research topics on finance and banking

Research Topics & Ideas: Finance

120+ Finance Research Topic Ideas To Fast-Track Your Project

If you’re just starting out exploring potential research topics for your finance-related dissertation, thesis or research project, you’ve come to the right place. In this post, we’ll help kickstart your research topic ideation process by providing a hearty list of finance-centric research topics and ideas.

PS – This is just the start…

We know it’s exciting to run through a list of research topics, but please keep in mind that this list is just a starting point . To develop a suitable education-related research topic, you’ll need to identify a clear and convincing research gap , and a viable plan of action to fill that gap.

If this sounds foreign to you, check out our free research topic webinar that explores how to find and refine a high-quality research topic, from scratch. Alternatively, if you’d like hands-on help, consider our 1-on-1 coaching service .

Overview: Finance Research Topics

Corporate finance topics
Investment banking topics
Private equity & VC
Asset management
Hedge funds
Financial planning & advisory
Quantitative finance
Treasury management
Financial technology (FinTech)
Commercial banking
International finance

Corporate Finance

These research topic ideas explore a breadth of issues ranging from the examination of capital structure to the exploration of financial strategies in mergers and acquisitions.

Evaluating the impact of capital structure on firm performance across different industries
Assessing the effectiveness of financial management practices in emerging markets
A comparative analysis of the cost of capital and financial structure in multinational corporations across different regulatory environments
Examining how integrating sustainability and CSR initiatives affect a corporation’s financial performance and brand reputation
Analysing how rigorous financial analysis informs strategic decisions and contributes to corporate growth
Examining the relationship between corporate governance structures and financial performance
A comparative analysis of financing strategies among mergers and acquisitions
Evaluating the importance of financial transparency and its impact on investor relations and trust
Investigating the role of financial flexibility in strategic investment decisions during economic downturns
Investigating how different dividend policies affect shareholder value and the firm’s financial performance

Investment Banking

The list below presents a series of research topics exploring the multifaceted dimensions of investment banking, with a particular focus on its evolution following the 2008 financial crisis.

Analysing the evolution and impact of regulatory frameworks in investment banking post-2008 financial crisis
Investigating the challenges and opportunities associated with cross-border M&As facilitated by investment banks.
Evaluating the role of investment banks in facilitating mergers and acquisitions in emerging markets
Analysing the transformation brought about by digital technologies in the delivery of investment banking services and its effects on efficiency and client satisfaction.
Evaluating the role of investment banks in promoting sustainable finance and the integration of Environmental, Social, and Governance (ESG) criteria in investment decisions.
Assessing the impact of technology on the efficiency and effectiveness of investment banking services
Examining the effectiveness of investment banks in pricing and marketing IPOs, and the subsequent performance of these IPOs in the stock market.
A comparative analysis of different risk management strategies employed by investment banks
Examining the relationship between investment banking fees and corporate performance
A comparative analysis of competitive strategies employed by leading investment banks and their impact on market share and profitability

Private Equity & Venture Capital (VC)

These research topic ideas are centred on venture capital and private equity investments, with a focus on their impact on technological startups, emerging technologies, and broader economic ecosystems.

Investigating the determinants of successful venture capital investments in tech startups
Analysing the trends and outcomes of venture capital funding in emerging technologies such as artificial intelligence, blockchain, or clean energy
Assessing the performance and return on investment of different exit strategies employed by venture capital firms
Assessing the impact of private equity investments on the financial performance of SMEs
Analysing the role of venture capital in fostering innovation and entrepreneurship
Evaluating the exit strategies of private equity firms: A comparative analysis
Exploring the ethical considerations in private equity and venture capital financing
Investigating how private equity ownership influences operational efficiency and overall business performance
Evaluating the effectiveness of corporate governance structures in companies backed by private equity investments
Examining how the regulatory environment in different regions affects the operations, investments and performance of private equity and venture capital firms

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Asset Management

This list includes a range of research topic ideas focused on asset management, probing into the effectiveness of various strategies, the integration of technology, and the alignment with ethical principles among other key dimensions.

Analysing the effectiveness of different asset allocation strategies in diverse economic environments
Analysing the methodologies and effectiveness of performance attribution in asset management firms
Assessing the impact of environmental, social, and governance (ESG) criteria on fund performance
Examining the role of robo-advisors in modern asset management
Evaluating how advancements in technology are reshaping portfolio management strategies within asset management firms
Evaluating the performance persistence of mutual funds and hedge funds
Investigating the long-term performance of portfolios managed with ethical or socially responsible investing principles
Investigating the behavioural biases in individual and institutional investment decisions
Examining the asset allocation strategies employed by pension funds and their impact on long-term fund performance
Assessing the operational efficiency of asset management firms and its correlation with fund performance

Hedge Funds

Here we explore research topics related to hedge fund operations and strategies, including their implications on corporate governance, financial market stability, and regulatory compliance among other critical facets.

Assessing the impact of hedge fund activism on corporate governance and financial performance
Analysing the effectiveness and implications of market-neutral strategies employed by hedge funds
Investigating how different fee structures impact the performance and investor attraction to hedge funds
Evaluating the contribution of hedge funds to financial market liquidity and the implications for market stability
Analysing the risk-return profile of hedge fund strategies during financial crises
Evaluating the influence of regulatory changes on hedge fund operations and performance
Examining the level of transparency and disclosure practices in the hedge fund industry and its impact on investor trust and regulatory compliance
Assessing the contribution of hedge funds to systemic risk in financial markets, and the effectiveness of regulatory measures in mitigating such risks
Examining the role of hedge funds in financial market stability
Investigating the determinants of hedge fund success: A comparative analysis

Financial Planning and Advisory

This list explores various research topic ideas related to financial planning, focusing on the effects of financial literacy, the adoption of digital tools, taxation policies, and the role of financial advisors.

Evaluating the impact of financial literacy on individual financial planning effectiveness
Analysing how different taxation policies influence financial planning strategies among individuals and businesses
Evaluating the effectiveness and user adoption of digital tools in modern financial planning practices
Investigating the adequacy of long-term financial planning strategies in ensuring retirement security
Assessing the role of financial education in shaping financial planning behaviour among different demographic groups
Examining the impact of psychological biases on financial planning and decision-making, and strategies to mitigate these biases
Assessing the behavioural factors influencing financial planning decisions
Examining the role of financial advisors in managing retirement savings
A comparative analysis of traditional versus robo-advisory in financial planning
Investigating the ethics of financial advisory practices

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The following list delves into research topics within the insurance sector, touching on the technological transformations, regulatory shifts, and evolving consumer behaviours among other pivotal aspects.

Analysing the impact of technology adoption on insurance pricing and risk management
Analysing the influence of Insurtech innovations on the competitive dynamics and consumer choices in insurance markets
Investigating the factors affecting consumer behaviour in insurance product selection and the role of digital channels in influencing decisions
Assessing the effect of regulatory changes on insurance product offerings
Examining the determinants of insurance penetration in emerging markets
Evaluating the operational efficiency of claims management processes in insurance companies and its impact on customer satisfaction
Examining the evolution and effectiveness of risk assessment models used in insurance underwriting and their impact on pricing and coverage
Evaluating the role of insurance in financial stability and economic development
Investigating the impact of climate change on insurance models and products
Exploring the challenges and opportunities in underwriting cyber insurance in the face of evolving cyber threats and regulations

Quantitative Finance

These topic ideas span the development of asset pricing models, evaluation of machine learning algorithms, and the exploration of ethical implications among other pivotal areas.

Developing and testing new quantitative models for asset pricing
Analysing the effectiveness and limitations of machine learning algorithms in predicting financial market movements
Assessing the effectiveness of various risk management techniques in quantitative finance
Evaluating the advancements in portfolio optimisation techniques and their impact on risk-adjusted returns
Evaluating the impact of high-frequency trading on market efficiency and stability
Investigating the influence of algorithmic trading strategies on market efficiency and liquidity
Examining the risk parity approach in asset allocation and its effectiveness in different market conditions
Examining the application of machine learning and artificial intelligence in quantitative financial analysis
Investigating the ethical implications of quantitative financial innovations
Assessing the profitability and market impact of statistical arbitrage strategies considering different market microstructures

Treasury Management

The following topic ideas explore treasury management, focusing on modernisation through technological advancements, the impact on firm liquidity, and the intertwined relationship with corporate governance among other crucial areas.

Analysing the impact of treasury management practices on firm liquidity and profitability
Analysing the role of automation in enhancing operational efficiency and strategic decision-making in treasury management
Evaluating the effectiveness of various cash management strategies in multinational corporations
Investigating the potential of blockchain technology in streamlining treasury operations and enhancing transparency
Examining the role of treasury management in mitigating financial risks
Evaluating the accuracy and effectiveness of various cash flow forecasting techniques employed in treasury management
Assessing the impact of technological advancements on treasury management operations
Examining the effectiveness of different foreign exchange risk management strategies employed by treasury managers in multinational corporations
Assessing the impact of regulatory compliance requirements on the operational and strategic aspects of treasury management
Investigating the relationship between treasury management and corporate governance

Financial Technology (FinTech)

The following research topic ideas explore the transformative potential of blockchain, the rise of open banking, and the burgeoning landscape of peer-to-peer lending among other focal areas.

Evaluating the impact of blockchain technology on financial services
Investigating the implications of open banking on consumer data privacy and financial services competition
Assessing the role of FinTech in financial inclusion in emerging markets
Analysing the role of peer-to-peer lending platforms in promoting financial inclusion and their impact on traditional banking systems
Examining the cybersecurity challenges faced by FinTech firms and the regulatory measures to ensure data protection and financial stability
Examining the regulatory challenges and opportunities in the FinTech ecosystem
Assessing the impact of artificial intelligence on the delivery of financial services, customer experience, and operational efficiency within FinTech firms
Analysing the adoption and impact of cryptocurrencies on traditional financial systems
Investigating the determinants of success for FinTech startups

Commercial Banking

These topic ideas span commercial banking, encompassing digital transformation, support for small and medium-sized enterprises (SMEs), and the evolving regulatory and competitive landscape among other key themes.

Assessing the impact of digital transformation on commercial banking services and competitiveness
Analysing the impact of digital transformation on customer experience and operational efficiency in commercial banking
Evaluating the role of commercial banks in supporting small and medium-sized enterprises (SMEs)
Investigating the effectiveness of credit risk management practices and their impact on bank profitability and financial stability
Examining the relationship between commercial banking practices and financial stability
Evaluating the implications of open banking frameworks on the competitive landscape and service innovation in commercial banking
Assessing how regulatory changes affect lending practices and risk appetite of commercial banks
Examining how commercial banks are adapting their strategies in response to competition from FinTech firms and changing consumer preferences
Analysing the impact of regulatory compliance on commercial banking operations
Investigating the determinants of customer satisfaction and loyalty in commercial banking

International Finance

The folowing research topic ideas are centred around international finance and global economic dynamics, delving into aspects like exchange rate fluctuations, international financial regulations, and the role of international financial institutions among other pivotal areas.

Analysing the determinants of exchange rate fluctuations and their impact on international trade
Analysing the influence of global trade agreements on international financial flows and foreign direct investments
Evaluating the effectiveness of international portfolio diversification strategies in mitigating risks and enhancing returns
Evaluating the role of international financial institutions in global financial stability
Investigating the role and implications of offshore financial centres on international financial stability and regulatory harmonisation
Examining the impact of global financial crises on emerging market economies
Examining the challenges and regulatory frameworks associated with cross-border banking operations
Assessing the effectiveness of international financial regulations
Investigating the challenges and opportunities of cross-border mergers and acquisitions

Choosing A Research Topic

These finance-related research topic ideas are starting points to guide your thinking. They are intentionally very broad and open-ended. By engaging with the currently literature in your field of interest, you’ll be able to narrow down your focus to a specific research gap .

When choosing a topic , you’ll need to take into account its originality, relevance, feasibility, and the resources you have at your disposal. Make sure to align your interest and expertise in the subject with your university program’s specific requirements. Always consult your academic advisor to ensure that your chosen topic not only meets the academic criteria but also provides a valuable contribution to the field.

If you need a helping hand, feel free to check out our private coaching service here.

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151+ Good Banking And Finance Research Topics For Students [2024 Updated]

Are you curious about Banking and Finance Research Topics? In this blog, we explore various banking and finance-related research topics. What drives the banking sector’s resilience in the face of challenges? How do financial markets influence our economic well-being?

Let’s find the good topics of personal finance, corporate decision-making, risk management, and more. From the fundamental principles of accounting to the latest trends in fintech, this collection of research topics spans various fields, offering a comprehensive view of the ever-evolving finance domain.

Discover the impact of digital currencies, the role of central banks, and the effectiveness of credit scoring models. Explore the importance of real estate finance and know the behavioral aspects influencing investment decisions. We also examine the intersection of finance with emerging technologies and its role in sustainable development.

Whether you are a student researching finance or the banking sector with good research ideas about economic difficulties. These Banking and Finance Research Topics provide a gateway to understanding the pivotal role finance plays in our global society. Let’s know all about them here.

Table of Contents

What Is Banking And Finance Research Topics?

Banking and finance research topics refer to specific questions that researchers investigate related to financial systems and institutions. These topics help explore how banks, investments, financial markets, and economic policies work.

Some examples of banking and finance research topics include:

How new technologies like mobile apps are changing banking
What causes stock market prices to rise and fall
How government regulations impact financial institutions
Why do people make certain financial decisions?
Ways to improve risk management for banks
The future of cryptocurrencies as an investment
How fintech companies are competing with traditional banks

Researching these topics aims to gain a deeper understanding of the financial world. The knowledge can then be used to inform better policies, practices, and decisions related to banking and finance.

How To Find Banking And Finance Research Topics For Students?

Here are some tips for students on finding good banking and finance research topics:

Look at current events in the banking and finance industries for inspiration. Pay attention to what’s happening with major banks, new technologies, economic policies, financial crises, and industry trends.
Review finance publications, academic journals, magazines, and websites to discover recent research studies related to banking and see what knowledge gaps they identify that require further investigation.
Browse research paper databases for sample banking and finance essays to find potential topics or note areas requiring additional up-to-date research.
Align topics with your existing interests and course curriculum. If you enjoy technology, explore fintech questions. If macroeconomics fascinates you, investigate the implications of monetary policies.
Consider meaningful real-life research questions, like how underprivileged groups are financially underserved or how developing nations can gain affordable banking access.
Brainstorm ideas and get input from professors who will guide you in refining topics based on viability, available data sources, analytical methods, and relevance to the current finance field.

List of Good Banking And Finance Research Topics

Here are the most interesting banking and finance research topics:

Good Banking And Finance Research Topics For Students

Comparative analysis of traditional banking vs. online banking.
The impact of mergers and acquisitions on bank performance.
Assessing the role of central banks in ensuring financial stability.
Investigating the effectiveness of bank stress tests in predicting financial crises.
Analyzing the factors influencing customer satisfaction in banking services.
The role of blockchain technology in enhancing banking security.
Examining the impact of interest rate fluctuations on bank profitability.
Evaluating the role of government intervention in preventing bank failures.
Analyzing the challenges and opportunities of Islamic banking.
The impact of Basel III regulations on banking risk management.

Best Banking And Finance Sector Research Topics For MBA Students

The role of the stock market in economic development.
Examining the factors affecting stock market volatility.
Impact of high-frequency trading on financial markets.
Exploring the relationship between corporate governance and stock prices.
The role of derivatives in managing financial market risks.
Analyzing the impact of macroeconomic indicators on stock prices.
The role of insider trading in financial markets.
Investigating the efficiency of emerging financial markets.
The impact of market sentiment on stock prices.
Analyzing the role of financial analysts in shaping market perceptions.

Personal Finance-Related Research Topics

The impact of financial literacy on personal finance management.
Evaluating the effectiveness of budgeting tools in personal finance.
The role of behavioral economics in understanding individual investment decisions.
Investigating the factors influencing retirement savings decisions.
The impact of socio-economic factors on household debt levels.
Assessing the effectiveness of financial planning in achieving financial goals.
The role of technology in personal financial management.
Analyzing the impact of tax policies on personal savings.
The relationship between education and income levels in personal finance.
Investigating the role of psychological biases in personal investment decisions.

Corporate Banking And Finance Research Topics

The impact of capital structure on firm profitability.
Evaluating the role of financial leverage in corporate decision-making.
Analyzing the factors influencing dividend payout policies.
The impact of corporate governance on firm performance.
Investigating the relationship between CEO compensation and firm performance.
The role of working capital management in corporate finance.
Analyzing the impact of exchange rate fluctuations on multinational corporations.
The influence of financial disclosure on investor decisions.
Evaluating the impact of corporate social responsibility on shareholder value.
The role of venture capital in financing innovation and startups.

Risk Management Research Topics For College Students

The impact of credit risk on financial institutions.
Analyzing the role of derivatives in hedging financial risks.
Evaluating the effectiveness of value-at-risk (VaR) models in risk management.
The impact of operational risk on financial institutions.
Exploring the relationship between risk-taking and financial performance.
Analyzing the role of insurance in managing financial risks.
The impact of climate change on financial risk assessment.
Evaluating the role of stress testing in assessing systemic risk.
The influence of cyber threats on financial institutions’ risk management.
The role of artificial intelligence in enhancing risk management practices.

Accounting and Auditing Research Topics

Analyzing the impact of International Financial Reporting Standards (IFRS) on financial reporting quality.
Evaluating the role of forensic accounting in fraud detection.
The impact of audit quality on financial statement reliability.
Investigating the role of auditor independence in ensuring financial transparency.
Analyzing the effectiveness of fair value accounting in financial reporting.
The influence of accounting conservatism on financial decision-making.
Evaluating the impact of accounting information on investment decisions.
The role of big data analytics in modern accounting practices.
Analyzing the challenges and opportunities of sustainability reporting.
The impact of earnings management on financial statement reliability.

Financial Regulation and Policy Research Topics

The role of government intervention in preventing financial crises.
Evaluating the impact of Dodd-Frank Wall Street Reform and Consumer Protection Act.
Analyzing the effectiveness of Basel III in regulating global banking.
The role of regulatory bodies in promoting financial market integrity.
Investigating the impact of tax policies on corporate financial decisions.
Analyzing the challenges and opportunities of cross-border financial regulation.
The role of ethics in financial decision-making and regulation.
Evaluating the impact of monetary policy on inflation and economic growth.
The influence of political factors on financial regulation.
The impact of regulatory changes on financial innovation.

Real Estate Finance Related Research Topics

Analyzing the factors influencing real estate prices and investment.
The impact of interest rate changes on real estate markets.
Evaluating the role of mortgage-backed securities in real estate finance.
The influence of housing policies on real estate market dynamics.
The role of real estate crowdfunding in property financing.
Analyzing the impact of urbanization on real estate development.
The role of sustainability in real estate investment decisions.
Evaluating the impact of economic downturns on real estate values.
The influence of demographic trends on real estate market dynamics.
Analyzing the challenges and opportunities of real estate finance in emerging markets.

Behavioral Finance Research Paper Topics

Investigating the role of behavioral biases in investment decisions.
The impact of overconfidence on financial decision-making.
Analyzing the influence of social networks on investment behavior.
Evaluating the role of emotions in financial decision-making.
The impact of financial news and media on investor sentiment.
Investigating the role of heuristics in shaping financial perceptions.
Analyzing the impact of market bubbles on investor behavior.
The influence of framing effects on investment choices.
Evaluating the role of financial education in mitigating behavioral biases.
The impact of cultural factors on individual investment decisions.

Financial Technology (Fintech) Research Topics

Analyzing the impact of robo-advisors on traditional investment advisory services.
The role of blockchain in reshaping payment systems.
Evaluating the potential of cryptocurrencies as a mainstream means of exchange.
The impact of artificial intelligence on credit scoring models.
Analyzing the challenges and opportunities of regulating fintech startups.
The role of big data analytics in personalized financial services.
Evaluating the impact of open banking on financial innovation.
The influence of cybersecurity threats on fintech adoption.
Analyzing the role of regulatory sandboxes in fostering fintech innovation.
The impact of fintech on financial inclusion in developing economies.

Economics and Finance Sector Related Research Topics

Investigating the relationship between economic indicators and financial markets.
The impact of trade policies on exchange rates and international finance.
Analyzing the role of economic sanctions in shaping financial landscapes.
Evaluating the impact of globalization on financial stability.
The role of monetary policy in addressing economic inequality.
Analyzing the impact of economic recessions on financial decision-making.
The influence of political instability on financial markets.
The impact of demographic trends on economic and financial dynamics.
Evaluating the role of economic forecasting in financial decision-making.
The relationship between economic growth and financial development.

Sustainable Banking And Finance Research Topics

Analyzing the impact of environmental, social, and governance (ESG) factors on investment decisions.
The role of green finance in promoting sustainable development.
Evaluating the impact of carbon pricing on financial markets.
The influence of sustainable investing on corporate decision-making.
Analyzing the challenges and opportunities of integrating sustainability into financial reporting.
The role of impact investing in addressing social and environmental issues.
Evaluating the impact of climate change on financial risk assessment.
The influence of corporate sustainability on shareholder value.
The role of green bonds in financing environmentally friendly projects.
Analyzing the effectiveness of sustainable finance policies in achieving global goals.

Recent Banking And Finance Research Topics

Investigating the potential of decentralized finance (DeFi) in traditional banking services.
The impact of quantum computing on financial modeling and risk management.
Analyzing the challenges and opportunities of central bank digital currencies (CBDCs).
The role of augmented reality (AR) and virtual reality (VR) in financial services.
The impact of 5G technology on financial transactions and services.
Evaluating the potential of tokenization in transforming financial markets.
Analyzing the role of artificial intelligence in credit scoring and lending decisions.
The influence of geopolitical factors on global financial markets.
The impact of regulatory technology (RegTech) in compliance and risk management.
The role of smart contracts in streamlining financial transactions.

Cross-Border Finance Research Paper Topics

Investigating the impact of exchange rate fluctuations on cross-border investments.
The role of currency unions in promoting cross-border trade and investments.
Analyzing the challenges and opportunities of cross-border banking operations.
Evaluating the impact of trade agreements on cross-border financial flows.
The influence of political and economic integration on cross-border finance.
Analyzing the role of international financial institutions in cross-border finance.
The impact of capital controls on cross-border investments.
The role of cross-border financial services in promoting global economic integration.
Evaluating the impact of cross-border financial regulations on multinational corporations.
The influence of cross-border financial crimes on international cooperation.

Financial Education and Literacy Research Topics

Investigating the impact of financial education programs on students’ financial literacy.
The role of technology in enhancing financial education and literacy.
Evaluating the effectiveness of workplace financial wellness programs.
Analyzing the impact of cultural factors on financial literacy levels.
The influence of family background on financial literacy.
The impact of early financial education on long-term financial behavior.
Analyzing the relationship between financial literacy and retirement planning.
The role of schools and universities in promoting financial literacy.
The influence of gender on financial literacy and decision-making.
Evaluating the impact of online resources on improving financial literacy.

Banking and Finance in Developing Economies

Analyzing the challenges and opportunities of financial inclusion in developing economies.
The role of microfinance in poverty alleviation and economic development.
Evaluating the impact of foreign aid on financial stability in developing countries.
The influence of corruption on financial development in developing economies.
Analyzing the role of remittances in shaping economic landscapes in developing countries.
The impact of informal financial services on rural communities.
Evaluating the role of government policies in promoting financial development.
The influence of economic and political instability on financial systems in developing countries.
The role of international financial institutions in supporting economic growth in developing economies.
Analyzing the impact of technology adoption on financial inclusion in developing regions.

What Are Some Good Topics In The Area Of Finance And Accounting For A Ph.D. Research?

Here are some current Banking And Finance research topics for students:

Recent Project Topics On Banking And Finance PDF

Here are the most recent project topics on banking and finance pdf:

These Are the best Banking and Finance Research Topics. These topics serve as gateways to understanding the nature of banking, finance, and other research topics. As you find a good research topic, consider your interests and the current trends shaping the financial domain. Whether it’s the impact of technology on banking, the dynamics of stock markets, or the role of sustainable finance.

Engage with your coursework, delve into academic journals, and attend seminars to find the latest understandings and potential research questions. Consulting with professors and advisors offers valuable guidance, helping refine your focus. Keep an eye on industry reports and financial news for inspiration, considering contemporary challenges and emerging trends.

Remember, your research can contribute to understanding financial systems and inform real-world practices. Choose a topic that not only captivates your interest but also addresses relevant issues, and you’ll find yourself good banking and finance research topics. Happy exploring!

Top 300+ Qualitative Research Topics For High School Students

100+ Most Interesting Google Scholar Research Topics For Students [Updated 2024]

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Banking and Finance Dissertation Topics – Selected for Business Students

Published by Owen Ingram at January 2nd, 2023 , Revised On August 16, 2023

Looking for an interesting banking and finance research idea for your dissertation? Your search for the best finance and banking dissertation topics ends right here because, a t ResearchProspect, we help students choose the most authentic and relevant topic for their dissertation projects.

Bank taxes, financial management, financial trading, credit management, market analysis for private investors, economic research methods, the economics of money and banking, international trade and multinational business, the wellbeing of people and society, principles and practices of banking, management and cost accounting, governance and ethics in banking, investment banking, introductory econometrics, and capital investment management are among the many topics covered in banking and finance.

Without further ado, here is our selection of the besting banking and finance thesis topics and ideas.

List of Banking and Finance Dissertation Topics

A Comprehensive Analysis of the Economic Crisis as It Relates to Banking and Finance
A Critical Review of Standard Deviation in Business
The Political and Economic Risks Involving National Bank Transactions
A Study of Corporate Developments in European Countries Regarding Banking and Finance
Security Measures Implemented in Financial Institutions Around the World
Banking and Finance Approaches from Around the World
An in-depth study of the World Trade Organization’s role in banking and finance
A Study of the Relationship Between Corporate Strategy and Capital Structures
Contrasting global, multinational banks with regional businesses
Preventing Repetitive Economic Collapse in National and Global Finances
The Motivations for Becoming International Expats All Over the World
The Difference Between Islamic Banking and Other Religious Denominations in Banking and Financial Habits
How Can Small-Scale Industries Survive the Global Banking Demands?
A Study of the Economic Crisis’s Impact on Banking and Finance
The Impact of the International Stock Exchange on Domestic Bank Transactions
A 2025 Projected Report on World Trade and Banking Statistics
How Can We Address the Issue of the Government’s Financial Deficit in Banking?
A Comparison of Contemporary and Classic Business Models and Companies’ Banking and Financial Habits
Which of the following should be the principal area of money investment that has arrived at the bank in the form of deposits?
How to strike a balance between investing money in various plans to generate a profit and managing depositor trust
What are banks’ responsibilities to their depositors, and how may such liabilities be managed without jeopardising depositor trust?
How the new banking financing laws enacted by governments throughout the world are better protecting depositors’ rights?
What is the terminology related to banking finance, which oversees the investment of deposited funds as well as the banks’ responsibilities to depositors?
Explain the most recent developments in research related to the topic of banking finance
How research in the banking finance industry assists governments and banking authorities in properly managing their finances?
What is the most recent credit rating software that assists in determining the rewards and dangers of investing bank funds in the stock market?
How banking finance assists the world’s top banks in managing consumer expectations and profit?
The negative impact of a manager’s poor management of a bank’s banking financing
Is it feasible to conduct a banking firm without the assistance of banking finance management?
What are the most significant aspects of banking financing that allow businesses to develop without constraints?

The importance of banking finance cannot be overstated. These are only a few of the most extensive subjects on which you may write a banking and finance dissertation. Remember that if you want to succeed in your studies, you must be able to offer reliable numbers and facts on the history and current state of banking and finance throughout the world. Otherwise, you will very certainly be unable to justify your study effectively. We hope you can take some inspiration and ideas from the above banking and finance dissertation topics .

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How to find banking and finance dissertation topics.

To find banking and finance dissertation topics:

Follow industry news and trends.
Study regulatory changes.
Explore emerging technologies.
Analyze financial markets.
Investigate risk management.
Consider ethical and global aspects.

299+ Engaging Banking And Finance Project Topics

Hello! Have you ever wondered how money works in our world? Well, get ready to dive into the depth of interesting banking and finance project topics.

You might think banks are only about saving money or getting loans, but there’s a whole lot more to explore. In this amazing list of project ideas, we’ll uncover cool things like how banks help businesses grow, why saving money is super important, and even how they keep our money safe.

Ever heard of things like ‘investments’ or ‘global connections’? We’ll solve these mysteries together and see how they make our world a more connected and interesting place.

From learning about how banks support big projects in our cities to understanding how our money can actually make more money there’s a whole financial universe waiting for us to discover! Let’s start this journey together and unlock the secrets of banking and finance.

Contribution Of Banking And Finance In A Country’s Economy

Table of Contents

Banking and finance play an important role in how a country’s economy works. They’re like the heart and blood vessels in our bodies, helping money flow through the economy and keeping it healthy. Here are some key contributions they make in a Country’s economy:

Savings and Loans: Banks help people save money and also lend money to others. When we save money in a bank, it’s like putting it in a safe place where it can grow. And when someone needs money for a house, a car, or to start a business, banks can lend it to them.
Business Growth: Finance helps businesses grow. Imagine someone has a fantastic idea for a new company but doesn’t have enough money to start. Banks can provide loans to turn these ideas into real businesses, creating jobs and products we use every day.
Investments: Finance helps people invest. When we invest, we’re using our money to buy things that can grow in value, like stocks or properties. This helps our money grow over time.
Supporting Government: Banks help governments run countries smoothly. They manage money for things like building roads, schools, and hospitals. Without banks, it would be tough for governments to do these big projects.
Stability and Security: Finance helps keep our money safe. Banks use security measures to protect our savings. Imagine if we had to keep all our money at home—there might be a risk of it getting lost or stolen.
Global Connections: Banks help countries work together. They allow people and businesses from different countries to trade and do business with each other easily, which makes the world more connected.
Interest and Savings: When we save money in a bank, they pay us interest. That means they give us a little bit more money over time. It’s like a reward for letting them keep our money safe.
Economic Growth: All these things together—saving, lending, investing, and more—help the economy grow. When the economy grows, it means there are more opportunities for everyone to have jobs and better lives.

So, banking and finance are really important because they help us manage our money, make it grow, and make sure our economy stays strong and healthy.

299+ Banking And Finance Project Topics

Top 15 project topics on risk management in banking.

Credit Risk Assessment Models in Banking
Market Risk Management Strategies and Techniques
Operational Risk Frameworks: Implementation and Analysis
Liquidity Risk Management in Financial Institutions
Stress Testing: Methods and Applications in Banking
Basel III Regulations: Impact and Compliance in Risk Management
Cybersecurity Threats and Risk Mitigation in Banking
Fraud Detection and Prevention Mechanisms in Financial Institutions
Risk Management in Investment Banking: Challenges and Best Practices
Derivatives and Risk Hedging Strategies in Banking
Systemic Risk Analysis in the Banking Sector
Risk Governance and Frameworks in Financial Institutions
Model Risk Management in Banking
Non-Performing Loans: Assessment and Risk Mitigation Strategies
Technology and Innovation in Risk Management for Banks

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Banking and Finance Dissertation Topics (28 Examples) For Research

Mark May 26, 2020 Jun 5, 2020 Banking and Finance , Finance No Comments

Are you searching for banking and finance dissertation topics? We understand that selecting a dissertation topic is one of the biggest challenges. So, we offer a wide range of banking and finance dissertation topics and project topics on banking and finance. You can also visit our site for corporate finance dissertation topics and other business […]

Are you searching for banking and finance dissertation topics? We understand that selecting a dissertation topic is one of the biggest challenges. So, we offer a wide range of project topics on banking and finance.

Our team of writers can provide quality work on your selected banking and finance research topics. Once you select from the research topics on banking and finance, we will provide an outline, which can provide guidance on how the study should be carried out .

If you have come to this post after searching for corporate finance or finance topics, following are the seperate posts made on these topics.

Finance Research Topics
Corporate Finance Research Topics

Banking and finance dissertation topics

Role of micro-loans in the modern financial industry.

Online currencies like Bitcoin brought changes in the concept of fiat currencies.

Identifying the forces causing American retail banking centres to change.

Analysing the treatment of off-balance sheet activities.

Examining the role of internet banking in society.

Evaluating how the modern economy prevents a run on the banks from happening.

To find out whether the technology can replace the role of retail banking centre.

Relationship between housing loans and the 2008 recession.

Impact of foreign direct investment on the emerging economies.

Identifying the best capital structure for a retail bank.

To study the effect of mergers and acquisition on employee’s morale and performance in the case of banks.

Evaluating the credit management and issues of bad debts in commercial banks in the UAE.

To what extent the electronic banking has affected customer satisfaction.

Portfolio management and its impact on the profitability level of banks.

Impact of interest rate on loan repayment in microfinance banks.

An appraisal of operational problems facing micro-finance banks in delta state.

Studying the impact of risk management on the profitability of banks.

Evaluation of bank lending and credit management.

Role of automated teller machine on customer satisfaction and retention.

Examining the impact of bank consolidation on operational efficiency.

Competitive strategies and changes in the banking industry.

Development of rural banking in the case of developed countries.

The effect of electronic payment systems on the behaviour and satisfaction level of customers.

How does the organisational structure affect the commercial banks and their performance?

How can banks use ratio analysis as a bank lending tool?

Evaluating the relationship between e-banking and cybercrime.

Studying the importance of credit management in the banking industry.

Problems related to loan granting and recovery.

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80 Banking and Finance Research Topics

FacebookXEmailWhatsAppRedditPinterestLinkedInAre you a student embarking on the exciting journey of research and looking for captivating topics in banking and finance to fuel your thesis or dissertation? Look no further! Selecting the proper research topics is pivotal to the success of your academic endeavor. Whether you’re pursuing an undergraduate, master’s, or doctoral degree, the world of […]

Are you a student embarking on the exciting journey of research and looking for captivating topics in banking and finance to fuel your thesis or dissertation? Look no further! Selecting the proper research topics is pivotal to the success of your academic endeavor. Whether you’re pursuing an undergraduate, master’s, or doctoral degree, the world of banking and finance offers a plethora of intriguing avenues to explore.

Banking and finance are often used interchangeably; the keywords “financial research” and “banking study” encompass the intricate mechanisms that drive the global economy, managing the flow of funds, investments, and financial instruments.

This comprehensive guide will delve into diverse research topics that will captivate your interest and contribute to growing knowledge in this dynamic field.

A List Of Potential Research Topics In Banking and Finance:

Analyzing the effect of Bank of England policies on interest rates and inflation.
Exploring the determinants and consequences of bank liquidity creation.
A critical analysis of Dodd-Frank Wall Street Reform and Consumer Protection Act.
Reviewing the role of systemically important financial institutions (sites) in the 2008 crisis.
Evaluating the effects of mergers and acquisitions on bank performance.
Evaluating the role of credit unions in promoting financial inclusion.
Analyzing the effects of financial market volatility on investor behavior.
Investigating the relationship between financial inclusion and economic growth.
Analyzing the risks and benefits of open banking implementation in the UK.
Exploring the role of insurance in reshaping the insurance industry after COVID-19.
Investigating the implications of negative interest rates on banking profitability.
Evaluating the impact of Brexit on London as a global financial hub.
Analyzing the challenges and opportunities of sustainable finance in the post-covid era.
Analyzing the implications of the London Interbank offered rate (LIBOR) transition in the UK.
Analyzing the resilience of microfinance institutions during and after the pandemic.
Exploring the relationship between UK taxation policies and investment decisions.
Examines Basel iii regulations’ impact on bank capital adequacy.
Examining the effects of political risk on international banking operations.
Reshaping investment strategies: a study of behavioral changes post-pandemic.
The role of credit rating agencies in financial markets: an empirical study.
Reviewing the effects of quantitative easing programs on financial markets .
Investigating the influence of behavioral biases on investment decisions.
Investigating the factors affecting customer loyalty in retail banking.
Impact of the pandemic on credit risk assessment and bank loan defaults.
Examining the determinants of corporate credit ratings and their implications.
Investigating the link between corporate social responsibility and financial performance.
The changing landscape of risk management in banking: a literature review.
The role of central banks in addressing systemic banking crises: a historical perspective.
Evaluating the effectiveness of risk management strategies in the banking sector.
Analyzing the impact of microfinance initiatives on rural economic empowerment.
Assessing the impact of economic uncertainty on investment behavior.
The role of e-commerce and online platforms in shaping post-pandemic retail banking.
Investigating the relationship between macroeconomic indicators and stock market performance.
A review of behavioral finance theories and their practical implications.
Sustainability reporting practices in banking: a global review.
Assessing the adoption and implementation of sustainable finance practices in banking.
Impact of Brexit on UK-EU financial services trade: challenges and opportunities.
Reviewing the effects of high-frequency trading on market liquidity and stability.
Impact of digital currencies on cross-border payments and remittances.
Impact of UK carbon pricing on financial institutions’ risk management strategies.
Analyzing remote work’s impact on financial institutions’ cybersecurity risks.
Analyzing the shift in consumer payment preferences post-COVID-19.
Analyzing the challenges and opportunities of open banking initiatives.
Impact of supply chain disruptions on trade finance and international banking.
Impact of regulatory changes on mortgage market dynamics in the UK.
Evaluating the effects of Brexit on cross-border capital flows and investment.
The shift in consumer behavior: a study of post-covid-19 payment preferences.
Examining the long-term effects of remote work on financial service organizations.
The role of UK Islamic finance in promoting ethical and Sharia-compliant banking.
Exploring the relationship between corporate governance and bank risk management.
The impact of quantitative easing on income inequality: a review of empirical studies.
The role of digital identity verification in ensuring financial security post-covid-19.
Analyzing the dynamics of cryptocurrency markets and their interaction with traditional finance.
Exploring the trends and patterns in the UK peer-to-peer lending market.
Assessing the adoption of contactless payments in the UK retail sector.
The role of data analytics in enhancing financial decision-making post-pandemic.
Reviewing the dynamics of global capital flows and their implications for developing economies.
E explores sovereign wealth funds’ role in global capital markets.
A critical review of financial innovations and their impact on banking services.
Analyzing the shift in UK real estate investment patterns post-Brexit.
Evaluating the effectiveness of central bank digital currencies in crisis management.
The role of venture capital in fostering technological innovation and startups.
Assessing the influence of dividend policies on corporate financial performance.
Impact of pandemic-driven ESG awareness on investment decision-making.
Evaluating the effectiveness of government stimulus packages in supporting financial institutions.
Evaluating the role of financial technology in enhancing financial inclusion in the UK.
A critical review of corporate governance practices in global banking.
Role of UK financial services compensation scheme (fscs) in ensuring consumer confidence.
The role of credit rating agencies in the subprime mortgage crisis: lessons learned.
The dynamics of financial crises: a comparative study of historical cases.
A review of Basel Accords: achievements, criticisms, and implications for banking.
An examination of financial market efficiency theories and empirical evidence.
Analyzing the role of central banks in financial stability.
Exploring central banks’ role in mitigating the pandemic’s economic impact.
Evaluating the impact of supply chain disruptions on trade financing instruments.
The role of corporate governance in preventing financial scandals: a comparative study.
Examining the impact of regulatory changes on bank risk-taking behavior.
Exploring the impact of fintech innovations on traditional banking services.
Investigating the effects of COVID-19 on the UK’s commercial real estate financing.
Analyzing the relationship between financial literacy and retirement planning.

In pursuing academic excellence, these meticulously curated banking and finance research topics across various degree levels provide a launching pad for your thesis or dissertation journey. Whether you’re unraveling the complexities of behavioral finance for your undergraduate thesis, dissecting the impact of digital currencies on traditional banking systems at the master’s level, or delving into the intricacies of international financial regulations for your doctoral dissertation, remember that your chosen topic should align with your passion and research interests. As you embark on this scholarly adventure, these topics offer a stepping stone toward contributing to the ever-evolving landscape of banking and finance research.

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50 Best Finance Dissertation Topics For Research Students

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Finance Dissertation Made Easier!

Embarking on your dissertation adventure? Look no further! Choosing the right finance dissertation topics is like laying the foundation for your research journey in Finance, and we're here to light up your path. In this blog, we're diving deep into why dissertation topics in finance matter so much. We've got some golden writing tips to share with you! We're also unveiling the secret recipe for structuring a stellar finance dissertation and exploring intriguing topics across various finance sub-fields. Whether you're captivated by cryptocurrency, risk management strategies, or exploring the wonders of Internet banking, microfinance, retail and commercial banking - our buffet of Finance dissertation topics will surely set your research spirit on fire!

What is a Finance Dissertation?

Finance dissertations are academic papers that delve into specific finance topics chosen by students, covering areas such as stock markets, banking, risk management, and healthcare finance. These dissertations require extensive research to create a compelling report and contribute to the student's confidence and satisfaction in the field of Finance. Now, let's understand why these dissertations are so important and why choosing the right Finance dissertation topics is crucial!

Why Are Finance Dissertation Topics Important?

Choosing the dissertation topics for Finance students is essential as it will influence the course of your research. It determines the direction and scope of your study. You must make sure that the Finance dissertation topics you choose are relevant to your field of interest, or you may end up finding it more challenging to write. Here are a few reasons why finance thesis topics are important:

1. Relevance

Opting for relevant finance thesis topics ensures that your research contributes to the existing body of knowledge and addresses contemporary issues in the field of Finance. Choosing a dissertation topic in Finance that is relevant to the industry can make a meaningful impact and advance understanding in your chosen area.

2. Personal Interest

Selecting Finance dissertation topics that align with your interests and career goals is vital. When genuinely passionate about your research area, you are more likely to stay motivated during the dissertation process. Your interest will drive you to explore the subject thoroughly and produce high-quality work.

3. Future Opportunities

Well-chosen Finance dissertation topics can open doors to various future opportunities. It can enhance your employability by showcasing your expertise in a specific finance area. It may lead to potential research collaborations and invitations to conferences in your field of interest.

4. Academic Supervision

Your choice of topics for dissertation in Finance also influences the availability of academic supervisors with expertise in your chosen area. Selecting a well-defined research area increases the likelihood of finding a supervisor to guide you effectively throughout the dissertation. Their knowledge and guidance will greatly contribute to the success of your research.

Writing Tips for Finance Dissertation

A lot of planning, formatting, and structuring goes into writing a dissertation. It starts with deciding on topics for a dissertation in Finance and conducting tons of research, deciding on methods, and so on. However, you can navigate the process more effectively with proper planning and organisation. Below are some tips to assist you along the way, and here is a blog on the 10 tips on writing a dissertation that can give you more information, should you need it!

1. Select a Manageable Topic

Choosing Finance research topics within the given timeframe and resources is important. Select a research area that interests you and aligns with your career goals. It will help you stay inspired throughout the dissertation process.

2. Conduct a Thorough Literature Review

A comprehensive literature review forms the backbone of your research. After choosing the Finance dissertation topics, dive deep into academic papers, books, and industry reports, gaining a solid understanding of your chosen area to identify research gaps and establish the significance of your study.

3. Define Clear Research Objectives

Clearly define your dissertation's research questions and objectives. It will provide a clear direction for your research and guide your data collection, analysis, and overall structure. Ensure your objectives are specific, measurable, achievable, relevant, and time-bound (SMART).

4. Collect and Analyse Data

Depending on your research methodology and your Finance dissertation topics, collect and analyze relevant data to support your findings. It may involve conducting surveys, interviews, experiments, and analyzing existing datasets. Choose appropriate statistical techniques and qualitative methods to derive meaningful insights from your data.

5. Structure and Organization

Pay attention to the structure and organization of your dissertation. Follow a logical progression of chapters and sections, ensuring that each chapter contributes to the overall coherence of your study. Use headings, subheadings, and clear signposts to guide the reader through your work.

6. Proofread and Edit

Once you have completed the writing process, take the time to proofread and edit your dissertation carefully. Check for clarity, coherence, and proper grammar. Ensure that your arguments are well-supported, and eliminate any inconsistencies or repetitions. Pay attention to formatting, citation styles, and consistency in referencing throughout your dissertation.

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Finance Dissertation Topics

Now that you know what a finance dissertation is and why they are important, it's time to have a look at some of the best Finance dissertation topics. For your convenience, we have segregated these topics into categories, including cryptocurrency, risk management, internet banking, and so many more. So, let's dive right in and explore the best Finance dissertation topics:

Dissertation topics in Finance related to Cryptocurrency

1. The Impact of Regulatory Frameworks on the Volatility and Liquidity of Cryptocurrencies.

2. Exploring the Factors Influencing Cryptocurrency Adoption: A Comparative Study.

3. Assessing the Efficiency and Market Integration of Cryptocurrency Exchanges.

4. An Analysis of the Relationship between Cryptocurrency Prices and Macroeconomic Factors.

5. The Role of Initial Coin Offerings (ICOs) in Financing Startups: Opportunities and Challenges.

Dissertation topics in Finance related to Risk Management

1. The Effectiveness of Different Risk Management Strategies in Mitigating Financial Risks in Banking Institutions.

2. The Role of Derivatives in Hedging Financial Risks: A Comparative Study.

3. Analyzing the Impact of Risk Management Practices on Firm Performance: A Case Study of a Specific Industry.

4. The Use of Stress Testing in Evaluating Systemic Risk: Lessons from the Global Financial Crisis.

5. Assessing the Relationship between Corporate Governance and Risk Management in Financial Institutions.

Dissertation topics in Finance related to Internet Banking

1. Customer Adoption of Internet Banking: An Empirical Study on Factors Influencing Usage.

Enhancing Security in Internet Banking: Exploring Biometric Authentication Technologies.

2. The Impact of Mobile Banking Applications on Customer Engagement and Satisfaction.

3. Evaluating the Efficiency and Effectiveness of Internet Banking Services in Emerging Markets.

4. The Role of Social Media in Shaping Customer Perception and Adoption of Internet Banking.

Dissertation topics in Finance related to Microfinance

1. The Impact of Microfinance on Poverty Alleviation: A Comparative Study of Different Models.

2. Exploring the Role of Microfinance in Empowering Women Entrepreneurs.

3. Assessing the Financial Sustainability of Microfinance Institutions in Developing Countries.

4. The Effectiveness of Microfinance in Promoting Rural Development: Evidence from a Specific Region.

5. Analyzing the Relationship between Microfinance and Entrepreneurial Success: A Longitudinal Study.

Dissertation topics in Finance related to Retail and Commercial Banking

1. The Impact of Digital Transformation on Retail and Commercial Banking: A Case Study of a Specific Bank.

2. Customer Satisfaction and Loyalty in Retail Banking: An Analysis of Service Quality Dimensions.

3. Analyzing the Relationship between Bank Branch Expansion and Financial Performance.

4. The Role of Fintech Startups in Disrupting Retail and Commercial Banking: Opportunities and Challenges.

5. Assessing the Impact of Mergers and Acquisitions on the Performance of Retail and Commercial Banks.

Dissertation topics in Finance related to Alternative Investment

1. The Performance and Risk Characteristics of Hedge Funds: A Comparative Analysis.

2. Exploring the Role of Private Equity in Financing and Growing Small and Medium-Sized Enterprises.

3. Analyzing the Relationship between Real Estate Investments and Portfolio Diversification.

4. The Potential of Impact Investing: Evaluating the Social and Financial Returns.

5. Assessing the Risk-Return Tradeoff in Cryptocurrency Investments: A Comparative Study.

Dissertation topics in Finance related to International Affairs

1. The Impact of Exchange Rate Volatility on International Trade: A Case Study of a Specific Industry.

2. Analyzing the Effectiveness of Capital Controls in Managing Financial Crises: Comparative Study of Different Countries.

3. The Role of International Financial Institutions in Promoting Economic Development in Developing Countries.

4. Evaluating the Implications of Trade Wars on Global Financial Markets.

5. Assessing the Role of Central Banks in Managing Financial Stability in a Globalized Economy.

Dissertation topics in Finance related to Sustainable Finance

1. The impact of sustainable investing on financial performance.

2. The role of green bonds in financing climate change mitigation and adaptation.

3. The development of carbon markets.

4. The use of environmental, social, and governance (ESG) factors in investment decision-making.

5. The challenges and opportunities of sustainable Finance in emerging markets.

Dissertation topics in Finance related to Investment Banking

1. The valuation of distressed assets.

2. The pricing of derivatives.

3. The risk management of financial institutions.

4. The regulation of investment banks.

5. The impact of technology on the investment banking industry.

Dissertation topics in Finance related to Actuarial Science

1. The development of new actuarial models for pricing insurance products.

2. The use of big data in actuarial analysis.

3. The impact of climate change on insurance risk.

4. The design of pension plans that are sustainable in the long term.

5. The use of actuarial science to manage risk in other industries, such as healthcare and Finance.

Tips To Find Good Finance Dissertation Topics

Embarking on a financial dissertation journey requires careful consideration of various factors. Your choice of topic in finance research topics is pivotal, as it sets the stage for the entire research process. Finding a good financial dissertation topic is essential to blend your interests with the current trends in the financial landscape. We suggest the following tips that can help you pick the perfect dissertation topic:

1. Identify your interests and strengths

2. Check for current relevance

3. Feedback from your superiors

4. Finalise the research methods

5. Gather the data

6. Work on the outline of your dissertation

7. Make a draft and proofread it

In this blog, we have discussed the importance of finance thesis topics and provided valuable writing tips and tips for finding the right topic, too. We have also presented a list of topics within various subfields of Finance. With this, we hope you have great ideas for finance dissertations. Good luck with your finance research journey!

Frequently Asked Questions

How do i research for my dissertation project topics in finance, what is the best topic for dissertation topics for mba finance, what is the hardest finance topic, how do i choose the right topic for my dissertation in finance, where can i find a dissertation topic in finance.

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Sustainable banking: a systematic review of concepts and measurements

Published: 10 May 2021
Volume 24 , pages 1–39, ( 2022 )

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Leticia da Silva Inácio ORCID: orcid.org/0000-0001-6398-6004 1 &
Ivete Delai 1

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The banking sector has a fundamental role in promoting sustainable development. Due to its performance as an intermediary, it can influence the pace and direction of this development, both by its customers and by its own business model. Measuring performance in this regard enables us to have a clearer view of strengths and weaknesses, improving the effectiveness of business decisions. Despite this relevance, there is still no consensus on what a sustainable bank is, and studies related to measurements in this sector are still incipient and incomplete. Considering this, this paper aims to identify the sustainability issues that have been evaluated in the banking sector. To do this, a systematic literature review was carried out with a content analysis of 63 papers. As a result, a broad view was obtained of the sustainability issues that were measured.

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Environmental-, social-, and governance-related factors for business investment and sustainability: a scientometric review of global trends

Mandatory CSR and sustainability reporting: economic analysis and literature review

What Is Sustainability? A Review of the Concept and Its Applications

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This research was supported by the Brazilian Coordination for Improvement of Personnel with Higher Education (CAPES), [Financing Code 001].

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da Silva Inácio, L., Delai, I. Sustainable banking: a systematic review of concepts and measurements. Environ Dev Sustain 24 , 1–39 (2022). https://doi.org/10.1007/s10668-021-01371-7

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Published: 08 June 2020

Deep learning in finance and banking: A literature review and classification

Jian Huang 1 ,
Junyi Chai ORCID: orcid.org/0000-0003-1560-845X 2 &
Stella Cho 2

Frontiers of Business Research in China volume 14 , Article number: 13 ( 2020 ) Cite this article

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Deep learning has been widely applied in computer vision, natural language processing, and audio-visual recognition. The overwhelming success of deep learning as a data processing technique has sparked the interest of the research community. Given the proliferation of Fintech in recent years, the use of deep learning in finance and banking services has become prevalent. However, a detailed survey of the applications of deep learning in finance and banking is lacking in the existing literature. This study surveys and analyzes the literature on the application of deep learning models in the key finance and banking domains to provide a systematic evaluation of the model preprocessing, input data, and model evaluation. Finally, we discuss three aspects that could affect the outcomes of financial deep learning models. This study provides academics and practitioners with insight and direction on the state-of-the-art of the application of deep learning models in finance and banking.

Introduction

Deep learning (DL) is an advanced technique of machine learning (ML) based on artificial neural network (NN) algorithms. As a promising branch of artificial intelligence, DL has attracted great attention in recent years. Compared with conventional ML techniques such as support vector machine (SVM) and k-nearest neighbors (kNN), DL possesses advantages of the unsupervised feature learning, a strong capability of generalization, and a robust training power for big data. Currently, DL has been applied comprehensively in classification and prediction tasks, computer visions, image processing, and audio-visual recognition (Chai and Li 2019 ). Although DL was developed in the field of computer science, its applications have penetrated diversified fields such as medicine, neuroscience, physics and astronomy, finance and banking (F&B), and operations management (Chai et al. 2013 ; Chai and Ngai 2020 ). The existing literature lacks a good overview of DL applications in F&B fields. This study attempts to bridge this gap.

While DL is the focus of computer vision (e.g., Elad and Aharon 2006 ; Guo et al. 2016 ) and natural language processing (e.g., Collobert et al. 2011 ) in the mainstream, DL applications in F&B are developing rapidly. Shravan and Vadlamani (2016) investigated the tools of text mining for F&B domains. They examined the representative ML algorithms, including SVM, kNN, genetic algorithm (GA), and AdaBoost. Butaru et al. ( 2016 ) compared performances of DL algorithms, including random forests, decision trees, and regularized logistic regression. They found that random forests gained the highest classification accuracy in the delinquency status.

Cavalcante et al. ( 2016 ) summarized the literature published from 2009 to 2015. They analyzed DL models, including multi-layer perceptron (MLP) (a fast library for approximate nearest neighbors), Chebyshev functional link artificial NN, and adaptive weighting NN. Although the study constructed a prediction framework in financial trading, some notable DL techniques such as long short-term memory (LSTM) and reinforcement learning (RL) models are neglect. Thus, the framework cannot ascertain the optimal model in a specific condition.

The reviews of the existing literature are either incomplete or outdated. However, our study provides a comprehensive and state-of-the-art review that could capture the relationships between typical DL models and various F&B domains. We identified critical conditions to limit our collection of articles. We employed academic databases in Science Direct, Springer-Link Journal, IEEE Xplore, Emerald, JSTOR, ProQuest Database, EBSCOhost Research Databases, Academic Search Premier, World Scientific Net, and Google Scholar to search for articles. We used two groups of keywords for our search. One group is related to the DL, including “deep learning,” “neural network,” “convolutional neural networks” (CNN), “recurrent neural network” (RNN), “LSTM,” and “RL.” The other group is related to finance, including “finance,” “market risk,” “stock risk,” “credit risk,” “stock market,” and “banking.” It is important to conduct cross searches between computer-science-related and finance-related literature. Our survey exclusively focuses on the financial application of DL models rather than other DL models like SVM, kNN, or random forest. The time range of our review was set between 2014 and 2018. In this stage, we collected more than 150 articles after cross-searching. We carefully reviewd each article and considered whether it is worthy of entering our pool of articles for review. We removed the articles if they are not from reputable journals or top professional conferences. Moreover, articles were discarded if the details of financial DL models presented were not clarified. Thus, 40 articles were selected for this review eventually.

This study contributes to the literature in the following ways. First, we systematically review the state-of-the-art applications of DL in F&B fields. Second, we summarize multiple DL models regarding specified F&B domains and identify the optimal DL model of various application scenarios. Our analyses rely on the data processing methods of DL models, including preprocessing, input data, and evaluation rules. Third, our review attempts to bridge the technological and application levels of DL and F&B, respectively. We recognize the features of various DL models and highlight their feasibility toward different F&B domains. The penetration of DL into F&B is an emerging trend. Researchers and financial analysts should know the feasibilities of particular DL models toward a specified financial domain. They usually face difficulties due to the lack of connections between core financial domains and numerous DL models. This study will fill this literature gap and guide financial analysts.

The rest of this paper is organized as follows. Section 2 provides a background of DL techniques. Section 3 introduces our research framework and methodology. Section 4 analyzes the established DL models. Section 5 analyzes key methods of data processing, including data preprocessing and data inputs. Section 6 captures appeared criteria for evaluating the performance of DL models. Section 7 provides a general comparison of DL models against identified F&B domains. Section 8 discusses the influencing factors in the performance of financial DL models. Section 9 concludes and outlines the scope for promising future studies.

Background of deep learning

Regarding DL, the term “deep” presents the multiple layers that exist in the network. The history of DL can be traced back to stochastic gradient descent in 1952, which is employed for an optimization problem. The bottleneck of DL at that time was the limit of computer hardware, as it was very time-consuming for computers to process the data. Today, DL is booming with the developments of graphics processing units (GPUs), dataset storage and processing, distributed systems, and software such as Tensor Flow. This section briefly reviews the basic concept of DL, including NN and deep neural network (DNN). All of these models have greatly contributed to the applications in F&B.

The basic structure of NN can be illustrated as Y = F ( X T w + c ) regarding the independent (input) variables X , the weight terms w , and the constant terms c . Y is the dependent variable and X is formed as an n × m matrix for the number of training sample n and the number of input variables m . To apply this structure in finance, Y can be considered as the price of next term, the credit risk level of clients, or the return rate of a portfolio. F is an activation function that is unique and different from regression models. F is usually formulated as sigmoid functions and tanh functions. Other functions can also be used, including ReLU functions, identity functions, binary step functions, ArcTan functions, ArcSinh functions, ISRU functions, ISRLU functions, and SQNL functions. If we combine several perceptrons in each layer and add a hidden layer from Z 1 to Z 4 in the middle, we term a single layer as a neural network, where the input layers are the X s , and the output layers are the Y s . In finance, Y can be considered as the stock price. Moreover, multiple Y s are also applicable; for instance, fund managers often care about future prices and fluctuations. Figure 1 illustrates the basic structure.

The structure of NN

Based on the basic structure of NN shown in Fig. 1 , traditional networks include DNN, backpropagation (BP), MLP, and feedforward neural network (FNN). Using these models can ignore the order of data and the significance of time. As shown in Fig. 2 , RNN has a new NN structure that can address the issues of long-term dependence and the order between input variables. As financial data in time series are very common, uncovering hidden correlations is critical in the real world. RNN can be better at solving this problem, as compared to other moving average (MA) methods that have been frequently adopted before. A detailed structure of RNN for a sequence over time is shown in Part B of the Appendix (see Fig. 7 in Appendix ).

The abstract structure of RNN

Although RNN can resolve the issue of time-series order, the issue of long-term dependencies remains. It is difficult to find the optimal weight for long-term data. LSTM, as a type of RNN, added a gated cell to overcome long-term dependencies by combining different activation functions (e.g., sigmoid or tanh). Given that LSTM is frequently used for forecasting in the finance literature, we extract LSTM from RNN models and name other structures of standard RNN as RNN(O).

As we focus on the application rather than theoretical DL aspect, this study will not consider other popular DL algorithms, including CNN and RL, as well as Latent variable models such as variational autoencoders and generative adversarial network. Table 6 in Appendix shows a legend note to explain the abbreviations used in this paper. We summarize the relationship between commonly used DL models in Fig. 3 .

Relationships of reviewed DL models for F&B domains

Research framework and methodology

Our research framework is illustrated in Fig. 4 . We combine qualitative and quantitative analyses of the articles in this study. Based on our review, we recognize and identify seven core F&B domains, as shown in Fig. 5 . To connect the DL side and the F&B side, we present our review on the application of the DL model in seven F&B domains in Section 4. It is crucial to analyze the feasibility of a DL model toward particular domains. To do so, we provide summarizations in three key aspects, including data preprocessing, data inputs, and evaluation rules, according to our collection of articles. Finally, we determine optimal DL models regarding the identified domains. We further discuss two common issues in using DL models for F&B: overfitting and sustainability.

The research framework of this study

The identified domains of F&B for DL applications

Figure 5 shows that the application domains can be divided into two major areas: (1) banking and credit risk and (2) financial market investment. The former contains two domains: credit risk prediction and macroeconomic prediction. The latter contains financial prediction, trading, and portfolio management. Prediction tasks are crucial, as emphasized by Cavalcante et al. ( 2016 ). We study this domain from three aspects of prediction, including exchange rate, stock market, and oil price. We illustrate this structure of application domains in F&B.

Figure 6 shows a statistic in the listed F&B domains. We illustrate the domains of financial applications on the X-axis and count the number of articles on the Y-axis. Note that a reviewed article could cover more than one domain in this figure; thus, the sum of the counts (45) is larger than the size of our review pool (40 articles). As shown in Fig. 6 , stock marketing prediction and trading dominate the listed domains, followed by exchange rate prediction. Moreover, we found two articles on banking credit risk and two articles on portfolio management. Price prediction and macroeconomic prediction are two potential topics that deserve more studies.

A count of articles over seven identified F&B domains

Application of DL models in F&B domains

Based on our review, six types of DL models are reported. They are FNN, CNN, RNN, RL, deep belief networks (DBN), and restricted Boltzmann machine (RBM). Regarding FNN, several papers use the alternative terms of backpropagation artificial neural network (ANN), FNN, MLP, and DNN. They have an identical structure. Regarding RNN, one of its well-known models in the time-series analysis is called LSTM. Nearly half of the reviewed articles apply FNN as the primary DL technique. Nine articles apply LSTM, followed by eight articles for RL, and six articles for RNN. Minor ones that are applied in F&B include CNN, DBM, and RBM. We count the number of articles that use various DL models in seven F&B domains, as shown in Table 1 . FNN is the principal model used in exchange rate, price, and macroeconomic predictions, as well as banking default risk and credit. LSTM and FNN are two kinds of popular models for stock market prediction. Differently, RL and FNN are frequently used regarding stock trading. FNN, RL, and simple RNN can be conducted in portfolio management. FNN is the primary model in macroeconomic and banking risk prediction. CNN, LSTM, and RL are emerging research approaches in banking risk prediction. The detailed statistics that contain specific articles can be found in Table 5 in Appendix .

Exchange rate prediction

Shen et al. ( 2015 ) construct an improved DBN model by including RBM and find that their model outperforms the random walk algorithm, auto-regressive-moving-average (ARMA), and FNN with fewer errors. Zheng et al. ( 2017 ) examine the performance of DBN and find that the DBN model estimates the exchange rate better than FNN model does. They find that a small number of layer nodes engender a more significant effect on DBN.

Several scholars believe that a hybrid model should have better performance. Ravi et al. ( 2017 ) contribute a hybrid model by using MLP (FNN), chaos theory, and multi-objective evolutionary algorithms. Their Chaos+MLP + NSGA-II model Footnote 1 has a mean squared error (MSE) with 2.16E-08 that is very low. Several articles point out that only a complicated neural network like CNN can gain higher accuracy. For example, Galeshchuk and Mukherjee ( 2017 ) conduct experiments and claim that a single hidden layer NN or SVM performs worse than a simple model like moving average (MA). However, they find that CNN could achieve higher classification accuracy in predicting the direction of the change of exchange rate because of successive layers of DNN.

Stock market prediction

In stock market prediction, some studies suggest that market news may influence the stock price and DL model, such as using a magic filter to extract useful information for price prediction. Matsubara et al. ( 2018 ) extract information from the news and propose a deep neural generative model to predict the movement of the stock price. This model combines DNN and a generative model. It suggests that this hybrid approach outperforms SVM and MLP.

Minh et al. ( 2017 ) develop a novel framework with two streams combining the gated recurrent unit network and the Stock2vec. It employs a word embedding and sentiment training system on financial news and the Harvard IV-4 dataset. They use the historical price and news-based signals from the model to predict the S&P500 and VN-index price directions. Their model shows that the two-stream gated recurrent unit is better than the gated recurrent unit or the LSTM. Jiang et al. ( 2018 ) establish a recurrent NN that extracts the interaction between the inner-domain and cross-domain of financial information. They prove that their model outperforms the simple RNN and MLP in the currency and stock market. Krausa and Feuerriegel ( 2017 ) propose that they can transform financial disclosure into a decision through the DL model. After training and testing, they point out that LSTM works better than the RNN and conventional ML methods such as ridge regression, Lasso, elastic net, random forest, SVR, AdaBoost, and gradient boosting. They further pre-train words embeddings with transfer learning (Krausa and Feuerriegel 2017 ). They conclude that better performance comes from LSTM with word embeddings. In the sentiment analysis, Sohangir et al. ( 2018 ) compares LSTM, doc2vec, and CNN to evaluate the stock opinions on the StockTwits. They conclude that CNN is the optimal model to predict the sentiment of authors. This result may be further applied to predict the stock market trend.

Data preprocessing is conducted to input data into the NN. Researchers may apply numeric unsupervised methods of feature extraction, including principal component analysis, autoencoder, RBM, and kNN. These methods can reduce the computational complexity and prevent overfitting. After the input of high-frequency transaction data, Chen et al. ( 2018b ) establish a DL model with an autoencoder and an RBM. They compare their model with backpropagation FNN, extreme learning machine, and radial basis FNN. They claim that their model can better predict the Chinese stock market. Chong et al. ( 2017 ) apply the principal component analysis (PCA) and RBM with high-frequency data of the South Korean market. They find that their model can explain the residual of the autoregressive model. The DL model can thus extract additional information and improve prediction performance. More so, Singh and Srivastava ( 2017 ) describe a model involving 2-directional and 2-dimensional (2D 2 ) PCA and DNN. Their model outperforms 2D 2 with radial basis FNN and RNN.

For time-series data, sometimes it is difficult to judge the weight of long-term and short-term data. The LSTM model is just for resolving this problem in financial prediction. The literature has attempted to prove that LSTM models are applicable and outperform conventional FNN models. Yan and Ouyang ( 2017 ) apply LSTM to challenge the MLP, SVM, and kNN in predicting a static and dynamic trend. After a wavelet decomposition and a reconstruction of the financial time series, their model can be used to predict a long-term dynamic trend. Baek and Kim ( 2018 ) apply LSTM not only in predicting the price of S&P500 and KOSPI200 but also in preventing overfitting. Kim and Won ( 2018 ) apply LSTM in the prediction of stock price volatility. They propose a hybrid model that combines LSTM with three generalized autoregressive conditional heteroscedasticity (GARCH)-type models. Hernandez and Abad ( 2018 ) argue that RBM is inappropriate for dynamic data modeling in the time-series analysis because it cannot retain memory. They apply a modified RBM model called p -RBM that can retain the memory of p past states. This model is used in predicting market directions of the NASDAQ-100 index. Compared with vector autoregression (VAR) and LSTM, notwithstanding, they find that LSTM is better because it can uncover the hidden structure within the non-linear data while VAR and p -RBM cannot capture the non-linearity in data.

CNN was established to predict the price with a complicated structure. Making the best use of historical price, Dingli and Fournier ( 2017 ) develop a new CNN model. This model can predict next month’s price. Their results cannot surpass other comparable models, such as logistic regression (LR) and SVM. Tadaaki ( 2018 ) applies the financial ratio and converts them into a “grayscale image” in the CNN model. The results reveal that CNN is more efficient than decision trees (DT), SVM, linear discriminant analysis, MLP, and AdaBoost. To predict the stock direction, Gunduz et al. ( 2017 ) establish a CNN model with a so-called specially ordered feature set whose classifier outperforms either CNN or LR.

Stock trading

Many studies adopt the conventional FNN model and try to set up a profitable trading system. Sezer et al. ( 2017 ) combine GA with MLP. Chen et al. ( 2017 ) adopt a double-layer NN and discover that its accuracy is better than ARMA-GARCH and single-layer NN. Hsu et al. ( 2018 ) equip the Black-Scholes model and a three-layer fully-connected feedforward network to estimate the bid-ask spread of option price. They argue that this novel model is better than the conventional Black-Scholes model with lower RMSE. Krauss et al. ( 2017 ) apply DNN, gradient-boosted-trees, and random forests in statistical arbitrage. They argue that their returns outperform the market index S&P500.

Several studies report that RNN and its derivate models are potential. Deng et al. ( 2017 ) extend the fuzzy learning into the RNN model. After comparing their model to different DL models like CNN, RNN, and LSTM, they claim that their model is the optimal one. Fischer and Krauss ( 2017 ) and Bao et al. ( 2017 ) argue that LSTM can create an optimal trading system. Fischer and Krauss ( 2017 ) claim that their model has a daily return of 0.46 and a sharp ratio of 5.8 prior to the transaction cost. Given the transaction cost, however, LSTM’s profitability fluctuated around zero after 2010. Bao et al. ( 2017 ) advance Fischer and Krauss’s ( 2017 ) work and propose a novel DL model (i.e., WSAEs-LSTM model). It uses wavelet transforms to eliminate noise, stacked autoencoders (SAEs) to predict stock price, and LSTM to predict the close price. The result shows that their model outperforms other models such as WLSTM, Footnote 2 LSTM, and RNN in predictive accuracy and profitability.

RL is popular recently despite its complexity. We find that five studies apply this model. Chen et al. ( 2018a ) propose an agent-based RL system to mimic 80% professional trading strategies. Feuerriegel and Prendinger ( 2016 ) convert the news sentiment into the signal in the trading system, although their daily returns and abnormal returns are nearly zero. Chakraborty ( 2019 ) cast the general financial market fluctuation into a stochastic control problem and explore the power of two RL models, including Q-learning Footnote 3 and state-action-reward-state-action (SARSA) algorithm. Both models can enhance profitability (e.g., 9.76% for Q-learning and 8.52% for SARSA). They outperform the buy-and-hold strategy. Footnote 4 Zhang and Maringer ( 2015 ) conduct a hybrid model called GA, with recurrent RL. GA is used to select an optimal combination of technical indicators, fundamental indicators, and volatility indicators. The out-of-sample trading performance is improved due to a significantly positive Sharpe ratio. Martinez-Miranda et al. ( 2016 ) create a new topic of trading. It uses a market manipulation scanner model rather than a trading system. They use RL to model spoofing-and-pinging trading. This study reveals that their model just works on the bull market. Jeong and Kim ( 2018 ) propose a model called deep Q-network that is constructed by RL, DNN, and transfer learning. They use transfer learning to solve the overfitting issue incurred as a result of insufficient data. They argue that the profit yields in this system increase by four times the amount in S&P500, five times in KOSPI, six times in EuroStoxx50, and 12 times in HIS.

Banking default risk and credit

Most articles in this domain focus on FNN applications. Rönnqvist and Sarlin ( 2017 ) propose a model for detecting relevant discussions in texting and extracting natural language descriptions of events. They convert the news into a signal of the bank-distress report. In their back-test, their model reflects the distressing financial event of the 2007–2008 period.

Zhu et al. ( 2018 ) propose a hybrid CNN model with a feature selection algorithm. Their model outperforms LR and random forest in consumer credit scoring. Wang et al. ( 2019 ) consider that online operation data can be used to predict consumer credit scores. They thus convert each kind of event into a word and apply the Event2vec model to transform the word into a vector in the LSTM network. The probability of default yields higher accuracy than other models. Jurgovsky et al. ( 2018 ) employs the LSTM to detect credit card fraud and find that LSTM can enhance detection accuracy.

Han et al. ( 2018 ) report a method that adopts RL to assess the credit risk. They claim that high-dimensional partial differential equations (PDEs) can be reformulated by using backward stochastic differential equations. NN approximates the gradient of the unknown solution. This model can be applied to F&B risk evaluation after considering all elements such as participating agents, assets, and resources, simultaneously.

Portfolio management

Song et al. ( 2017 ) establish a model after combining ListNet and RankNet to make a portfolio. They take a long position for the top 25% stocks and hold the short position for the bottom 25% stocks weekly. The ListNetlong-short model is the optimal one, which can achieve a return of 9.56%. Almahdi and Yang ( 2017 ) establish a better portfolio with a combination of RNN and RL. The result shows that the proposed trading system respond to transaction cost effects efficiently and outperform hedge fund benchmarks consistently.

Macroeconomic prediction

Sevim et al. ( 2014 ) develops a model with a back-propagation learning algorithm to predict the financial crises up to a year before it happened. This model contains three-layer perceptrons (i.e., MLP) and can achieve an accuracy rate of approximately 95%, which is superior to DT and LR. Chatzis et al. ( 2018 ) examine multiple models such as classification tree, SVM, random forests, DNN, and extreme gradient boosting to predict the market crisis. The results show that crises encourage persistence. Furthermore, using DNN increases the classification accuracy that makes global warning systems more efficient.

Price prediction

For price prediction, Sehgal and Pandey ( 2015 ) review ANN, SVM, wavelet, GA, and hybrid systems. They separate the time-series models into stochastic models, AI-based models, and regression models to predict oil prices. They reveal that researchers prevalently use MLP for price prediction.

Data preprocessing and data input

Data preprocessing.

Data preprocessing is conducted to denoise before data training of DL. This section summarizes the methods of data preprocessing. Multiple preprocessing techniques discussed in Part 4 include the principal component analysis (Chong et al. 2017 ), SVM (Gunduz et al. 2017 ), autoencoder, and RBM (Chen et al. 2018b ). There are several additional techniques of feature selection as follows.

Relief: The relief algorithm (Zhu et al. 2018 ) is a simple approach to weigh the importance of the feature. Based on NN algorithms, relief repeats the process for n times and divides each final weight vector by n . Thus, the weight vectors are the relevance vectors, and features are selected if their relevance is larger than the threshold τ .

Wavelet transforms: Wavelet transforms are used to fix the noise feature of the financial time series before feeding into a DL network. It is a widely used technique for filtering and mining single-dimensional signals (Bao et al. 2017 ).

Chi-square: Chi-square selection is commonly used in ML to measure the dependence between a feature and a class label. The representative usage is by Gunduz et al. ( 2017 ).

Random forest: Random forest algorithm is a two-stage process that contains random feature selection and bagging. The representative usage is by Fischer and Krauss ( 2017 ).

Data inputs

Data inputs are an important criterion for judging whether a DL model is feasible for particular F&B domains. This section summarizes the method of data inputs that have been adopted in the literature. Based on our review, five types of input data in the F&B domain can be presented. Table 2 provides a detailed summary of the input variable in F&B domains.

History price: The daily exchange rate can be considered as history price. The price can be the high, low, open, and close price of the stock. Related articles include Bao et al. ( 2017 ), Chen et al. ( 2017 ), Singh and Srivastava ( 2017 ), and Yan and Ouyang ( 2017 ).

Technical index: Technical indexes include MA, exponential MA, MA convergence divergence, and relative strength index. Related articles include Bao et al. ( 2017 ), Chen et al. ( 2017 ), Gunduz et al. ( 2017 ), Sezer et al. ( 2017 ), Singh and Srivastava ( 2017 ), and Yan and Ouyang ( 2017 ).

Financial news: Financial news covers financial message, sentiment shock score, and sentiment trend score. Related articles include Feuerriegel and Prendinger ( 2016 ), Krausa and Feuerriegel ( 2017 ), Minh et al. ( 2017 ), and Song et al. ( 2017 ).

Financial report data: Financial report data can account for items in the financial balance sheet or the financial report data (e.g., return on equity, return on assets, price to earnings ratio, and debt to equity ratio). Zhang and Maringer ( 2015 ) is a representative study on the subject.

Macroeconomic data: This kind of data includes macroeconomic variables. It may affect elements of the financial market, such as exchange rate, interest rate, overnight interest rate, and gross foreign exchange reserves of the central bank. Representative articles include Bao et al. ( 2017 ), Kim and Won ( 2018 ), and Sevim et al. ( 2014 ).

Stochastic data: Chakraborty ( 2019 ) provides a representative implementation.

Evaluation rules

It is critical to judge whether an adopted DL model works well in a particular financial domain. We, thus, need to consider evaluation systems of criteria for gauging the performance of a DL model. This section summarizes the evaluation rules of F&B-oriented DL models. Based on our review, three evaluation rules dominate: the error term, the accuracy index, and the financial index. Table 3 provides a detailed summary. The evaluation rules can be boiled down to the following categories.

Error term: Suppose Y t + i and F t + i are the real data and the prediction data, respectively, where m is the total number. The following is a summary of the functional formula commonly employed for evaluating DL models.

Mean Absolute Error (MAE): $ {\sum}_{i=1}^m\frac{\left|{Y}_{t+i}-{F}_{t+i}\right|}{m} $ ;

Mean Absolute Percent Error (MAPE): $ \frac{100}{m}{\sum}_{i=1}^m\frac{\left|{Y}_{t+i}-{F}_{t+i}\right|}{Y_{t+i}} $ ;

Mean Squared Error (MSE): $ {\sum}_{i=1}^m\frac{{\left({Y}_{t+i}-{F}_{t+i}\right)}^2}{m} $ ;

Root Mean Squared Error (RMSE): $ \sqrt{\sum_{i=1}^m\frac{{\left({Y}_{t+i}-{F}_{t+i}\right)}^2}{m}} $ ;

Normalized Mean Square Error (NMSE): $ \frac{1}{m}\frac{\sum {\left({Y}_{t+i}-{F}_{t+i}\right)}^2}{\mathit{\operatorname{var}}\left({Y}_{t+i}\right)} $ .

Accuracy index: According to Matsubara et al. ( 2018 ), we use TP, TN, FP, and FN to represent the number of true positives, true negatives, false positives, and false negatives, respectively, in a confusion matrix for classification evaluation. Based on our review, we summarize the accuracy indexes as follows.

Directional Predictive Accuracy (DPA): $ \frac{1}{N}{\sum}_{t=1}^N{D}_t $ , if ( Y t + 1 − Y t ) × ( F t + 1 − Y t ) ≥ 0, D t = 1, otherwise, D t = 0;

Actual Correlation Coefficient (ACC): $ \frac{TP+ TN}{TP+ FP+ FN+ TN} $ ;

Matthews Correlation Coefficient (MCC): $ \frac{TP\times TN- FP\times FN}{\sqrt{\left( TP+ FP\right)\left( TP+ FN\right)\left( TN+ FP\right)\left( TN+ FN\right)}} $ .

Financial index: Financial indexes involve total return, Sharp ratio, abnormal return, annualized return, annualized number of transaction, percentage of success, average profit percent per transaction, average transaction length, maximum profit percentage in the transaction, maximum loss percentage in the transaction, maximum capital, and minimum capital.

For the prediction by regressing the numeric dependent variables (e.g., exchange rate prediction or stock market prediction), evaluation rules are mostly error terms. For the prediction by classification in the category data (e.g., direction prediction on oil price), the accuracy indexes are widely conducted. For stock trading and portfolio management, financial indexes are the final evaluation rules.

General comparisons of DL models

This study identifies the most efficient DL model in each identified F&B domain. Table 4 illustrates our comparisons of the error terms in the pool of reviewed articles. Note that “A > B” means that the performance of model A is better than that of model B. “A + B” indicates the hybridization of multiple DL models.

At this point, we have summarized three methods of data processing in DL models against seven specified F&B domains, including data preprocessing, data inputs, and evaluation rules. Apart from the technical level of DL, we find the following:

NN has advantages in handling cross-sectional data;

RNN and LSTM are more feasible in handling time series data;

CNN has advantages in handling the data with multicollinearity.

Apart from application domains, we can induce the following viewpoints. Cross-sectional data usually appear in exchange rate prediction, price prediction, and macroeconomic prediction, for which NN could be the most feasible model. Time series data usually appear in stock market prediction, for which LSTM and RNN are the best options. Regarding stock trading, a feasible DL model requires the capabilities of decision and self-learning, for which RL can be the best. Moreover, CNN is more suitable for the multivariable environment of any F&B domains. As shown in the statistics of the Appendix , the frequency of using corresponding DL models corresponds to our analysis above. Selecting proper DL models according to the particular needs of financial analysis is usually challenging and crucial. This study provides several recommendations.

We summarize emerging DL models in F&B domains. Nevertheless, can these models refuse the efficient market hypothesis (EMH)? Footnote 5 According to the EMH, the financial market has its own discipline. There is no long-term technical tool that could outperform an efficient market. If so, using DL models may not be practical in long-term trading as it requires further experimental tests. However, why do most of the reviewed articles argue that their DL models of trading outperform the market returns? This argument has challenged the EMH. A possible explanation is that many DL algorithms are still challenging to apply in the real-world market. The DL models may raise trading opportunities to gain abnormal returns in the short-term. In the long run, however, many algorithms may lose their superiority, whereas EMH still works as more traders recognize the arbitrage gap offered by these DL models.

This section discusses three aspects that could affect the outcomes of DL models in finance.

Training and validation of data processing

The size of the training set.

The optimal way to improve the performance of models is by enhancing the size of the training data. Bootstrap can be used for data resampling, and generative adversarial network (GAN) can extend the data features. However, both can recognize numerical parts of features. Sometimes, the sample set is not diverse enough; thus, it loses its representativeness. Expanding the data size could make the model more unstable. The current literature reported diversified sizes of training sets. The requirements of data size in the training stage could vary by different F&B tasks.

The number of input factors

Input variables are independent variables. Based on our review, multi-factor models normally perform better than single-factor models in the case that the additional input factors are effective. In the time-series data model, long-term data have less prediction errors than that for a short period. The number of input factors depends on the employment of the DL structure and the specific environment of F&B tasks.

The quality of data

Several methods can be used to improve the data quality, including data cleaning (e.g., dealing with missing data), data normalization (e.g., taking the logarithm, calculating the changes of variables, and calculating the t -value of variables), feature selection (e.g., Chi-square test), and dimensionality reduction (e.g., PCA). Financial DL models require that the input variables should be interpretable in economics. When inputting the data, researchers should clarify the effective variables and noise. Several financial features, such as technical indexes, are likely to be created and added into the model.

Selection on structures of DL models

DL model selection should depend on problem domains and cases in finance. NN is suitable for processing cross-sectional data. LSTM and other RNNs are optimal choices for time-series data in prediction tasks. CNN can settle the multicollinearity issue through data compression. Latent variable models like GAN can be better for dimension reduction and clustering. RL is applicable in the cases with judgments like portfolio management and trading. The return levels and outcomes on RL can be affected significantly by environment (observation) definitions, situation probability transfer matrix, and actions.

The setting of objective functions and the convexity of evaluation rules

Objective function selection affects training processes and expected outcomes. For predictions on stock price, low MAE merely reflects the effectiveness of applied models in training; however, it may fail in predicting future directions. Therefore, it is vital for additional evaluation rules for F&B. Moreover, it can be more convenient to resolve the objective functions if they are convex.

The influence of overfitting (underfitting)

Overfitting (underfitting) commonly happens in using DL models, which is clearly unfavorable. A generated model performs perfectly in one case but usually cannot replicate good performance with the same model and identical coefficients. To solve this problem, we have to trade off the bias against variances. Bias posits that researchers prefer to keep it small to illustrate the superiority of their models. Generally, a deeper (i.e., more layered) NN model or neurons can reduce errors. However, it is more time-consuming and could reduce the feasibility of applied DL models.

One solution is to establish validation sets and testing sets for deciding the numbers of layers and neurons. After setting optimal coefficients in the validation set (Chong et al. 2017 ; Sevim et al. 2014 ), the result in the testing sets reveals the level of errors that could mitigate the effect of overfitting. One can input more samples of financial data to check the stability of the model’s performance. This method is known as the early stopping. It stops training more layers in the network once the testing result has achieved an optimal level.

Moreover, regularization is another approach to conquer the overfitting. Chong et al. ( 2017 ) introduces a constant term for the objective function and eventually reduces the variates of the result. Dropout is also a simple method to address overfitting. It reduces the dimensions and layers of the network (Minh et al. 2017 ; Wang et al. 2019 ). Finally, the data cleaning process (Baek and Kim 2018 ; Bao et al. 2017 ), to an extent, could mitigate the impact of overfitting.

Financial models

The sustainability of the model.

According to our reviews, the literature focus on evaluating the performance of historical data. However, crucial problems remain. Given that prediction is always complicated, the problem of how to justify the robustness of the used DL models in the future remains. More so, whether a DL model could survive in dynamic environments must be considered.

The following solutions could be considered. First, one can divide the data into two groups according to the time range; performance can subsequently be checked (e.g., using the data for the first 3 years to predict the performance of the fourth year). Second, the feature selection can be used in the data preprocessing, which could improve the sustainability of models in the long run. Third, stochastic data can be generated for each input variable by fixing them with a confidence interval, after which a simulation to examine the robustness of all possible future situations is conducted.

The popularity of the model

Whether a DL model is effective for trading is subject to the popularity of the model in the financial market. If traders in the same market conduct an identical model with limited information, they may run identical results and adopt the same trading strategy accordingly. Thus, they may lose money because their strategy could sell at a lower price after buying at a higher.

Conclusion and future works

Concluding remarks.

This paper provides a comprehensive survey of the literature on the application of DL in F&B. We carefully review 40 articles refined from a collection of 150 articles published between 2014 and 2018. The review and refinement are based on a scientific selection of academic databases. This paper first recognizes seven core F&B domains and establish the relationships between the domains and their frequently-used DL models. We review the details of each article under our framework. Importantly, we analyze the optimal models toward particular domains and make recommendations according to the feasibility of various DL models. Thus, we summarize three important aspects, including data preprocessing, data inputs, and evaluation rules. We further analyze the unfavorable impacts of overfitting and sustainability when applying DL models and provide several possible solutions. This study contributes to the literature by presenting a valuable accumulation of knowledge on related studies and providing useful recommendations for financial analysts and researchers.

Future works

Future studies can be conducted from the DL technical and F&B application perspectives. Regarding the perspective of DL techniques, training DL model for F&B is usually time-consuming. However, effective training could greatly enhance accuracy by reducing errors. Most of the functions can be simulated with considerable weights in complicated networks. First, one of the future works should focus on data preprocessing, such as data cleaning, to reduce the negative effect of data noise in the subsequent stage of data training. Second, further studies on how to construct layers of networks in the DL model are required, particularly when considering a reduction of the unfavorable effects of overfitting and underfitting. According to our review, the comparisons between the discussed DL models do not hinge on an identical source of input data, which renders these comparisons useless. Third, more testing regarding F&B-oriented DL models would be beneficial.

In addition to the penetration of DL techniques in F&B fields, more structures of DL models should be explored. From the perspective of F&B applications, the following problems need further research to investigate desirable solutions. In the case of financial planning, can a DL algorithm transfer asset recommendations to clients according to risk preferences? In the case of corporate finance, how can a DL algorithm benefit capital structure management and, thus, maximize the values of corporations? How can managers utilize DL technical tools to gauge the investment environment and financial data? How can they use such tools to optimize cash balances and cash inflow and outflow? Until recently, DL models like RL and generative adversarial networks are rarely used. More investigations on constructing DL structures for F&B regarding preferences would be beneficial. Finally, the developments of professional F&B software and system platforms that implement DL techniques are highly desirable.

Availability of data and materials

Not applicable.

In the model, NSGA stands for non-dominated sorting genetic algorithm.

A combination of Wavelet transforms (WT) and long-short term memory (LSTM) is called WLSTM in Bao et al. ( 2017 ).

Q-learning is a model-free reinforcement learning algorithm.

Buy-and-hold is a passive investment strategy in which an investor buys stocks (or ETFs) and holds them for a long period regardless of fluctuations in the market.

EMH was developed from a Ph.D. dissertation by economist Eugene Fama in the 1960s. It says that at any given time, stock prices reflect all available information and trade at exactly their fair value at all times. It is impossible to consistently choose stocks that will beat the returns of the overall stock market. Therefore, this hypothesis implies that the pursuit of market-beating performance is more about chance than it is about researching and selecting the right stocks.

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The constructive comments of the editor and three anonymous reviewers on an earlier version of this paper are greatly appreciated. The authors are indebted to seminar participants at 2019 China Accounting and Financial Innovation Form at Zhuhai for insightful discussions. The corresponding author thanks the financial supports from BNU-HKBU United International College Research Grant under Grant R202026.

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Financial technology and the future of banking

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This paper presents an analytical framework that describes the business model of banks. It draws on the classical theory of banking and the literature on digital transformation. It provides an explanation for existing trends and, by extending the theory of the banking firm, it illustrates how financial intermediation will be impacted by innovative financial technology applications. It further reviews the options that established banks will have to consider in order to mitigate the threat to their profitability. Deposit taking and lending are considered in the context of the challenge made from shadow banking and the all-digital banks. The paper contributes to an understanding of the future of banking, providing a framework for scholarly empirical investigation. In the discussion, four possible strategies are proposed for market participants, (1) customer retention, (2) customer acquisition, (3) banking as a service and (4) social media payment platforms. It is concluded that, in an increasingly digital world, trust will remain at the core of banking. That said, liquidity transformation will still have an important role to play. The nature of banking and financial services, however, will change dramatically.

Introduction

The bank of the future will have several different manifestations. This paper extends theory to explain the impact of financial technology and the Internet on the nature of banking. It provides an analytical framework for academic investigation, highlighting the trends that are shaping scholarly research into these dynamics. To do this, it re-examines the nature of financial intermediation and transactions. It explains how digital banking will be structurally, as well as physically, different from the banks described in the literature to date. It does this by extending the contribution of Klein ( 1971 ), on the theory of the banking firm. It presents suggested strategies for incumbent, and challenger banks, and how banking as a service and social media payment will reshape the competitive landscape.

The banking industry has been evolving since Banca Monte dei Paschi di Siena opened its doors in 1472. Its leveraged business model has proved very scalable over time, but it is now facing new challenges. Firstly, its book to capital ratios, as documented by Berger et al ( 1995 ), have been consistently falling since 1840. This trend continues as competition has increased. In the past decade, the industry has experienced declines in profitability as measured by return on tangible equity. This is partly the result of falling leverage and fee income and partly due to the net interest margin (connected to traditional lending activity). These trends accelerated following the 2008 financial crisis. At the same time, technology has made banks more competitive. Advances in digital technology are changing the very nature of banking. Banks are now distributing services via mobile technology. A prolonged period of very low interest rates is also having an impact. To sustain their profitability, Brei et al. ( 2020 ) note that many banks have increased their emphasis on fee-generating services.

As Fama ( 1980 ) explains, a bank is an intermediary. The Internet is, however, changing the way financial service providers conduct their role. It is fundamentally changing the nature of the banking. This in turn is changing the nature of banking services, and the way those services are delivered. As a consequence, in order to compete in the changing digital landscape, banks have to adapt. The banks of the future, both incumbents and challengers, need to address liquidity transformation, data, trust, competition, and the digitalization of financial services. Against this backdrop, incumbent banks are focused on reinventing themselves. The challenger banks are, however, starting with a blank canvas. The research questions that these dynamics pose need to be investigated within the context of the theory of banking, hence the need to revise the existing analytical framework.

Banks perform payment and transfer functions for an economy. The Internet can now facilitate and even perform these functions. It is changing the way that transactions are recorded on ledgers and is facilitating both public and private digital currencies. In the past, banks operated in a world of information asymmetry between themselves and their borrowers (clients), but this is changing. This differential gave one bank an advantage over another due to its knowledge about its clients. The digital transformation that financial technology brings reduces this advantage, as this information can be digitally analyzed.

Even the nature of deposits is being transformed. Banks in the future will have to accept deposits and process transactions made in digital form, either Central Bank Digital Currencies (CBDC) or cryptocurrencies. This presents a number of issues: (1) it changes the way financial services will be delivered, (2) it requires a discussion on resilience, security and competition in payments, (3) it provides a building block for better cross border money transfers and (4) it raises the question of private and public issuance of money. Braggion et al ( 2018 ) consider whether these represent a threat to financial stability.

The academic study of banking began with Edgeworth ( 1888 ). He postulated that it is based on probability. In this respect, the nature of the business model depends on the probability that a bank will not be called upon to meet all its liabilities at the same time. This allows banks to lend more than they have in deposits. Because of the resultant mismatch between long term assets and short-term liabilities, a bank’s capital structure is very sensitive to liquidity trade-offs. This is explained by Diamond and Rajan ( 2000 ). They explain that this makes a bank a’relationship lender’. In effect, they suggest a bank is an intermediary that has borrowed from other investors.

Diamond and Rajan ( 2000 ) argue a lender can negotiate repayment obligations and that a bank benefits from its knowledge of the customer. As shall be shown, the new generation of digital challenger banks do not have the same tradeoffs or knowledge of the customer. They operate more like a broker providing a platform for banking services. This suggests that there will be more than one type of bank in the future and several different payment protocols. It also suggests that banks will have to data mine customer information to improve their understanding of a client’s financial needs.

The key focus of Diamond and Rajan ( 2000 ), however, was to position a traditional bank is an intermediary. Gurley and Shaw ( 1956 ) describe how the customer relationship means a bank can borrow funds by way of deposits (liabilities) and subsequently use them to lend or invest (assets). In facilitating this mediation, they provide a service whereby they store money and provide a mechanism to transmit money. With improvements in financial technology, however, money can be stored digitally, lenders and investors can source funds directly over the internet, and money transfer can be done digitally.

A review of financial technology and banking literature is provided by Thakor ( 2020 ). He highlights that financial service companies are now being provided by non-deposit taking contenders. This paper addresses one of the four research questions raised by his review, namely how theories of financial intermediation can be modified to accommodate banks, shadow banks, and non-intermediated solutions.

To be a bank, an entity must be authorized to accept retail deposits. A challenger bank is, therefore, still a bank in the traditional sense. It does not, however, have the costs of a branch network. A peer-to-peer lender, meanwhile, does not have a deposit base and therefore acts more like a broker. This leads to the issue that this paper addresses, namely how the banks of the future will conduct their intermediation.

In order to understand what the bank of the future will look like, it is necessary to understand the nature of the aforementioned intermediation, and the way it is changing. In this respect, there are two key types of intermediation. These are (1) quantitative asset transformation and, (2) brokerage. The latter is a common model adopted by challenger banks. Figure 1 depicts how these two types of financial intermediation match savers with borrowers. To avoid nuanced distinction between these two types of intermediation, it is common to classify banks by the services they perform. These can be grouped as either private, investment, or commercial banking. The service sub-groupings include payments, settlements, fund management, trading, treasury management, brokerage, and other agency services.

How banks act as intermediaries between lenders and borrowers. This function call also be conducted by intermediaries as brokers, for example by shadow banks. Disintermediation occurs over the internet where peer-to-peer lenders match savers to lenders

Financial technology has the ability to disintermediate the banking sector. The competitive pressures this results in will shape the banks of the future. The channels that will facilitate this are shown in Fig. 2 , namely the Internet and/or mobile devices. Challengers can participate in this by, (1) directly matching borrows with savers over the Internet and, (2) distributing white labels products. The later enables banking as a service and avoids the aforementioned liquidity mismatch.

The strategic options banks have to match lenders with borrowers. The traditional and challenger banks are in the same space, competing for business. The distributed banks use the traditional and challenger banks to white label banking services. These banks compete with payment platforms on social media. The Internet heralds an era of banking as a service

There are also physical changes that are being made in the delivery of services. Bricks and mortar branches are in decline. Mobile banking, or m-banking as Liu et al ( 2020 ) describe it, is an increasingly important distribution channel. Robotics are increasingly being used to automate customer interaction. As explained by Vishnu et al ( 2017 ), these improve efficiency and the quality of execution. They allow for increased oversight and can be built on legacy systems as well as from a blank canvas. Application programming interfaces (APIs) are bringing the same type of functionality to m-banking. They can be used to authorize third party use of banking data. How banks evolve over time is important because, according to the OECD, the activity in the financial sector represents between 20 and 30 percent of developed countries Gross Domestic Product.

In summary, financial technology has evolved to a level where online banks and banking as a service are challenging incumbents and the nature of banking mediation. Banking is rapidly transforming because of changes in such technology. At the same time, the solving of the double spending problem, whereby digital money can be cryptographically protected, has led to the possibility that paper money will become redundant at some point in the future. A theoretical framework is required to understand this evolving landscape. This is discussed next.

The theory of the banking firm: a revision

In financial theory, as eloquently explained by Fama ( 1980 ), banking provides an accounting system for transactions and a portfolio system for the storage of assets. That will not change for the banks of the future. Fama ( 1980 ) explains that their activities, in an unregulated state, fulfil the Modigliani–Miller ( 1959 ) theorem of the irrelevance of the financing decision. In practice, traditional banks compete for deposits through the interest rate they offer. This makes the transactional element dependent on the resulting debits and credits that they process, essentially making banks into bookkeeping entities fulfilling the intermediation function. Since this is done in response to competitive forces, the general equilibrium is a passive one. As such, the banking business model is vulnerable to disruption, particularly by innovation in financial technology.

A bank is an idiosyncratic corporate entity due to its ability to generate credit by leveraging its balance sheet. That balance sheet has assets on one side and liabilities on the other, like any corporate entity. The assets consist of cash, lending, financial and fixed assets. On the other side of the balance sheet are its liabilities, deposits, and debt. In this respect, a bank’s equity and its liabilities are its source of funds, and its assets are its use of funds. This is explained by Klein ( 1971 ), who notes that a bank’s equity W , borrowed funds and its deposits B is equal to its total funds F . This is the same for incumbents and challengers. This can be depicted algebraically if we let incumbents be represented by Φ and challengers represented by Γ:

Klein ( 1971 ) further explains that a bank’s equity is therefore made up of its share capital and unimpaired reserves. The latter are held by a bank to protect the bank’s deposit clients. This part is also mandated by regulation, so as to protect customers and indeed the entire banking system from systemic failure. These protective measures include other prudential requirements to hold cash reserves or other liquid assets. As shall be shown, banking services can be performed over the Internet without these protections. Banking as a service, as this phenomenon known, is expected to increase in the future. This will change the nature of the protection available to clients. It will change the way banks transform assets, explained next.

A bank’s deposits are said to be a function of the proportion of total funds obtained through the issuance of the ith deposit type and its total funds F , represented by α i . Where deposits, represented by Bs , are made in the form of Bs (i = 1 *s n) , they generate a rate of interest. It follows that Si Bs = B . As such,

Therefor it can be said that,

The importance of Eq. 3 is that the balance sheet can be leveraged by the issuance of loans. It should be noted, however, that not all loans are returned to the bank in whole or part. Non-performing loans reduce the asset side of a bank’s balance sheet and act as a constraint on capital, and therefore new lending. Clearly, this is not the case with banking as a service. In that model, loans are brokered. That said, with the traditional model, an advantage of financial technology is that it facilitates the data mining of clients’ accounts. Lending can therefore be more targeted to borrowers that are more likely to repay, thereby reducing non-performing loans. Pari passu, the incumbent bank of the future will therefore have a higher risk-adjusted return on capital. In practice, however, banking as a service will bring greater competition from challengers and possible further erosion of margins. Alternatively, some banks will proactively engage in partnerships and acquisitions to maintain their customer base and address the competition.

A bank must have reserves to meet the demand of customers demanding their deposits back. The amount of these reserves is a key function of banking regulation. The Basel Committee on Banking Supervision mandates a requirement to hold various tiers of capital, so that banks have sufficient reserves to protect depositors. The Committee also imposes a framework for mitigating excessive liquidity risk and maturity transformation, through a set Liquidity Coverage Ratio and Net Stable Funding Ratio.

Recent revisions of theory, because of financial technology advances, have altered our understanding of banking intermediation. This will impact the competitive landscape and therefor shape the nature of the bank of the future. In this respect, the threat to incumbent banks comes from peer-to-peer Internet lending platforms. These perform the brokerage function of financial intermediation without the use of the aforementioned banking balance sheet. Unlike regulated deposit takers, such lending platforms do not create assets and do not perform risk and asset transformation. That said, they are reliant on investors who do not always behave in a counter cyclical way.

Financial technology in banking is not new. It has been used to facilitate electronic markets since the 1980’s. Thakor ( 2020 ) refers to three waves of application of financial innovation in banking. The advent of institutional futures markets and the changing nature of financial contracts fundamentally changed the role of banks. In response to this, academics extended the concept of a bank into an entity that either fulfills the aforementioned functions of a broker or a qualitative asset transformer. In this respect, they connect the providers and users of capital without changing the nature of the transformation of the various claims to that capital. This transformation can be in the form risk transfer or the application of leverage. The nature of trading of financial assets, however, is changing. Price discovery can now be done over the Internet and that is moving liquidity from central marketplaces (like the stock exchange) to decentralized ones.

Alongside these trends, in considering what the bank of the future will look like, it is necessary to understand the unregulated lending market that competes with traditional banks. In this part of the lending market, there has been a rise in shadow banks. The literature on these entities is covered by Adrian and Ashcraft ( 2016 ). Shadow banks have taken substantial market share from the traditional banks. They fulfil the brokerage function of banks, but regulators have only partial oversight of their risk transformation or leverage. The rise of shadow banks has been facilitated by financial technology and the originate to distribute model documented by Bord and Santos ( 2012 ). They use alternative trading systems that function as electronic communication networks. These facilitate dark pools of liquidity whereby buyers and sellers of bonds and securities trade off-exchange. Since the credit crisis of 2008, total broker dealer assets have diverged from banking assets. This illustrates the changed lending environment.

In the disintermediated market, banking as a service providers must rely on their equity and what access to funding they can attract from their online network. Without this they are unable to drive lending growth. To explain this, let I represent the online network. Extending Klein ( 1971 ), further let Ψ represent banking as a service and their total funds by F . This state is depicted as,

Theoretically, it can be shown that,

Shadow banks, and those disintermediators who bypass the banking system, have an advantage in a world where technology is ubiquitous. This becomes more apparent when costs are considered. Buchak et al. ( 2018 ) point out that shadow banks finance their originations almost entirely through securitization and what they term the originate to distribute business model. Diversifying risk in this way is good for individual banks, as banking risks can be transferred away from traditional banking balance sheets to institutional balance sheets. That said, the rise of securitization has introduced systemic risk into the banking sector.

Thus, we can see that the nature of banking capital is changing and at the same time technology is replacing labor. Let A denote the number of transactions per account at a period in time, and C denote the total cost per account per time period of providing the services of the payment mechanism. Klein ( 1971 ) points out that, if capital and labor are assumed to be part of the traditional banking model, it can be observed that,

It can therefore be observed that the total service charge per account at a period in time, represented by S, has a linear and proportional relationship to bank account activity. This is another variable that financial technology can impact. According to Klein ( 1971 ) this can be summed up in the following way,

where d is the basic bank decision variable, the service charge per transaction. Once again, in an automated and digital environment, financial technology greatly reduces d for the challenger banks. Swankie and Broby ( 2019 ) examine the impact of Artificial Intelligence on the evaluation of banking risk and conclude that it improves such variables.

Meanwhile, the traditional banking model can be expressed as a product of the number of accounts, M , and the average size of an account, N . This suggests a banks implicit yield is it rate of interest on deposits adjusted by its operating loss in each time period. This yield is generated by payment and loan services. Let R 1 depict this. These can be expressed as a fraction of total demand deposits. This is depicted by Klein ( 1971 ), if one assumes activity per account is constant, as,

As a result, whether a bank is structured with traditional labor overheads or built digitally, is extremely relevant to its profitability. The capital and labor of tradition banks, depicted as Φ i , is greater than online networks, depicted as I i . As such, the later have an advantage. This can be shown as,

What Klein (1972) failed to highlight is that the banking inherently involves leverage. Diamond and Dybving (1983) show that leverage makes bank susceptible to run on their liquidity. The literature divides these between adverse shock events, as explained by Bernanke et al ( 1996 ) or moral hazard events as explained by Demirgu¨¸c-Kunt and Detragiache ( 2002 ). This leverage builds on the balance sheet mismatch of short-term assets with long term liabilities. As such, capital and liquidity are intrinsically linked to viability and solvency.

The way capital and liquidity are managed is through credit and default management. This is done at a bank level and a supervisory level. The Basel Committee on Banking Supervision applies capital and leverage ratios, and central banks manage interest rates and other counter-cyclical measures. The various iterations of the prudential regulation of banks have moved the microeconomic theory of banking from the modeling of risk to the modeling of imperfect information. As mentioned, shadow and disintermediated services do not fall under this form or prudential regulation.

The relationship between leverage and insolvency risk crucially depends on the degree of banks total funds F and their liability structure L . In this respect, the liability structure of traditional banks is also greater than online networks which do not have the same level of available funds, depicted as,

Diamond and Dybvig ( 1983 ) observe that this liability structure is intimately tied to a traditional bank’s assets. In this respect, a bank’s ability to finance its lending at low cost and its ability to achieve repayment are key to its avoidance of insolvency. Online networks and/or brokers do not have to finance their lending, simply source it. Similarly, as brokers they do not face capital loss in the event of a default. This disintermediates the bank through the use of a peer-to-peer environment. These lenders and borrowers are introduced in digital way over the internet. Regulators have taken notice and the digital broker advantage might not last forever. As a result, the future may well see greater cooperation between these competing parties. This also because banks have valuable operational experience compared to new entrants.

It should also be observed that bank lending is either secured or unsecured. Interest on an unsecured loan is typically higher than the interest on a secured loan. In this respect, incumbent banks have an advantage as their closeness to the customer allows them to better understand the security of the assets. Berger et al ( 2005 ) further differentiate lending into transaction lending, relationship lending and credit scoring.

The evolution of the business model in a digital world

As has been demonstrated, the bank of the future in its various manifestations will be a consequence of the evolution of the current banking business model. There has been considerable scholarly investigation into the uniqueness of this business model, but less so on its changing nature. Song and Thakor ( 2010 ) are helpful in this respect and suggest that there are three aspects to this evolution, namely competition, complementary and co-evolution. Although liquidity transformation is evolving, it remains central to a bank’s role.

All the dynamics mentioned are relevant to the economy. There is considerable evidence, as outlined by Levine ( 2001 ), that market liberalization has a causal impact on economic growth. The impact of technology on productivity should prove positive and enhance the functioning of the domestic financial system. Indeed, market liberalization has already reshaped banking by increasing competition. New fee based ancillary financial services have become widespread, as has the proprietorial use of balance sheets. Risk has been securitized and even packaged into trade-able products.

Challenger banks are developing in a complementary way with the incumbents. The latter have an advantage over new entrants because they have information on their customers. The liquidity insurance model, proposed by Diamond and Dybvig ( 1983 ), explains how such banks have informational advantages over exchange markets. That said, financial technology changes these dynamics. It if facilitating the processing of financial data by third parties, explained in greater detail in the section on Open Banking.

At the same time, financial technology is facilitating banking as a service. This is where financial services are delivered by a broker over the Internet without resort to the balance sheet. This includes roboadvisory asset management, peer to peer lending, and crowd funding. Its growth will be facilitated by Open Banking as it becomes more geographically adopted. Figure 3 illustrates how these business models are disintermediating the traditional banking role and matching burrowers and savers.

The traditional view of banks ecosystem between savers and borrowers, atop the Internet which is matching savers and borrowers directly in a peer-to-peer way. The Klein ( 1971 ) theory of the banking firm does not incorporate the mirrored dynamics, and as such needs to be extended to reflect the digital innovation that impacts both borrowers and severs in a peer-to-peer environment

Meanwhile, the banking sector is co-evolving alongside a shadow banking phenomenon. Lenders and borrowers are interacting, but outside of the banking sector. This is a concern for central banks and banking regulators, as the lending is taking place in an unregulated environment. Shadow banking has grown because of financial technology, market liberalization and excess liquidity in the asset management ecosystem. Pozsar and Singh ( 2011 ) detail the non-bank/bank intersection of shadow banking. They point out that shadow banking results in reverse maturity transformation. Incumbent banks have blurred the distinction between their use of traditional (M2) liabilities and market-based shadow banking (non-M2) liabilities. This impacts the inter-generational transfers that enable a bank to achieve interest rate smoothing.

Securitization has transformed the risk in the banking sector, transferring it to asset management institutions. These include structured investment vehicles, securities lenders, asset backed commercial paper investors, credit focused hedge and money market funds. This in turn has led to greater systemic risk, the result of the nature of the non-traded liabilities of securitized pooling arrangements. This increased risk manifested itself in the 2008 credit crisis.

Commercial pressures are also shaping the banking industry. The drive for cost efficiency has made incumbent banks address their personally costs. Bank branches have been closed as technology has evolved. Branches make it easier to withdraw or transfer deposits and challenger banks are not as easily able to attract new deposits. The banking sector is therefore looking for new point of customer contact, such as supermarkets, post offices and social media platforms. These structural issues are occurring at the same time as the retail high street is also evolving. Banks have had an aggressive roll out of automated telling machines and a reduction in branches and headcount. Online digital transactions have now become the norm in most developed countries.

The financing of banks is also evolving. Traditional banks have tended to fund illiquid assets with short term and unstable liquid liabilities. This is one of the key contributors to the rise to the credit crisis of 2008. The provision of liquidity as a last resort is central to the asset transformation process. In this respect, the banking sector experienced a shock in 2008 in what is termed the credit crisis. The aforementioned liquidity mismatch resulted in the system not being able to absorb all the risks associated with subprime lending. Central banks had to resort to quantitative easing as a result of the failure of overnight funding mechanisms. The image of the entire banking sector was tarnished, and the banks of the future will have to address this.

The future must learn from the mistakes of the past. The structural weakness of the banking business model cannot be solved. That said, the latest Basel rules introduce further risk mitigation, improved leverage ratios and increased levels of capital reserve. Another lesson of the credit crisis was that there should be greater emphasis on risk culture, governance, and oversight. The independence and performance of the board, the experience and the skill set of senior management are now a greater focus of regulators. Internal controls and data analysis are increasingly more robust and efficient, with a greater focus on a banks stable funding ratio.

Meanwhile, the very nature of money is changing. A digital wallet for crypto-currencies fulfills much the same storage and transmission functions of a bank; and crypto-currencies are increasing being used for payment. Meanwhile, in Sweden, stores have the right to refuse cash and the majority of transactions are card based. This move to credit and debit cards, and the solving of the double spending problem, whereby digital money can be crypto-graphically protected, has led to the possibility that paper money could be replaced at some point in the future. Whether this might be by replacement by a CBDC, or decentralized digital offering, is of secondary importance to the requirement of banks to adapt. Whether accommodating crytpo-currencies or CBDC’s, Kou et al. ( 2021 ) recommend that banks keep focused on alternative payment and money transferring technologies.

Central banks also have to adapt. To limit disintermediation, they have to ensure that the economic design of their sponsored digital currencies focus on access for banks, interest payment relative to bank policy rate, banking holding limits and convertibility with bank deposits. All these developments have implications for banks, particularly in respect of funding, the secure storage of deposits and how digital currency interacts with traditional fiat money.

Open banking

Against the backdrop of all these trends and changes, a new dynamic is shaping the future of the banking sector. This is termed Open Banking, already briefly mentioned. This new way of handling banking data protocols introduces a secure way to give financial service companies consensual access to a bank’s customer financial information. Figure 4 illustrates how this works. Although a fairly simple concept, the implications are important for the banking industry. Essentially, a bank customer gives a regulated API permission to securely access his/her banking website. That is then used by a banking as a service entity to make direct payments and/or download financial data in order to provide a solution. It heralds an era of customer centric banking.

How Open Banking operates. The customer generates data by using his bank account. A third party provider is authorized to access that data through an API request. The bank confirms digitally that the customer has authorized the exchange of data and then fulfills the request

Open Banking was a response to the documented inertia around individual’s willingness to change bank accounts. Following the Retail Banking Review in the UK, this was addressed by lawmakers through the European Union’s Payment Services Directive II. The legislation was designed to make it easier to change banks by allowing customers to delegate authority to transfer their financial data to other parties. As a result of this, a whole host of data centric applications were conceived. Open banking adds further momentum to reshaping the future of banking.

Open Banking has a number of quite revolutionary implications. It was started so customers could change banks easily, but it resulted in some secondary considerations which are going to change the future of banking itself. It gives a clear view of bank financing. It allows aggregation of finances in one place. It also allows can give access to attractive offerings by allowing price comparisons. Open Banking API’s build a secure online financial marketplace based on data. They also allow access to a larger market in a faster way but the third-party providers for the new entrants. Open Banking allows developers to build single solutions on an API addressing very specific problems, like for example, a cash flow based credit rating.

Romānova et al. ( 2018 ) undertook a questionnaire on the Payment Services Directive II. The results suggest that Open Banking will promote competitiveness, innovation, and new product development. The initiative is associated with low costs and customer satisfaction, but that some concerns about security, privacy and risk are present. These can be mitigated, to some extent, by secure protocols and layered permission access.

Discussion: strategic options

Faced with these disruptive trends, there are four strategic options for market participants to con- sider. There are (1) a defensive customer retention strategy for incumbents, (2) an aggressive customer acquisition strategy for challenger banks (3) a banking as a service strategy for new entrants, and (4) a payments strategy for social media platforms.

Each of these strategies has to be conducted in a competitive marketplace for money demand by potential customers. Figure 5 illustrates where the first three strategies lie on the tradeoff between money demand and interest rates. The payment strategy can’t be modeled based on the supply of money. In the figure, the market settles at a rate L 2 . The incumbent banks have the capacity to meet the largest supply of these loans. The challenger banks have a constrained function but due to a lower cost base can gain excess rent through higher rates of interest. The peer-to-peer bank as a service brokers must settle for the market rate and a constrained supply offering.

The money demand M by lenders on the y axis. Interest rates on the y axis are labeled as r I and r II . The challenger banks are represented by the line labeled Γ. They have a price and technology advantage and so can lend at higher interest rates. The brokers are represented by the line labeled Ω. They are price takers, accepting the interest rate determined by the market. The same is true for the incumbents, represented by the line labeled Φ but they have a greater market share due to their customer relationships. Note that payments strategy for social media platforms is not shown on this figure as it is not affected by interest rates

Figure 5 illustrates that having a niche strategy is not counterproductive. Liu et al ( 2020 ) found that banks performing niche activities exhibit higher profitability and have lower risk. The syndication market now means that a bank making a loan does not have to be the entity that services it. This means banks in the future can better shape their risk profile and manage their lending books accordingly.

An interesting question for central banks is what the future Deposit Supply function will look like. If all three forms: open banking, traditional banking and challenger banks develop together, will the bank of the future have the same Deposit Supply function? The Klein ( 1971 ) general formulation assumes that deposits are increasing functions of implicit and explicit yields. As such, the very nature of central bank directed monetary policy may have to be revisited, as alluded to in the earlier discussion on digital money.

The client retention strategy (incumbents)

The competitive pressures suggest that incumbent banks need to focus on customer retention. Reichheld and Kenny ( 1990 ) found that the best way to do this was to focus on the retention of branch deposit customers. Obviously, another way is to provide a unique digital experience that matches the challengers.

Incumbent banks have a competitive advantage based on the information they have about their customers. Allen ( 1990 ) argues that where risk aversion is observable, information markets are viable. In other words, both bank and customer benefit from this. The strategic issue for them, therefore, becomes the retention of these customers when faced with greater competition.

Open Banking changes the dynamics of the banking information advantage. Borgogno and Colangelo ( 2020 ) suggest that the access to account (XS2A) rule that it introduced will increase competition and reduce information asymmetry. XS2A requires banks to grant access to bank account data to authorized third payment service providers.

The incumbent banks have a high-cost base and legacy IT systems. This makes it harder for them to migrate to a digital world. There are, however, also benefits from financial technology for the incumbents. These include reduced cost and greater efficiency. Financial technology can also now support platforms that allow incumbent banks to sell NPL’s. These platforms do not require the ownership of assets, they act as consolidators. The use of technology to monitor the transactions make the processing cost efficient. The unique selling point of such platforms is their centralized point of contact which results in a reduction in information asymmetry.

Incumbent banks must adapt a number of areas they got to adapt in terms of their liquidity transformation. They have to adapt the way they handle data. They must get customers to trust them in a digital world and the way that they trust them in a bricks and mortar world. It is no coincidence. When you go into a bank branch that is a great big solid building great big facade and so forth that is done deliberately so that you trust that bank with your deposit.

The risk of having rising non-performing loans needs to be managed, so customer retention should be selective. One of the puzzles in banking is why customers are regularly denied credit, rather than simply being charged a higher price for it. This credit rationing is often alleviated by collateral, but finance theory suggests value is based on the discounted sum of future cash flows. As such, it is conceivable that the bank of the future will use financial technology to provide innovative credit allocation solutions. That said, the dual risks of moral hazard and information asymmetries from the adoption of such solutions must be addressed.

Customer retention is especially important as bank competition is intensifying, as is the digitalization of financial services. Customer retention requires innovation, and that innovation has been moving at a very fast rate. Until now, banks have traditionally been hesitant about technology. More recently, mergers and acquisitions have increased quite substantially, initiated by a need to address actual or perceived weaknesses in financial technology.

The client acquisition strategy (challengers)

As intermediaries, the challenger banks are the same as incumbent banks, but designed from the outset to be digital. This gives them a cost and efficiency advantage. Anagnostopoulos ( 2018 ) suggests that the difference between challenger and traditional banks is that the former address its customers problems more directly. The challenge for such banks is customer acquisition.

Open Banking is a major advantage to challenger banks as it facilitates the changing of accounts. There is widespread dissatisfaction with many incumbent banks. Open Banking makes it easier to change accounts and also easier to get a transaction history on the client.

Customer acquisition can be improved by building trust in a brand. Historically, a bank was physically built in a very robust manner, hence the heavy architecture and grand banking halls. This was done deliberately to engender a sense of confidence in the deposit taking institution. Pure internet banks are not able to do this. As such, they must employ different strategies to convey stability. To do this, some communicate their sustainability credentials, whilst others use generational values-based advertising. Customer acquisition in a banking context is traditionally done by offering more attractive rates of interest. This is illustrated in Fig. 5 by the intersect of traditional banks with the market rate of interest, depicted where the line Γ crosses L 2 . As a result of the relationship with banking yield, teaser rates and introductory rates are common. A customer acquisition strategy has risks, as consumers with good credit can game different challenger banks by frequently changing accounts.

Most customer acquisition, however, is done based on superior service offering. The functionality of challenger banking accounts is often superior to incumbents, largely because the latter are built on legacy databases that have inter-operability issues. Having an open platform of services is a popular customer acquisition technique. The unrestricted provision of third-party products is viewed more favorably than a restricted range of products.

The banking as a service strategy (new entrants)

Banking from a customer’s perspective is the provision of a service. Customers don’t care about the maturity transformation of banking balance sheets. Banking as a service can be performed without recourse to these balance sheets. Banking products are brokered, mostly by new entrants, to individuals as services that can be subscribed to or paid on a fee basis.

There are a number banking as a service solutions including pre-paid and credit cards, lending and leasing. The banking as a service brokers are effectively those that are aggregating services from others using open banking to enable banking as a service.

The rise of banking as a service needs to be understood as these compete directly with traditional banks. As explained, some of these do this through peer-to-peer lending over the internet, others by matching borrows and sellers, conducting mediation as a loan broker. Such entities do not transform assets and do not have banking licenses. They do not have a branch network and often don not have access to deposits. This means that they have no insurance protection and can be subject to interest rate controls.

The new genre of financial technology, banking as a service provider, conduct financial services transformation without access to central bank liquidity. In a distributed digital asset world, the assets are stored on a distributed ledger rather than a traditional banking ledger. Financial technology has automated credit evaluation, savings, investments, insurance, trading, banking payments and risk management. These banking as a service offering are only as secure as the technology on which they are built.

The social media payment strategy (disintermediators and disruptors)

An intermediation bank is a conceptual idea, one created solely on a social networking site. Social media has developed a market for online goods and services. Williams ( 2018 ) estimates that there are 2.46 billion social media users. These all make and receive payments of some kind. They demand security and functionality. Importantly, they have often more clients than most banks. As such, a strategy to monetize the payments infrastructure makes sense.

All social media platforms are rich repositories of data. Such platforms are used to buy and sell things and that requires payments. Some platforms are considering evolving their own digital payment, cutting out the banks as middlemen. These include Facebook’s Diem (formerly Libra), a digital currency, and similar developments at some of the biggest technology companies. The risk with social media payment platform is that there is systemic counter-party protection. Regulators need to address this. One way to do this would be to extend payment service insurance to such platforms.

Social media as a platform moves the payment relationship from a transaction to a customer experience. The ability to use consumer desires in combination with financial data has the potential to deliver a number of new revenue opportunities. These will compete directly with the banks of the future. This will have implications for (1) the money supply, (2) the market share of traditional banks and, (3) the services that payment providers offer.

Further research

Several recommendations for research derive from both the impact of disintermediation and the four proposed strategies that will shape banking in the future. The recommendations and suggestions are based on the mentioned papers and the conclusions drawn from them.

As discussed, the nature of intermediation is changing, and this has implications for the pricing of risk. The role of interest rates in banking will have to be further reviewed. In a decentralized world based on crypto currencies the central banks do not have the same control over the money supply, This suggest the quantity theory of money and the liquidity preference theory need to be revisited. As explained, the Internet reduces much of the friction costs of intermediation. Researchers should ask how this will impact maturity transformation. It is also fair to ask whether at some point in the future there will just be one big bank. This question has already been addressed in the literature but the Internet facilities the possibility. Diamond ( 1984 ) and Ramakrishnan and Thakor ( 1984 ) suggested the answer was due to diversification and its impact on reducing monitoring costs.

Attention should be given by academics to the changing nature of banking risk. How should regulators, for example, address the moral hazard posed by challenger banks with weak balance sheets? What about deposit insurance? Should it be priced to include unregulated entities? Also, what criteria do borrowers use to choose non-banking intermediaries? The changing risk environment also poses two interesting practical questions. What will an online bank run look like, and how can it be averted? How can you establish trust in digital services?

There are also research questions related to the nature of competition. What, for example, will be the nature of cross border competition in a decentralized world? Is the credit rationing that generates competition a static or dynamic phenomena online? What is the value of combining consumer utility with banking services?

Financial intermediaries, like banks, thrive in a world of deficits and surpluses supported by information asymmetries and disconnectedness. The connectivity of the internet changes this dynamic. In this respect, the view of Schumpeter ( 1911 ) on the role of financial intermediaries needs revisiting. Lenders and borrows can be connected peer to peer via the internet.

All the dynamics mentioned change the nature of moral hazard. This needs further investigation. There has been much scholarly research on the intrinsic riskiness of the mismatch between banking assets and liabilities. This mismatch not only results in potential insolvency for a single bank but potentially for the whole system. There has, for example, been much debate on the whether a bank can be too big to fail. As a result of the riskiness of the banking model, the banks of the future will be just a liable to fail as the banks of the past.

This paper presented a revision of the theory of banking in a digital world. In this respect, it built on the work of Klein ( 1971 ). It provided an overview of the changing nature of banking intermediation, a result of the Internet and new digital business models. It presented the traditional academic view of banking and how it is evolving. It showed how this is adapted to explain digital driven disintermediation.

It was shown that the banking industry is facing several documented challenges. Risk is being taken of balance sheet, securitized, and brokered. Financial technology is digitalizing service delivery. At the same time, the very nature of intermediation is being changed due to digital currency. It is argued that the bank of the future not only has to face these competitive issues, but that technology will enhance the delivery of banking services and reduce the cost of their delivery.

The paper further presented the importance of the Open Banking revolution and how that facilitates banking as a service. Open Banking is increasing client churn and driving banking as a service. That in turn is changing the way products are delivered.

Four strategies were proposed to navigate the evolving competitive landscape. These are for incumbents to address customer retention; for challengers to peruse a low-cost digital experience; for niche players to provide banking as a service; and for social media platforms to develop payment platforms. In all these scenarios, the banks of the future will have to have digital strategies for both payments and service delivery.

It was shown that both incumbents and challengers are dependent on capital availability and borrowers credit concerns. Nothing has changed in that respect. The risks remain credit and default risk. What is clear, however, is the bank has become intrinsically linked with technology. The Internet is changing the nature of mediation. It is allowing peer to peer matching of borrowers and savers. It is facilitating new payment protocols and digital currencies. Banks need to evolve and adapt to accommodate these. Most of these questions are empirical in nature. The aim of this paper, however, was to demonstrate that an understanding of the banking model is a prerequisite to understanding how to address these and how to develop hypotheses connected with them.

In conclusion, financial technology is changing the future of banking and the way banks intermediate. It is facilitating digital money and the online transmission of financial assets. It is making banks more customer enteric and more competitive. Scholarly investigation into banking has to adapt. That said, whatever the future, trust will remain at the core of banking. Similarly, deposits and lending will continue to attract regulatory oversight.

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Fintech's Impact on the World of Business

Fintech, or financial technology, has been instrumental in reshaping the financial services industry, especially over the last fifteen years. It has disrupted traditional business models and created new opportunities for businesses and individuals alike, both in enterprise and consumer segments. Historically, applications of technology in the financial services and banking sector have been around since the 1950s and 1960s. Up until the mid-1990s, these financial technology applications were mostly confined to the backend or the non-consumer-facing aspects of financial services. People used to go to a traditional bank for their banking services in the nineties more and less the same way they have over the past few decades. While in the background, the transfer of money or the cashing of checks might have been increasingly achieved through financial technology, the consumer interaction was primarily person-to-person.

With the advent of the internet in the mid-1990s, we saw the first iterations of consumer-facing financial technology, although it was mostly static then. For instance, you could check your bank account balance online, and that was mostly it. Slowly though, that evolution continued to evolve until the mid-2000s when we had a Cambrian explosion of innovation in Fintech, primarily catalyzed by the advent of smartphones. Suddenly, everyone had a computer in their pocket that could always be on, connected, and equipped with a camera and GPS capabilities.

It wasn't long before banking and other forms of financial offerings became mobile-first, and the evolution continued at an even faster rate. In fact, there are several different areas where Fintech made a significant impact, including each with its own positive impact and potential negative consequences:

Payments and Money Transfers Digital banking, including mobile wallets, payment apps, and mobile payments, has made transactions faster, more convenient, and cheaper than before. Lending Peer-to-peer lending platforms and alternative credit scoring models have opened up new sources of capital for small businesses and individuals who may have struggled to obtain loans from traditional banks. Personal Finance Robo-advisors and budgeting apps have made financial planning and retirement management more accessible and affordable for consumers. Blockchain and Cryptocurrencies Digital currencies and blockchain technology have the potential to revolutionize the global economy and financial systems by increasing transparency, providing better access, enabling deeper automation, and further reducing the cost of financial products and transactions. Insurtech and Real Estate Tech Advanced data analytics and AI-driven solutions are transforming the insurance and real estate sectors, potentially making them more efficient, opening up new investment opportunities, and being customer-centric.

Every company nowadays, in essence, can be a Fintech company. You can provide financing without being a bank; you can provide payment services or payment solutions, or you can manage your own financial and treasury needs in a more efficient way. In fact, Fintech is at the core of many major companies, not just in finance; for instance, you can boil something as massive as Uber down into a database with scheduling and payment services. And you can extrapolate that example across many other companies to better appreciate the impact and potential of Fintech.

What Are Some Current Dynamics Affecting the Fintech Industry?

Currently, we are faced with systemic changes in the industry and its dynamic interactions with others. The current market gyrations are affecting many companies, and Fintech has additional layers of complexity, such as regulation, to contend with. Since the advent of modern financial technology in the way that we know it, we've been operating in a zero- or near-zero interest rate environment. The cost of capital has been quite low, and a lot of entrepreneurs or founders who started companies in this era may not have the experience of dealing with all the headwinds that they are now facing, from inflation to increasingly higher interest rates and subsequent rise in cost of capital – in short, the risk-reward dynamics have fundamentally changed. Time will tell how the changes will eventually play out, but we know that the old rules no longer apply. Looking forward, the future of technology in the financial industry and services across the board – from insurance to payments to lending to consumers and so on – will continue to shift dramatically, and while it is quite exciting to observe all the changes, it is imperative to proactively observe and formulate responses to disruptive innovation forces coming our way, whether you are an entrepreneur, an investor, an executive, or a board member.

What Is the Current Interplay Between Fintech Startups and Traditional Financial Institutions?

One could argue that, at first, larger institutions saw Fintech startups as a competitive threat, and there was this dichotomy that the two camps would always be in competition. While, to some extent, that's still the case, seeing the latest trends, there appears to be more of a shift toward collaboration as opposed to direct competition.

The reason for this is quite simple. Startups are very, very good at innovating at a fast pace. But they don't have distribution, and scaling is difficult. Large financial institutions have the brand names and, perhaps, the trust of the consumers. They are also quite adept at distribution, so a more collaborative approach would benefit both, notwithstanding some of the structural limitations that such a framework will entail.

For instance, selling to large financial institutions or integration is a huge undertaking. It takes a long time, requires a lot of effort, and needs buy-in from a lot of different groups like cybersecurity, legal, regulatory, marketing, strategy, and more. Eventually, despite some of the inherent challenges in financial services in general and Fintech in particular, this collaboration model is expected to continue becoming more prevalent.

What Challenges Do Executives Face When Confronted with Innovation Disruption Enabled by Fintech?

As Fintech continues to evolve and reshape the financial services industry and beyond, executives face several challenges in staying current with these changes – to name a few:

Keeping Up with Rapidly Changing Technologies With new Fintech innovations and more Fintech companies and startups emerging almost daily, it can be difficult for professionals to stay informed about the latest trends and developments. Regulatory Compliance The Fintech industry is subject to complex and evolving regulations that vary across different jurisdictions and business lines. Professionals must navigate this regulatory landscape to ensure compliance and avoid potential legal pitfalls. Talent Management The demand for skilled professionals is rising across the board, and companies must compete for top talent while upskilling their existing workforce. Integrating Fintech Solutions into Existing Business Models Incorporating new technologies and processes into established organizations can be challenging, particularly when it comes to integrating new Fintech solutions with legacy systems. Balancing Innovation and Security As businesses adopt new Fintech solutions, they must also ensure that their data and customer information remain secure and protected from cyber threats and fraud. Buy vs. Build Investment Considerations Whether one is an entrepreneur, an investor, or an executive, it is imperative to make sound judgments when it comes to responding to changing markets and consumer needs and developing solutions that meet such needs. This could be achieved via either buying an existing solution (e.g., M&A of startups) or through in-house research and development – each approach will entail specific analyses that cannot be complete without being abreast of the latest in the industry.

How Are Regulatory Bodies Interacting with the Financial Sector?

Regulation is a fundamental aspect of financial services and Fintech. The main challenge is that entrepreneurs and innovators are running much faster than regulators can keep pace, understandably so. Also, the complexity and sophistication of new technology involved and anticipating all implications pose another hurdle. Nonetheless, you can't be an entrepreneur, investor, or executive in Fintech without appreciating or operating within the regulatory framework, even at a high level, to know what is possible and what is permissible.

How Can Executives Navigate Fintech's Market Dynamics?

There are several ways for executives to stay on top of Fintech innovation and changes in the financial services industry to navigate market dynamics and challenges more effectively. These include: Embrace Continuous Learning Staying informed about Fintech's latest trends and developments requires a commitment to continuous learning. Read the latest financial technology news in old and new sources alike (e.g., The Financial Times , The New York Times , The Wall Street Journal , Protocol.com, and CoinDesk ), review industry reports from resources like McKinsey and Pitchbook, take classes, attend conferences, and engage with thought leaders to make sense and stay ahead of the rapidly changing landscape. Understand the Potential of Emerging Technologies Blockchain, Generative AI (artificial intelligence), machine learning, and other emerging technologies have the potential to revolutionize the financial services and banking industry in ways that were impossible to predict. Professionals must educate themselves about these technologies from a top-down perspective and explore their potential applications within their organizations. Develop a Regulatory Strategy Navigating the complex regulatory landscape of Fintech requires a well-defined strategy. Professionals should collaborate with legal and compliance experts to ensure that their organizations meet all regulatory requirements and avoid potential pitfalls. Foster a Culture of Innovation Encouraging innovation within an organization is critical to staying ahead in the rapidly evolving Fintech landscape. Create an environment that supports experimentation, collaboration, and responsible risk-taking to drive the adoption of new technologies and business models. Prioritize Cybersecurity & Data Protection As organizations adopt new Fintech solutions, ensuring data integrity, security, and privacy should remain a top priority. Develop robust cybersecurity strategies, invest in cutting-edge security technologies, and continuously train employees on best practices for protecting sensitive information from ever-evolving threats.

The Future of Fintech

There is always something new when it comes to Fintech. New buzzwords and hot topics appear almost daily, all within the context of Fintech solutions – Web 3.0, Insurtech, Generative AI, and more. While we can't go into great detail on each topic, we can give an overview of several solutions that address the future of Fintech. Some of these innovative technologies are still experimental technologies (for the most part), and there's still a lot of infrastructure that needs to be built for them to see broad use and applications. Nonetheless, they are all very exciting and interesting innovations that could fundamentally shift many industries in new directions, including financial services.

Data continues to be very important, both in the traditional financial sector and Fintech startups, enabling many tools leveraging AI and machine learning – everything from behavioral and transaction data to macro and economic data that all need to be treated responsibly and with care. We have to exercise caution regarding biases that machine learning-based solutions might introduce or perpetuate, among other concerns, to privacy, access, and inclusion. Yet, each is a very powerful tool in ensuring that we can reduce friction and cost and still be able to address needs that we couldn't do before, all the while creating more equitable access.

The Importance of Fintech Education

As Fintech continues to revolutionize the world of the finance industry, it's crucial for executives to stay current with the latest trends and developments. One way to do this is through targeted educational programs, such as Professor Farrokhnia's Future of Finance: Leveraging Fintech Innovation program offered by Columbia Business School Executive Education.

Designed to help professionals demystify the forces shaping the financial services industry, this dynamic program helps participants tackle key Fintech business questions without the need for any prior technical, math, or computer science background. It also explores the potential applications of emerging technologies and develops strategies for navigating the complex industry and regulatory environments.

By participating in this program, executives can gain valuable insights and tools to help them address the challenges they face in the rapidly evolving world of Fintech, stay ahead of the competition, and drive innovation within their organizations.

The Future of Finance: Leveraging Fintech Innovation

The world of Fintech is evolving at breakneck speed, reshaping the traditional financial services industry and creating new opportunities for businesses and individuals alike. As the market dynamics in Fintech continue to shift, executives must equip themselves with the knowledge and skills to navigate these changes and leverage the potential of emerging technologies.

Education plays a pivotal role in innovation literacy and preparing executives for the challenges and opportunities presented by Fintech. Programs like Future of Finance: Leveraging Fintech Innovation offer a targeted, expert-led approach to gaining the knowledge and skills needed to thrive in this dynamic landscape from both academic and practitioner perspectives. Don't miss the opportunity to stay ahead in the world of Fintech – invest in your education and embrace the future of finance today.

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Economic Effects of Tighter Lending by Banks

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FRBSF Economic Letter 2024-11 | May 6, 2024

Banks tightened the criteria used to approve loans over the past year. Analysis shows that their tighter lending standards can be partially explained by economic conditions that reduce demand for loans and increase their potential risk, such as policy rate increases and a slowing economy. The unexplained part may reflect a restrained credit supply, specifically related to banks being less willing or able to take on risk. What are the potential economic consequences? Past credit supply shocks have had significant long-lasting effects on unemployment but less impact on inflation.

The first half of 2023 was characterized by credit market turbulence, including the collapse of Silicon Valley Bank, Signature Bank, and others. The increased uncertainty in the banking sector that followed these closures led many banks to tighten their credit standards, becoming stricter about the conditions under which they were willing to lend. According to the Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS), lending standards in 2023 tightened to a degree only seen during the Global Financial Crisis and the COVID-19 pandemic. This leads to questions about the possible effects on the overall economy, particularly whether tighter standards resulted from an unexpected drop in the credit supply or other economic factors, such as higher interest rates or a slowing of the economy.

In this Economic Letter , I analyze supply and demand factors in credit market conditions and their impact on bank lending standards, like Lown and Morgan (2006) and others. A measure based on reports from bank loan officers shows that credit conditions began tightening in mid-2022, well before the bank closures. Since early 2023, about half of the tightening in lending standards has been due to changes in the credit supply specific to the banking sector, such as banks reevaluating their willingness to take on risk, and the remainder in response to other economic conditions. My analysis also estimates that unexpected changes to credit supply conditions—including the March 2023 bank closures—can account for 0.4 percentage point of unemployment by the end of 2023, meaning that unemployment in that quarter would have been 3.3% without the credit supply shock. My estimates suggest that the effects related to these credit supply shocks will be persistent, lasting through 2026. The contribution of these shocks to inflation is likely to be more subdued, pushing core personal consumption expenditures (PCE) inflation down by less than a 0.1 percentage point through 2026.

Bank lending standards and the economy

Bank lending to businesses depends on two key components: the loan interest rate and the lending standards that businesses need to meet to qualify for a loan. When banks are more willing to take on risk, they impose minimal lending standards; by contrast, when banks prefer to take on less risk, they scrutinize borrowers more and impose stricter conditions. The interest rate on loans responds to both credit supply and credit demand conditions. By contrast, lending standards are more directly related to the willingness or ability of banks to tolerate risk. Thus, they can be used as a proxy for credit supply conditions.

Using SLOOS data, I measure commercial and industrial bank lending conditions as the percentage of responding banks that report tighter lending standards minus the percentage that report easing of lending standards. The resulting measure can range from –100, meaning that all banks are easing standards, to 100, meaning that all banks are tightening standards. A positive (negative) number means that it is harder (easier) for firms to get credit. This method has been used by Lown and Morgan (2006) and other studies to measure credit supply conditions. Figure 1 shows the evolution of this measure from 2007 through 2023 for lending to medium and large businesses (blue line) and to small businesses (green line).

Figure 1 Tightening in commercial and industrial lending standards

The figure shows that lending standards tightened in 2023 to a degree seen only during the Global Financial Crisis in 2008 and the onset of the COVID-19 pandemic in 2020. It also clearly shows that lending standards began tightening in the second half of 2022, well before the bank collapses in early 2023. Finally, the tightening in 2023 lending standards was very similar for all businesses regardless of their size. Therefore, I use the measure for medium and large firms as representative for the economy.

I use this measure in statistical analysis to estimate how credit conditions interact with the rest of the economy, particularly to understand their impact on unemployment and inflation. To measure unemployment, I focus on the unemployment gap, calculated as the difference between the measured unemployment rate and the Congressional Budget Office measure of the potential unemployment rate, and I use the core personal consumption expenditures (PCE) price index to measure inflation.

My approach builds on the work of Lown and Morgan (2006), combining this measure of credit conditions with other measures of financial conditions. These include the effective federal funds rate, the 10-year Treasury constant maturity yield, the 30-year fixed mortgage rate spread relative to the 10-year Treasury yield, the BAA corporate bonds yield spread relative to 10-year Treasury bonds, and bank loans. Finally, to reflect forces that have recently been important in shaping the economy and inflation—namely supply chain pressures and significant changes in energy prices—I also include the West Texas Intermediate spot oil price, and the Federal Reserve Bank of New York’s Global Supply Chain Pressures Index. The analysis uses data from 1998 through the second quarter of 2023.

My statistical model considers interactions between the different variables within the same quarter and over time. The SLOOS lending standards measure is observed early in the quarter and corresponds to bank responses from the previous quarter. Shocks to this measure are thus identified as changes in lending standards that do not respond to other variables within the same quarter. That is, tightening of standards can respond to this identified shock in the same quarter, and to other types of shocks from previous quarters.

Figure 2 shows how much a 10 percentage point tightening in lending standards affects the unemployment gap and inflation. The horizontal axis shows the number of quarters since the shock took place. The vertical axis shows the increase in percentage points for each variable relative to the absence of tighter lending standards, with zero meaning no change in outcomes. The solid blue line is the median estimate, and the shaded areas represent the 70% (darker) and 90% (lighter) probability ranges of possible estimates.

Figure 2 Response of unemployment and inflation to a 10 percentage point tightening of lending standards

Note: Shading represents 70% (darker) and 90% (lighter) probability estimates around median estimate. Source: Senior Loan Officer Opinion Survey on Bank Lending Practices and author’s calculations.

Overall, the tightening in lending standards induces a persistent increase in the unemployment gap and a small drop in inflation. The impact on unemployment is expected: tighter lending standards imply that firms cannot invest as much, reducing demand for credit in the economy. With weaker demand, firms will hire fewer workers and lay off some of their workforce, leading to higher unemployment.

The impact on inflation is more nuanced. On the one hand, a weaker demand for credit eases price inflation. On the other hand, as documented in Gilchrist and Zakrajsek (2012), tighter lending standards are also associated with higher interest rates, which increase operational costs for firms. Firms will pass some of those higher costs to their customers, leading to price inflation. Model estimates suggest the demand effect is more likely to prevail, and inflation falls slightly on net in response to tighter lending standards.

What led to tight lending standards in 2023?

Was the 2023 tightening in lending standards a pure credit supply shock, or was it a natural response of banks to evolving economic conditions? To address this question, I compare actual data at each point in time with the model’s predictions for that time to extract each component’s response to past shocks. I use the results to determine how much of the actual response of each component is due to shocks of different sources—for example, how much of the changing lending standards comes from responses to supply chain shocks or credit supply shocks.

The analysis suggests that credit supply shocks account for about 23 percentage points of the tighter lending standards in the first half of 2023. The remaining 22 percentage points of the tightening is associated with the response of lending standards to changes in economic conditions due to supply chain pressures and other factors originating outside the credit market.

The measure also shows that lending standards started to tighten before 2023, as early as the second quarter of 2022, as shown in Figure 1. This suggests that inflationary pressures and monetary policy tightening in previous quarters played a role in banking conditions more generally. Therefore, tighter credit standards may be related to the bank collapses in that they shared similar root causes in recent economic and financial conditions. However, credit supply factors in the first half of 2023 that could be associated with bank closures explain only part of the overall tightening of lending standards. Furthermore, my model estimates that the impact of the credit supply shock on tighter lending standards will be relatively short lived, dissipating by the end of 2024.

I next use this methodology to estimate how much credit supply shocks contributed to unemployment and inflation in the recent past and how much they are expected to contribute through 2026. To do this, I combine the estimated size of the shocks with the estimated responses of the economy to those shocks. The bars in Figure 3 show the median estimated contribution to unemployment.

Figure 3 Contribution of credit supply shocks to unemployment

The estimated contribution for the last quarter of 2023 is 0.4 percentage point, which means that unemployment would have been 3.3% without the credit supply shock, rather than the 3.7% reported in the data. My analysis shows that, even though the tightening of lending standards is not expected to last long, the effects on unemployment are estimated to persist through 2026. For inflation, the contribution of the credit supply shock is more subdued but more persistent, pulling inflation down by less than 0.1 percentage point through the entire projection into 2026. A persistent increase in corporate bond yield spreads implied by the credit supply shock may explain why the effects on the rest of the economy last so long.

This analysis has several limitations, including the possibility that underlying economic relations changed with the COVID-19 pandemic. Related to this, the model is proportional, implying that a shock of twice the size would have effects that are also twice the reported size. However, the unusually large shocks in this analysis could trigger more than proportional economic responses—for example, if cascading bank failures induced snowball effects in the economy due to an increasingly fragile banking system. Finally, using different measures to proxy for financial and monetary policy conditions could result in different estimates, although my tests using different data yielded similar results to those reported here.

In the first half of 2023, lending standards tightened substantially. This Letter finds that only about half of the tightening resulted from a credit supply shock that would have caused a slowdown in economic activity, while the remainder corresponds to banks’ normal response to overall economic conditions. While a tightening of lending standards is not expected to persist for very long, this analysis suggests it could add half a percentage point to unemployment through 2024 and push down inflation by a small amount.

Lown, Cara, and Donald P. Morgan. 2006. “The Credit Cycle and the Business Cycle: New Findings Using the Loan Officer Opinion Survey.” Journal of Money Credit and Banking 38(6).

Simon Gilchrist and Egon Zakrajsek. 2012. “Credit Spreads and Business Cycle Fluctuations.” American Economic Review 102(4, June), pp. 1,692–1,720.

Opinions expressed in FRBSF Economic Letter do not necessarily reflect the views of the management of the Federal Reserve Bank of San Francisco or of the Board of Governors of the Federal Reserve System. This publication is edited by Anita Todd and Karen Barnes. Permission to reprint portions of articles or whole articles must be obtained in writing. Please send editorial comments and requests for reprint permission to [email protected]

McKinsey Global Private Markets Review 2024: Private markets in a slower era

At a glance, macroeconomic challenges continued.

McKinsey Global Private Markets Review 2024: Private markets: A slower era

If 2022 was a tale of two halves, with robust fundraising and deal activity in the first six months followed by a slowdown in the second half, then 2023 might be considered a tale of one whole. Macroeconomic headwinds persisted throughout the year, with rising financing costs, and an uncertain growth outlook taking a toll on private markets. Full-year fundraising continued to decline from 2021’s lofty peak, weighed down by the “denominator effect” that persisted in part due to a less active deal market. Managers largely held onto assets to avoid selling in a lower-multiple environment, fueling an activity-dampening cycle in which distribution-starved limited partners (LPs) reined in new commitments.

About the authors

This article is a summary of a larger report, available as a PDF, that is a collaborative effort by Fredrik Dahlqvist , Alastair Green , Paul Maia, Alexandra Nee , David Quigley , Aditya Sanghvi , Connor Mangan, John Spivey, Rahel Schneider, and Brian Vickery , representing views from McKinsey’s Private Equity & Principal Investors Practice.

Performance in most private asset classes remained below historical averages for a second consecutive year. Decade-long tailwinds from low and falling interest rates and consistently expanding multiples seem to be things of the past. As private market managers look to boost performance in this new era of investing, a deeper focus on revenue growth and margin expansion will be needed now more than ever.

Perspectives on a slower era in private markets

Global fundraising contracted.

Fundraising fell 22 percent across private market asset classes globally to just over $1 trillion, as of year-end reported data—the lowest total since 2017. Fundraising in North America, a rare bright spot in 2022, declined in line with global totals, while in Europe, fundraising proved most resilient, falling just 3 percent. In Asia, fundraising fell precipitously and now sits 72 percent below the region’s 2018 peak.

Despite difficult fundraising conditions, headwinds did not affect all strategies or managers equally. Private equity (PE) buyout strategies posted their best fundraising year ever, and larger managers and vehicles also fared well, continuing the prior year’s trend toward greater fundraising concentration.

The numerator effect persisted

Despite a marked recovery in the denominator—the 1,000 largest US retirement funds grew 7 percent in the year ending September 2023, after falling 14 percent the prior year, for example 1 “U.S. retirement plans recover half of 2022 losses amid no-show recession,” Pensions and Investments , February 12, 2024. —many LPs remain overexposed to private markets relative to their target allocations. LPs started 2023 overweight: according to analysis from CEM Benchmarking, average allocations across PE, infrastructure, and real estate were at or above target allocations as of the beginning of the year. And the numerator grew throughout the year, as a lack of exits and rebounding valuations drove net asset values (NAVs) higher. While not all LPs strictly follow asset allocation targets, our analysis in partnership with global private markets firm StepStone Group suggests that an overallocation of just one percentage point can reduce planned commitments by as much as 10 to 12 percent per year for five years or more.

Despite these headwinds, recent surveys indicate that LPs remain broadly committed to private markets. In fact, the majority plan to maintain or increase allocations over the medium to long term.

Investors fled to known names and larger funds

Fundraising concentration reached its highest level in over a decade, as investors continued to shift new commitments in favor of the largest fund managers. The 25 most successful fundraisers collected 41 percent of aggregate commitments to closed-end funds (with the top five managers accounting for nearly half that total). Closed-end fundraising totals may understate the extent of concentration in the industry overall, as the largest managers also tend to be more successful in raising non-institutional capital.

While the largest funds grew even larger—the largest vehicles on record were raised in buyout, real estate, infrastructure, and private debt in 2023—smaller and newer funds struggled. Fewer than 1,700 funds of less than $1 billion were closed during the year, half as many as closed in 2022 and the fewest of any year since 2012. New manager formation also fell to the lowest level since 2012, with just 651 new firms launched in 2023.

Whether recent fundraising concentration and a spate of M&A activity signals the beginning of oft-rumored consolidation in the private markets remains uncertain, as a similar pattern developed in each of the last two fundraising downturns before giving way to renewed entrepreneurialism among general partners (GPs) and commitment diversification among LPs. Compared with how things played out in the last two downturns, perhaps this movie really is different, or perhaps we’re watching a trilogy reusing a familiar plotline.

Dry powder inventory spiked (again)

Private markets assets under management totaled $13.1 trillion as of June 30, 2023, and have grown nearly 20 percent per annum since 2018. Dry powder reserves—the amount of capital committed but not yet deployed—increased to $3.7 trillion, marking the ninth consecutive year of growth. Dry powder inventory—the amount of capital available to GPs expressed as a multiple of annual deployment—increased for the second consecutive year in PE, as new commitments continued to outpace deal activity. Inventory sat at 1.6 years in 2023, up markedly from the 0.9 years recorded at the end of 2021 but still within the historical range. NAV grew as well, largely driven by the reluctance of managers to exit positions and crystallize returns in a depressed multiple environment.

Private equity strategies diverged

Buyout and venture capital, the two largest PE sub-asset classes, charted wildly different courses over the past 18 months. Buyout notched its highest fundraising year ever in 2023, and its performance improved, with funds posting a (still paltry) 5 percent net internal rate of return through September 30. And although buyout deal volumes declined by 19 percent, 2023 was still the third-most-active year on record. In contrast, venture capital (VC) fundraising declined by nearly 60 percent, equaling its lowest total since 2015, and deal volume fell by 36 percent to the lowest level since 2019. VC funds returned –3 percent through September, posting negative returns for seven consecutive quarters. VC was the fastest-growing—as well as the highest-performing—PE strategy by a significant margin from 2010 to 2022, but investors appear to be reevaluating their approach in the current environment.

Private equity entry multiples contracted

PE buyout entry multiples declined by roughly one turn from 11.9 to 11.0 times EBITDA, slightly outpacing the decline in public market multiples (down from 12.1 to 11.3 times EBITDA), through the first nine months of 2023. For nearly a decade leading up to 2022, managers consistently sold assets into a higher-multiple environment than that in which they had bought those assets, providing a substantial performance tailwind for the industry. Nowhere has this been truer than in technology. After experiencing more than eight turns of multiple expansion from 2009 to 2021 (the most of any sector), technology multiples have declined by nearly three turns in the past two years, 50 percent more than in any other sector. Overall, roughly two-thirds of the total return for buyout deals that were entered in 2010 or later and exited in 2021 or before can be attributed to market multiple expansion and leverage. Now, with falling multiples and higher financing costs, revenue growth and margin expansion are taking center stage for GPs.

Real estate receded

Demand uncertainty, slowing rent growth, and elevated financing costs drove cap rates higher and made price discovery challenging, all of which weighed on deal volume, fundraising, and investment performance. Global closed-end fundraising declined 34 percent year over year, and funds returned −4 percent in the first nine months of the year, losing money for the first time since the 2007–08 global financial crisis. Capital shifted away from core and core-plus strategies as investors sought liquidity via redemptions in open-end vehicles, from which net outflows reached their highest level in at least two decades. Opportunistic strategies benefited from this shift, with investors focusing on capital appreciation over income generation in a market where alternative sources of yield have grown more attractive. Rising interest rates widened bid–ask spreads and impaired deal volume across food groups, including in what were formerly hot sectors: multifamily and industrial.

Private debt pays dividends

Debt again proved to be the most resilient private asset class against a turbulent market backdrop. Fundraising declined just 13 percent, largely driven by lower commitments to direct lending strategies, for which a slower PE deal environment has made capital deployment challenging. The asset class also posted the highest returns among all private asset classes through September 30. Many private debt securities are tied to floating rates, which enhance returns in a rising-rate environment. Thus far, managers appear to have successfully navigated the rising incidence of default and distress exhibited across the broader leveraged-lending market. Although direct lending deal volume declined from 2022, private lenders financed an all-time high 59 percent of leveraged buyout transactions last year and are now expanding into additional strategies to drive the next era of growth.

Infrastructure took a detour

After several years of robust growth and strong performance, infrastructure and natural resources fundraising declined by 53 percent to the lowest total since 2013. Supply-side timing is partially to blame: five of the seven largest infrastructure managers closed a flagship vehicle in 2021 or 2022, and none of those five held a final close last year. As in real estate, investors shied away from core and core-plus investments in a higher-yield environment. Yet there are reasons to believe infrastructure’s growth will bounce back. Limited partners (LPs) surveyed by McKinsey remain bullish on their deployment to the asset class, and at least a dozen vehicles targeting more than $10 billion were actively fundraising as of the end of 2023. Multiple recent acquisitions of large infrastructure GPs by global multi-asset-class managers also indicate marketwide conviction in the asset class’s potential.

Private markets still have work to do on diversity

Private markets firms are slowly improving their representation of females (up two percentage points over the prior year) and ethnic and racial minorities (up one percentage point). On some diversity metrics, including entry-level representation of women, private markets now compare favorably with corporate America. Yet broad-based parity remains elusive and too slow in the making. Ethnic, racial, and gender imbalances are particularly stark across more influential investing roles and senior positions. In fact, McKinsey’s research reveals that at the current pace, it would take several decades for private markets firms to reach gender parity at senior levels. Increasing representation across all levels will require managers to take fresh approaches to hiring, retention, and promotion.

Artificial intelligence generating excitement

The transformative potential of generative AI was perhaps 2023’s hottest topic (beyond Taylor Swift). Private markets players are excited about the potential for the technology to optimize their approach to thesis generation, deal sourcing, investment due diligence, and portfolio performance, among other areas. While the technology is still nascent and few GPs can boast scaled implementations, pilot programs are already in flight across the industry, particularly within portfolio companies. Adoption seems nearly certain to accelerate throughout 2024.

Private markets in a slower era

If private markets investors entered 2023 hoping for a return to the heady days of 2021, they likely left the year disappointed. Many of the headwinds that emerged in the latter half of 2022 persisted throughout the year, pressuring fundraising, dealmaking, and performance. Inflation moderated somewhat over the course of the year but remained stubbornly elevated by recent historical standards. Interest rates started high and rose higher, increasing the cost of financing. A reinvigorated public equity market recovered most of 2022’s losses but did little to resolve the valuation uncertainty private market investors have faced for the past 18 months.

Within private markets, the denominator effect remained in play, despite the public market recovery, as the numerator continued to expand. An activity-dampening cycle emerged: higher cost of capital and lower multiples limited the ability or willingness of general partners (GPs) to exit positions; fewer exits, coupled with continuing capital calls, pushed LP allocations higher, thereby limiting their ability or willingness to make new commitments. These conditions weighed on managers’ ability to fundraise. Based on data reported as of year-end 2023, private markets fundraising fell 22 percent from the prior year to just over $1 trillion, the largest such drop since 2009 (Exhibit 1).

The impact of the fundraising environment was not felt equally among GPs. Continuing a trend that emerged in 2022, and consistent with prior downturns in fundraising, LPs favored larger vehicles and the scaled GPs that typically manage them. Smaller and newer managers struggled, and the number of sub–$1 billion vehicles and new firm launches each declined to its lowest level in more than a decade.

Despite the decline in fundraising, private markets assets under management (AUM) continued to grow, increasing 12 percent to $13.1 trillion as of June 30, 2023. 2023 fundraising was still the sixth-highest annual haul on record, pushing dry powder higher, while the slowdown in deal making limited distributions.

Investment performance across private market asset classes fell short of historical averages. Private equity (PE) got back in the black but generated the lowest annual performance in the past 15 years, excluding 2022. Closed-end real estate produced negative returns for the first time since 2009, as capitalization (cap) rates expanded across sectors and rent growth dissipated in formerly hot sectors, including multifamily and industrial. The performance of infrastructure funds was less than half of its long-term average and even further below the double-digit returns generated in 2021 and 2022. Private debt was the standout performer (if there was one), outperforming all other private asset classes and illustrating the asset class’s countercyclical appeal.

Private equity down but not out

Higher financing costs, lower multiples, and an uncertain macroeconomic environment created a challenging backdrop for private equity managers in 2023. Fundraising declined for the second year in a row, falling 15 percent to $649 billion, as LPs grappled with the denominator effect and a slowdown in distributions. Managers were on the fundraising trail longer to raise this capital: funds that closed in 2023 were open for a record-high average of 20.1 months, notably longer than 18.7 months in 2022 and 14.1 months in 2018. VC and growth equity strategies led the decline, dropping to their lowest level of cumulative capital raised since 2015. Fundraising in Asia fell for the fourth year of the last five, with the greatest decline in China.

Despite the difficult fundraising context, a subset of strategies and managers prevailed. Buyout managers collectively had their best fundraising year on record, raising more than $400 billion. Fundraising in Europe surged by more than 50 percent, resulting in the region’s biggest haul ever. The largest managers raised an outsized share of the total for a second consecutive year, making 2023 the most concentrated fundraising year of the last decade (Exhibit 2).

Despite the drop in aggregate fundraising, PE assets under management increased 8 percent to $8.2 trillion. Only a small part of this growth was performance driven: PE funds produced a net IRR of just 2.5 percent through September 30, 2023. Buyouts and growth equity generated positive returns, while VC lost money. PE performance, dating back to the beginning of 2022, remains negative, highlighting the difficulty of generating attractive investment returns in a higher interest rate and lower multiple environment. As PE managers devise value creation strategies to improve performance, their focus includes ensuring operating efficiency and profitability of their portfolio companies.

Deal activity volume and count fell sharply, by 21 percent and 24 percent, respectively, which continued the slower pace set in the second half of 2022. Sponsors largely opted to hold assets longer rather than lock in underwhelming returns. While higher financing costs and valuation mismatches weighed on overall deal activity, certain types of M&A gained share. Add-on deals, for example, accounted for a record 46 percent of total buyout deal volume last year.

Real estate recedes

For real estate, 2023 was a year of transition, characterized by a litany of new and familiar challenges. Pandemic-driven demand issues continued, while elevated financing costs, expanding cap rates, and valuation uncertainty weighed on commercial real estate deal volumes, fundraising, and investment performance.

Managers faced one of the toughest fundraising environments in many years. Global closed-end fundraising declined 34 percent to $125 billion. While fundraising challenges were widespread, they were not ubiquitous across strategies. Dollars continued to shift to large, multi-asset class platforms, with the top five managers accounting for 37 percent of aggregate closed-end real estate fundraising. In April, the largest real estate fund ever raised closed on a record $30 billion.

Capital shifted away from core and core-plus strategies as investors sought liquidity through redemptions in open-end vehicles and reduced gross contributions to the lowest level since 2009. Opportunistic strategies benefited from this shift, as investors turned their attention toward capital appreciation over income generation in a market where alternative sources of yield have grown more attractive.

In the United States, for instance, open-end funds, as represented by the National Council of Real Estate Investment Fiduciaries Fund Index—Open-End Equity (NFI-OE), recorded $13 billion in net outflows in 2023, reversing the trend of positive net inflows throughout the 2010s. The negative flows mainly reflected $9 billion in core outflows, with core-plus funds accounting for the remaining outflows, which reversed a 20-year run of net inflows.

As a result, the NAV in US open-end funds fell roughly 16 percent year over year. Meanwhile, global assets under management in closed-end funds reached a new peak of $1.7 trillion as of June 2023, growing 14 percent between June 2022 and June 2023.

Real estate underperformed historical averages in 2023, as previously high-performing multifamily and industrial sectors joined office in producing negative returns caused by slowing demand growth and cap rate expansion. Closed-end funds generated a pooled net IRR of −3.5 percent in the first nine months of 2023, losing money for the first time since the global financial crisis. The lone bright spot among major sectors was hospitality, which—thanks to a rush of postpandemic travel—returned 10.3 percent in 2023. 2 Based on NCREIFs NPI index. Hotels represent 1 percent of total properties in the index. As a whole, the average pooled lifetime net IRRs for closed-end real estate funds from 2011–20 vintages remained around historical levels (9.8 percent).

Global deal volume declined 47 percent in 2023 to reach a ten-year low of $650 billion, driven by widening bid–ask spreads amid valuation uncertainty and higher costs of financing (Exhibit 3). 3 CBRE, Real Capital Analytics Deal flow in the office sector remained depressed, partly as a result of continued uncertainty in the demand for space in a hybrid working world.

During a turbulent year for private markets, private debt was a relative bright spot, topping private markets asset classes in terms of fundraising growth, AUM growth, and performance.

Fundraising for private debt declined just 13 percent year over year, nearly ten percentage points less than the private markets overall. Despite the decline in fundraising, AUM surged 27 percent to $1.7 trillion. And private debt posted the highest investment returns of any private asset class through the first three quarters of 2023.

Private debt’s risk/return characteristics are well suited to the current environment. With interest rates at their highest in more than a decade, current yields in the asset class have grown more attractive on both an absolute and relative basis, particularly if higher rates sustain and put downward pressure on equity returns (Exhibit 4). The built-in security derived from debt’s privileged position in the capital structure, moreover, appeals to investors that are wary of market volatility and valuation uncertainty.

Direct lending continued to be the largest strategy in 2023, with fundraising for the mostly-senior-debt strategy accounting for almost half of the asset class’s total haul (despite declining from the previous year). Separately, mezzanine debt fundraising hit a new high, thanks to the closings of three of the largest funds ever raised in the strategy.

Over the longer term, growth in private debt has largely been driven by institutional investors rotating out of traditional fixed income in favor of private alternatives. Despite this growth in commitments, LPs remain underweight in this asset class relative to their targets. In fact, the allocation gap has only grown wider in recent years, a sharp contrast to other private asset classes, for which LPs’ current allocations exceed their targets on average. According to data from CEM Benchmarking, the private debt allocation gap now stands at 1.4 percent, which means that, in aggregate, investors must commit hundreds of billions in net new capital to the asset class just to reach current targets.

Private debt was not completely immune to the macroeconomic conditions last year, however. Fundraising declined for the second consecutive year and now sits 23 percent below 2021’s peak. Furthermore, though private lenders took share in 2023 from other capital sources, overall deal volumes also declined for the second year in a row. The drop was largely driven by a less active PE deal environment: private debt is predominantly used to finance PE-backed companies, though managers are increasingly diversifying their origination capabilities to include a broad new range of companies and asset types.

Infrastructure and natural resources take a detour

For infrastructure and natural resources fundraising, 2023 was an exceptionally challenging year. Aggregate capital raised declined 53 percent year over year to $82 billion, the lowest annual total since 2013. The size of the drop is particularly surprising in light of infrastructure’s recent momentum. The asset class had set fundraising records in four of the previous five years, and infrastructure is often considered an attractive investment in uncertain markets.

While there is little doubt that the broader fundraising headwinds discussed elsewhere in this report affected infrastructure and natural resources fundraising last year, dynamics specific to the asset class were at play as well. One issue was supply-side timing: nine of the ten largest infrastructure GPs did not close a flagship fund in 2023. Second was the migration of investor dollars away from core and core-plus investments, which have historically accounted for the bulk of infrastructure fundraising, in a higher rate environment.

The asset class had some notable bright spots last year. Fundraising for higher-returning opportunistic strategies more than doubled the prior year’s total (Exhibit 5). AUM grew 18 percent, reaching a new high of $1.5 trillion. Infrastructure funds returned a net IRR of 3.4 percent in 2023; this was below historical averages but still the second-best return among private asset classes. And as was the case in other asset classes, investors concentrated commitments in larger funds and managers in 2023, including in the largest infrastructure fund ever raised.

The outlook for the asset class, moreover, remains positive. Funds targeting a record amount of capital were in the market at year-end, providing a robust foundation for fundraising in 2024 and 2025. A recent spate of infrastructure GP acquisitions signal multi-asset managers’ long-term conviction in the asset class, despite short-term headwinds. Global megatrends like decarbonization and digitization, as well as revolutions in energy and mobility, have spurred new infrastructure investment opportunities around the world, particularly for value-oriented investors that are willing to take on more risk.

Private markets make measured progress in DEI

Diversity, equity, and inclusion (DEI) has become an important part of the fundraising, talent, and investing landscape for private market participants. Encouragingly, incremental progress has been made in recent years, including more diverse talent being brought to entry-level positions, investing roles, and investment committees. The scope of DEI metrics provided to institutional investors during fundraising has also increased in recent years: more than half of PE firms now provide data across investing teams, portfolio company boards, and portfolio company management (versus investment team data only). 4 “ The state of diversity in global private markets: 2023 ,” McKinsey, August 22, 2023.

In 2023, McKinsey surveyed 66 global private markets firms that collectively employ more than 60,000 people for the second annual State of diversity in global private markets report. 5 “ The state of diversity in global private markets: 2023 ,” McKinsey, August 22, 2023. The research offers insight into the representation of women and ethnic and racial minorities in private investing as of year-end 2022. In this chapter, we discuss where the numbers stand and how firms can bring a more diverse set of perspectives to the table.

The statistics indicate signs of modest advancement. Overall representation of women in private markets increased two percentage points to 35 percent, and ethnic and racial minorities increased one percentage point to 30 percent (Exhibit 6). Entry-level positions have nearly reached gender parity, with female representation at 48 percent. The share of women holding C-suite roles globally increased 3 percentage points, while the share of people from ethnic and racial minorities in investment committees increased 9 percentage points. There is growing evidence that external hiring is gradually helping close the diversity gap, especially at senior levels. For example, 33 percent of external hires at the managing director level were ethnic or racial minorities, higher than their existing representation level (19 percent).

Yet, the scope of the challenge remains substantial. Women and minorities continue to be underrepresented in senior positions and investing roles. They also experience uneven rates of progress due to lower promotion and higher attrition rates, particularly at smaller firms. Firms are also navigating an increasingly polarized workplace today, with additional scrutiny and a growing number of lawsuits against corporate diversity and inclusion programs, particularly in the US, which threatens to impact the industry’s pace of progress.

Fredrik Dahlqvist is a senior partner in McKinsey’s Stockholm office; Alastair Green is a senior partner in the Washington, DC, office, where Paul Maia and Alexandra Nee are partners; David Quigley is a senior partner in the New York office, where Connor Mangan is an associate partner and Aditya Sanghvi is a senior partner; Rahel Schneider is an associate partner in the Bay Area office; John Spivey is a partner in the Charlotte office; and Brian Vickery is a partner in the Boston office.

The authors wish to thank Jonathan Christy, Louis Dufau, Vaibhav Gujral, Graham Healy-Day, Laura Johnson, Ryan Luby, Tripp Norton, Alastair Rami, Henri Torbey, and Alex Wolkomir for their contributions

The authors would also like to thank CEM Benchmarking and the StepStone Group for their partnership in this year's report.

This article was edited by Arshiya Khullar, an editor in the Gurugram office.

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Availability of Funds and Collection of Checks (Regulation CC) Threshold Adjustments

The Board of Governors of the Federal Reserve System (Board) and the Consumer Financial Protection Bureau (CFPB) are amending Regulation CC, which implements the Expedited Funds Availability Act (EFA Act), to adjust for inflation dollar amounts relating to availability of funds. In 2019, the Board and the CFPB finalized a rule that formally set a methodology for inflation adjustments which occur every five years.

May 13, 2024

As a result of the 21.8 percent increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers between July 2018 and July 2023, the following thresholds are effective from July 1, 2025 for five years:

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As a result of the 10.5 percent increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers between July 2011 and July 2018, the following thresholds are effective from July 1, 2020 for five years:

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