What the rising rate environment means for banks in 2023
Mike Abbott, Accenture

More than 60% of the banks Accenture has surveyed are planning to start a core replacement this year, says Mike Abbott, global banking lead at the firm.


Penny Crosman (00:03):

Welcome to the American Banker Podcast, I’m Penny Crosman. What trends should banks be wary of and planning for in 2023? We’re here today with Mike Abbott, global banking lead at Accenture, who has just written a report on this topic. Welcome, Mike. 

Mike Abbott (00:18):

Thank you Penny. And happy new year. 

Penny Crosman (00:20):

Happy New Year to you, too. So your first big trend that you talk about in your report is that rising interest rates will bring a lot more value back to the basic model of banking, which is charging one rate for deposits and a higher rate for loans and using that profit margin to basically run the business. What kinds of opportunities and challenges could that bring, this sort of going back to the basics? 

Mike Abbott (00:55):

If you think about it, when you look backwards, it’s interesting, we went back and looked and the last rising rate environment was shockingly in 2005 and the iPhone was introduced in 2007. So we have not had a rising rate environment in the banking world, a serious rising rate environment since 2005, almost 17 years ago. And I think in many ways what we’ve seen and what we’ve witnessed in the last preceding 17 years has been kind of a big bang of banking. Meaning the zero rates have distorted a lot of things. You had the rise of neos, cryptos, you had product silos, you had banking kind of smashed apart because of these zero rates. And what we see gravity doing and what we see rising rates doing is really acting like gravity, kind of pulling banking back together, which is exactly what you put up front, which is that using deposits to lend again and providing that value back to customers. What I think you’re going to see is you’re going to see this us move out of these product silos that zero rates pushed us into and move into integrated product offerings in a big way. I think of it like an Amazon Prime for banking, which is bringing banking back together as a holistic service for consumers. And I think it’s good for banks, I think it’s going to be good for consumers and I think it’s, it’s going to be overall good for the economy as we move forward here. 

Penny Crosman (02:22):

Now you said the most dangerous place for a bank to be in 2023 will be at the top of Bankrate’s list of competing deposit takers. Why do you see danger in that game of competing for the best deposit rate? 

Mike Abbott (02:36):

Yeah, and the top of Bankrate.com is a dangerous place to be in a rising rate environment because in many ways the players that go up there have to pay the absolute highest marginal cost to fund their lending businesses. And when you look at that versus the average deposit rate in the U.S., which right now might be between 20 and 30 basis points, which most likely will go up, I’m sure over time that differential is an incredible cost to pay when you’re trying to lend out there. So last time we had this, and again it’s been 17 plus years, almost two decades the last time we went through this, you saw a whole host of mergers and acquisitions between the liability rich side of the banking industry, the deposit side, your traditional branch-based deposits and the lending side. So it’sthe same theme of gravity, which is you’re going to see things come back together and in this case, most likely through M&A over time. 


In fact, if you look back at the early 2000s, one of the most interesting trends, which we should all go back and take a look at, is when we had monoline credit card issuers. And if you remember those in the early 2000s, there was a number of monoline credit card issuers that were just asset sides. And many of them either did one of two things. Either they ended up acquiring banks themselves and becoming banks or they got merged into banks during those rising rate environments. So I think you’re going to see very much a repeat of that. And again, that’s why it’s the most dangerous place to be up there because either one or two things probably has to happen: you either need to find a better, more cost effective deposit or you are probably going to have to acquire the liability side and find a way to reduce your deposit, reduce your funding costs over time so that you can continue to lend. So that’s why I see that as a dangerous place to be. 

Penny Crosman (04:27):

So your second trend is about the renaissance of the branch, which I have a feeling that might be a little controversial because I feel like people have been talking about branches are dead for years as more and more and more people use mobile banking and online banking, the rates are in the high 70 percentage points, I think. What is the argument for a comeback for bank branches? 

Mike Abbott (04:53):

Yeah, this is a really interesting one and we’re going to release a report a little bit later in the February timeframe. But we had data on this that was eye-opening even to me. And I agree with you, I thought it, it’s definitely controversial. But what we found was even younger people, especially after being locked up in this pandemic for three years, want to have a conversation for complex products, they want to get back and have a conversation with a banker again. And what you’re seeing on that front is again, in a rising rate environment, all of a sudden branches, instead of being like vaults, they can become Apple stores, they can become places of conversation to help somebody find the right product, the right loan, the right offer to bring all that together and having that conversation becomes much more important. A branches going to make a massive renaissance and will we see branches popping up all over the place? Probably not. But you’re going to see a lot of innovation in this. And when you look around the world, especially in Europe, what you’re seeing is you’ve seen places like pop-up branches come up. So again, think of it more like Apple stores than vaults going forward, 

Penny Crosman (06:04):

I haven’t analyzed this fully myself, but it seems like some of the big banks have been putting more branches in wealthy neighborhoods and the credit deserts or the low income areas that have no branches remain that way. Do you think that’s going to change? Is anybody going to try to put physical branches in the poorest neighborhoods? 

Mike Abbott (06:27):

Yeah, it’s a great question. It’s not something I’ve looked at personally. What I can tell you is if you look at what’s been happening, what we’ve seen around the world, the idea of popup branches and such, the ability to put up a branch when you don’t have to drop a vault in there and you think of it more again like an Apple store, it becomes much more cost effective. So I think you will see a lot of creativity in how branches and how people reach out to their customers directly going forward in different ways that we just haven’t seen before. And again, the other thing I would say on that, Penny, is that when you look at a branch network in a zero rate environment like the last two decades that we’ve had, if that branch network costs you somewhere between 75 or a hundred basis points a year deposit, you’re looking at it purely as an expense. When all of a sudden interest rates are 4% or 5%, paying 75 basis points to get really good deposits and have a great relationship and be able to lend to small businesses and help entrepreneurs, that doesn’t look like such a bad deal. 

Penny Crosman (07:30):

Yeah, that makes sense. And you also noted in your report that the metaverse is maturing. What kinds of opportunities do you see for banks in the metaverse now and in the future? 

Mike Abbott (07:41):

Yeah, we have definitely seen a maturing in the metaverse. I think in many ways, I believe the metaverse is going to follow the same playbook that we saw with online banking and with mobile. It’s starting off and we’re already seeing it in a lot of the things that we’re doing right now. It’ll start off initially as just enablement. So no different than when we had online banking and all of a sudden you could go to a website and bank and then eventually you went to a mobile app. In many ways you’ll see online banking go into the metaverse, but instead of now being a small little 2D screen phone that’s in your pocket, it’ll be this immersive 3D experience where you might be able to see your deposits, your balance, your investments, your mortgage, your auto loan, look at everything as a large pallet. 


So that’s the basic first thing, enablement of the channel and the glass that’s out there. But then I think it’s going to move into a much more interesting space, which is engagement. Because one of the things that’s happened as we become more and more digital, and by our estimation more than 99% of the touch points now are remote in banking. To your point, digital’s taken off. But in becoming digital, we’ve become functionally correct and emotionally devoid, we’ve lost the conversation. Imagine now being in the metaverse and being able to sit there and be looking at your bank account and then click on a button and have a conversation again. Well, the banker right in your kitchen on that front, it has the ability, the potential to put humanity back in the banking again in ways that I think we can only imagine right now, we’ll start seeing emerging over 2023. And then when you roll the tape further forward, and this is maybe a little out there for your listeners, I think eventually you will have products, just like we have products in the real world, you’ll have products that emerge in the metaverse. Now, I think Snoop Dogg bought some real estate on Sandbox and some smart entrepreneur bought the site right next to Snoop Dogg’s house for $450,000. I would argue that most of the bankers probably listening as this podcast today would not lend that $450,000 to Snoop Dogg’s neighbor right now, but in the future they may very well do it. 

Penny Crosman (09:55):

Yeah, it’s fascinating to me. I’ve heard of people buying Prada handbags in the metaverse for more than they would buy the actual handbag from an actual store, and it’s very hard for me to wrap my old-fashioned brain around that idea. But there’s definitely a component of the population that does go for that. 

Mike Abbott (10:18):

Hang out with a 10 year old for a little while and you’ll get there real quick. 

Penny Crosman (10:24):

I guess that’s what I should do.

Mike Abbott (10:25):

It’s a whole different world. 

Penny Crosman (10:27):

So you also spoke of the struggle that banks have been having in attracting and keeping top tech talent. That’s something we’ve been writing about periodically. You talked about how culture is so important to trying to appeal to very talented developers and designers. Are there any real keys to building the right kind of culture for top tech talent? Or are there any role models you would point to either in banking or outside of banking? 

Mike Abbott (11:01):

Yeah, it’s one of the top trends for this year, the right culture, the right talent. And we see it as around getting the right culture in place to retain and attract. So here’s the paradox for banks, which is they are regulatory driven and there are things that you have to do for safety and soundness and there’s no getting around that. At the same time, you want to attract people that are creative, innovative and give them the space. So what we’ve seen some, I’m hesitant to name particular names, but I’m just going to say some of even the very largest banks in the United States doing is finding a way to balance that much what Google has done, where they’ll give people 20% of their time to do things creative. So they’re designing their processes in such a way that they’re much, much more transparent, they’re much more collaborative internally. 


And then on top of that, they’re providing time and space for people to give them a sandbox where they can go out. And the example we were just talking about with the metaverse, they’re giving them time to go, say, do your own development and develop a next-generation metaverse app for us and for our bank and see what it looks like. And in that way you can balance the rigor and the needs of what has to happen in a regulatory driven environment with the necessity to have things done the first time with also the ability to innovate the same time. So creating the culture is really about creating a balance of opportunities so that people see what they’re doing today has also an implication on the future. And I think that has been some of the best models I’ve seen out there is creating the time and space for the future at the same time while you’re doing your job today. 

Penny Crosman (12:43):

Sure, you could do a whole podcast just on that topic. 

Mike Abbott (12:48):

And then the expectations of the the younger generation and how you treat them. I mean certainly the old command and control style is going to give way to a much more collaborative environment. And it already is, because frankly, many of the younger generation are becoming the leaders now. 

Penny Crosman (13:04):

Sure. So another interesting point that you made in your report is that a lot of people expect credit delinquencies will soar in the coming year, and yet you warn banks not to have their collections departments dial for dollars. And I thought that was really interesting. How do you think heightened collections could backfire and what are the alternatives to that? 

Mike Abbott (13:29):

Again, just kind of going back when was our last real delinquency cycle, almost 12 years ago, right? Again, almost right at this point start was the starting point in time with the iPhone. It’s just hard to imagine that right now. Most people don’t even have home phones anymore. So you’re going to be calling up their cell phones all the time. They’re going to put you right into the spam box no matter what. So just the basic concept, Penny, I think of dialing for dollars has seen today, yet many banks have not moved on from there. But let’s talk about what the opportunity is. So now think about it in terms of if we took a digital approach to this, all of a sudden if you log into your mobile banking app, you can have a texting conversation back and forth. 


You can be much more empathetic. You should be using the digital tools that we’ve seen in marketing around behavioral economics to understand a person’s situation and then use the right conversational language to help them solve their problem from that perspective. So we much rather have texting back and forth with our banker to solve it. We know we’re in trouble. How can you help me? How can you have a conversation with me without ringing me up on my phone, which is now something much more personal and different than it was 12 years ago. So I do think that collections in this digital, or even post-digital age has to move away from the techniques that were used a decade ago. Just the world has changed dramatically. And I do believe, and I’ve already seen it with some of the banks we’ve been working with, the ones that are going to take that digital idea to collections are going to do exceptionally well and they will be first in line to be repaid. The ones that try to use the hammer, it’s going to be a different problem. 

Penny Crosman (15:12):

It’s interesting because I could also see the potential for texts to feel like phishing or smishing or something like that. So I think as you said, the tone and the way you do it is going to be pretty important too. 

Mike Abbott (15:30):

Critically important. So you think of logging into your mobile bank, you log into your bank, your banking app, well you have that space right now. Most banks and lenders think of the mobile banking, the mobile app experience as just something that be service oriented. Why shouldn’t it be conversationally oriented when you’re in there and helping them out? Hey, you’re a little delinquent here, you a little ding here. Hey, we can help you fix that. Give us a right, can we help you out conversation rather than just pushing people through wire frames all day long. I think it’s just requires just a different way of thinking. 

Penny Crosman (16:01):

Sure. So I think was your last trend was about modernizing core systems, and I think you feel like this is the year a lot of banks are really going to take the plunge and do that. Why do you think this might be the year for that? 

Mike Abbott (16:16):

Well, it goes back to where we started. Banks will have a substantial windfall from this rising rate environment. And the question for every bank out there is what do you do with that rising windfall? And a lot of them have decided that now is the time to tackle that 30 to 40 year old legacy environment that is their core engines right now in many of them, let’s say not the largest banks, but the ones right below them, your mid-market banks, especially in the United States, this is an opportunity to set the foundation to help them scale to the next scale and next level and to merge up from that perspective. And they need to do this not just from a product innovation point of view, but also from a compliance risk and just to be able to modernize. 


The other piece that’s going on right now is many of them recognizing that their systems are, unless they’re going to retrain new programmers, it’s time that they’re going to have to modernize those environments to work on different platforms. And the other thing that’s happened, I think just at the exact same time as the cloud has come out, and you’ve had a lot of the supply chain in there in the core supply chain, modernize their architectures to be able to use them the cloud. So you have almost a perfect alignment of the stars to start making this happen. Now will it happen overnight in a matter of a few months? No, no. This is a multi-year trend without a doubt. But we’ve seen north of 60% of the banks we’ve talked to and we’ve surveyed are in one form or another right now looking at starting their core replacements this year. So we think it’s a trend that you’ll starting to see and you’ll continue to see pickup. 

Penny Crosman (17:54):

Well, that makes sense, and I hope you’re right because this does seem like it’s time. So Mike Abbott, thank you so much for joining us today. To all of you, thank you for listening to the American Banker podcast. I produced this episode with audio production by Kevin Parise. Special thanks this week to Mike Abbott at Accenture. Rate us, review us and subscribe to our content at www.americanbanker.com/subscribe. For American Banker, I’m Penny Crosman, and thanks for listening.


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