management services to include tax advisory services, estate planning and long-term care services. The market remains large and has room for growth, with leading banks accounting for only about 32% of the global wealth management market.

In the payments space, the growth in transaction volumes continues to be a major opportunity, but margins are being squeezed by technological competition and regulatory scrutiny. Banks are looking to expand revenue from value-added services and emerging payment channels such as mobile and digital payments to remain competitive in a volatile market.

3. Credit quality and risk management

NPLs are expected to increase slightly by 2025, particularly in consumer loans such as credit cards and auto loans. With interest rates falling, consumer loans.

While the delinquency rate is likely to increase, it also means that banks will face increased delinquencies. Credit card loans, which have the highest delinquency rate in the banking industry (1.69%), will need to be more closely managed to avoid financial risks.

The commercial real estate industry, especially the office segment, will also be a major concern. The change in working patterns after the pandemic has created new challenges for banks involved in commercial real estate. Banks with assets of $10 billion to $100 billion are facing high exposure to commercial real estate, which could pose major risks if the real estate market does not recover.

Meanwhile, banks are gradually turning to advanced technologies to manage risks and increase operational efficiency. Investment in artificial intelligence (AI) is a major priority. According to industry research, AI could boost global banking industry profits by 9% over the next five years, reaching $2 trillion by 2028. However, not all banks have the infrastructure needed to implement AI. Only about a quarter of banks have a robust data management platform to apply generative AI, suggesting that many organizations still face significant barriers to adopting new technologies.

Conclusion

The future of banking in 2025 will depend on the ability of banking organizations to adjust strategies, manage costs, and optimize technology to meet growing challenges. Large banks have the advantage of diversifying revenue streams and having strong brands, giving them the flexibility to adjust deposit rates and maintain profitability. However, regional and small and medium-sized banks can also take advantage of development opportunities if they know how to invest properly in technology, talent and customer experience.

Source: The Financial Brand

Compiled by the author group DTSVN - Digital transformation solutions for the Finance - Banking industry.

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DTSVN is a pioneering Digital Transformation Company providing the latest digital solutions exclusively for businesses in the Finance - Banking industry in Vietnam; helping Banks and financial institutions quickly complete technology systems to serve Digital Transformation.