McKinsey Report: As AI financial advisors rise, client funds will flow to high-yield products, shrinking bank industry profits by $170 billion.

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The rise of artificial intelligence is fundamentally challenging the global banking industry. According to a recent report by McKinsey & Co., as AI financial advisors capable of automatically optimizing savings become increasingly popular, customer funds will flow on a large scale from low-interest accounts to high-yield products. This may cause the global banking industry's annual profit pool to shrink by as much as $170 billion.

The report warns that AI technology is breaking the long-standing customer inertia that protects banks' cheap funding sources. AI financial advisors launched by tech companies or fintech newcomers can seamlessly search for and transfer consumer funds to higher-interest savings accounts, money market funds, or other investment vehicles, thereby eroding traditional banks' core profit source—net interest margin.

McKinsey estimates that globally, $2.1 trillion to $4.7 trillion in retail deposits are at risk of flowing out from low-yield or non-interest-bearing accounts. This shift not only puts pressure on banks' liquidity management but also directly threatens their profitability. For banks that rely on low-cost deposits to support lending businesses, this is nothing short of a disruptive blow.

The report points out that the banking industry is at a critical crossroads. They must quickly make strategic choices: Should they raise deposit rates to retain customers, thus squeezing their own profit margins; or watch deposits drain away and bear the consequences of rising funding costs? Whichever path is chosen, the traditional bank profit model will face a severe test.

AI Breaks Customer Inertia

For a long time, the profitability of traditional banks has largely benefited from customer "stickiness" or inertia. Due to information asymmetry and the cumbersome process of transferring funds, a large number of depositors prefer to keep their money in low-interest current or savings accounts, providing banks with a stable and cheap source of funds.

However, McKinsey’s report makes it clear that generative AI is fundamentally changing this pattern. AI financial advisors can monitor market interest rates 24/7, automatically identify the best deposit options for users, and complete transfers with one click.

The report says, “The friction that has protected banks’ low-cost deposits for decades is about to evaporate.” This type of automated, intelligent service will greatly lower the threshold for customers to move funds, making price sensitivity the primary factor determining the flow of funds.

Profit Pools Face Huge Impact

AI-driven fund transfers have a direct and enormous impact on bank profits.

McKinsey calculates that in the most likely scenario, such deposit outflows will reduce the annual profits of the global banking industry by about $170 billion. This figure is mainly due to the narrowing of net interest income (NII).

On one hand, to cope with competition, banks may be forced to raise the interest rates on their deposit products, which will directly increase their funding costs. On the other hand, if banks fail to effectively retain deposits, they will have to turn to more costly funding channels, such as the wholesale funding market, which will also erode their profits.

The report emphasizes that this impact varies for different types of banks. Those heavily reliant on retail deposits and slow to digitally transform will face the greatest risk.

Banks Must Proactively Adapt

Faced with the disruptive challenges brought by AI, McKinsey believes that banks can no longer remain passive. The report proposes several key strategic paths for the banking industry to respond to the coming changes.

First, banks need to reassess their value proposition. Simply serving as a place to store funds is no longer enough to retain customers. Banks must accelerate the development of their AI capabilities, creating personalized wealth management and financial planning tools that can rival or surpass external AI advisors, thus shifting customer relationships from mere interest rate competition to deeper, value- and trust-based engagement.

Second, banks should actively seek to diversify their sources of income. As net interest margins face long-term pressure, business models that rely on interest spread revenue will become increasingly fragile. Banks need to vigorously develop non-interest income businesses such as wealth management, investment advisory, insurance, and payments to hedge against the risk of declining deposit business profits.

Finally, investing in technology and talent is the key to success in this transformation. Banks must increase investment in data analytics, artificial intelligence, and customer experience technology, while also attracting and retaining top talent able to harness these technologies. The report concludes that those banks that proactively embrace AI and integrate it into their core business will have a chance to stand out in this industry reshuffle, while those slow to act may be marginalized.

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