Key Takeaways
- Physical branches no longer define banking as technological evolution affects every aspect of the business, from how banks interact with customers to how they underwrite loans.
- Technology will substantially improve productivity, but most of the gains will be eaten up by competition and will be passed on to consumers in the long run.
- Tariff-related uncertainties can create attractive opportunities for prospective investors to scoop up high-quality banking names—Bank of America is our top pick.
Brick-and-mortar banking is falling back, making room for technological innovations to drive how banks operate, engage customers, manage risk, and pursue growth. Investors should keep their eyes on the digitization of services and banking capabilities, along with the data and artificial intelligence fueling those changes.
Leading banks are allocating between 14% and 20% of their noninterest expenses to technology-related spending. Larger banks like Bank of America BAC, JPMorgan JPM, and Citi C lead in research and development investment and engineering talent. At the same time, we’re skeptical that new-age financial technology companies will disrupt the core banking industry.
Our US Banks Technology Report ranks banks within our coverage across five parameters: tech research and development budget, deposits per branch, adjusted employees per branch, adjusted assets per employee, and percentage of employees in engineering roles.
Because these parameters are highly correlated with a particular bank’s technological capabilities, they give insight into some of the best bank stocks to consider.
This ranking allows us to identify banks best positioned to leverage their tech capabilities to improve their efficiency and gain market share over the next decade.
The Decline of Physical Banking and the Rise of Digitization
Today, customers can check balances, invest money, transfer funds, and apply for loans without ever visiting a branch. More than 70% of US customers consider digital channels their primary medium to access banking while only 10% consider physical bank branches their go-to.
In turn, banks are moving away from their reliance on physical branches and investing in their digital capabilities: Physical bank branches in the US have declined by around 17% since 2012.
Total US Bank Employees Have Stagnated Since 2004 After Growing Steadily for Several Decades
Large US banks have been shrinking their physical footprint much faster than smaller banks while offering better digital products and capabilities. This could lead to smaller banks ceding share to larger banks in the long run.
We see this trend persisting as upcoming generations, Generation Z and beyond, become the dominant consumer base. Gen Z will demand seamless, instantaneous digital banking services, and we expect that generation’s mobile banking users to grow rapidly in upcoming years.
Higher deposits per branch show that a bank is relatively less reliant on physical branches for deposits. JP Morgan, Bank of America, and Citigroup led banks under our coverage in highest deposits per branch. Banks like Regions Financial Group RF and KeyCorp KEY trailed the pack.
Digital Adoption Has Grown Steadily in the Past Decade for Large US Banks While Their Physical Footprint Has Shrunk Substantially
Data: The New Currency of Financial Institutions
We discuss digitization, data, and AI separately in the report, but it’s important to note these capabilities are deeply interconnected. Without digitization, there is no data, and without data there is no AI.
Data not only powers AI-related functionalities in banking but also has numerous independent use cases, from risk management to product development. Data also plays an essential role in fraud detection, customer analytics, and providing other core banking services.
A prime example of the benefits of investing in a modern data stack within the banking context is underwriting. All else equal, banks that better leverage data will have a substantial advantage in underwriting, leading to lower credit costs.
Our Economic Moat considers risk culture, market intelligence advantage, and risk management across our coverage. Banks that are awarded moats by Morningstar have materially lower charge-offs compared with banks that don’t have moats.
The data advantage in banking will only get more pronounced as the amount of data increases and the relative gap among banks in managing this data widens.
While Charge-offs Are a Function of Loan Mix Competitively Advantaged Banks Are Better at Underwriting Loans Partly Due to Their Data Advantage
Artificial intelligence: Accelerating Productivity and Innovation
The financial-services industry is one of the biggest users of machine-learning technology globally, following IT and telecom’s 19% market share by usage with an 18% market share by usage.
Machine Learning Market Share By Industry Usage (%)
Many banks use generative AI to not only create more efficient processes in areas like customer support (chatbots and virtual assistants) but also in applications like document automation and workforce-support AI tools.
AI-powered automation can streamline core banking operations like security authentication, payment routing, and algorithmic trading. It can also improve productivity for repetitive, time-consuming tasks like document processing or loan processing.
AI-powered prediction models have been proven to perform much better than traditional quant models in forecasting market trends, risk management, product recommendations, credit risk, and fraud detection. We believe generative AI functionalities like document automation, workforce copilot, and call center automation are best-positioned for widespread adoption in the banking industry in upcoming years.
While the current functionality for AI-powered tools may be limited, the capability and importance of AI in its many banking applications will only increase over time.
The Rise and Limits of Fintech
The amount of capital invested in US fintechs has grown from about $8 billion in 2010 to $75 billion in 2023, the most recent year for which data is available. Investor enthusiasm around fintech is evidently strong, but understanding where that capital is going is key to evaluating long-term impact on traditional banking investments.
Excluding payments, only around 16% of the total capital invested into fintechs has gone into firms that directly challenge products and services sold by traditional banks.
3 Categories Account for About 80 Percent of Capital Raised Since 2019
Fintechs, like PayPal PYPL, Stripe, and Toast TOST, have already disrupted the payments space, taking substantial market share from what could potentially have been captured by banks. But the payments space has stabilized in the past few years, and we do not expect to see drastic shifts in this market.
That said, fintechs have had limited success in disrupting core banking services. Though there are areas where fintechs have done well—like payments, mortgage refinancing, and high-yield consumer loans—they still hold a very small share of the banking revenue and profit pool.
Fintechs often don’t have the scale of traditional banks, giving incumbents an edge when it comes to R&D investments in newer areas like AI.
Overall, traditional banks now match or exceed fintechs in terms of digital capabilities.
Strategic Focus of Tech Investment in Banking
While closing the gap of their digital prowess compared with fintechs, banks are also strategically investing in technology to reduce costs, improve efficiency, transform business models, launch innovative products, and conduct maintenance-related tasks.
Per industry estimates, around 38% of total tech spending goes into paying the salaries of banks’ internal tech-related workforce. Another 29% of the tech budget goes into paying for software solutions.
Cybersecurity and fraud prevention account for a substantial amount of banks’ investments in tech, followed by artificial intelligence-related tech. Cloud computing is another key area of investment that enables banks to scale their services efficiently while reducing infrastructure costs.
Bank Tech Budgets Have Significantly Shifted Toward AI in the Past Year
When comparing 2024 tech budget allocation with 2023, allocation toward AI increased by 25 percentage points at the expense of digitization (which decreased by 26 percentage points).
Larger banks have always been more productive than smaller banks, but the gap has widened significantly in the past two decades because of the varying impact of technology adoption between various bank sizes.
For financial advisors, this widening gap underscores the importance of scale in tech execution—offering a potential advantage when selecting bank equities for client portfolios.
Long-Term Implications: Winners, Laggards, and Industry Dynamics
Tech advancements will continue to have a significant positive impact on the productivity of the banking industry.
We believe there will be winners and losers in the bank tech race, but the productivity improvements for the entire sector will largely be passed onto customers in the long run. The changing banking landscape won’t have implications on the cumulative return profile of the US banking industry.
Because of this, it is more important to identify individual banks that will be potential winners or losers in the tech race.
The benefits of R&D investments become visible during the implementation phase when these banks gain share and improve their efficiency, thereby boosting profitability. Over time, tech becomes mature, and other banks start to catch up with the leaders.
During the catch-up period, banks that are tech leaders experience diminishing marginal returns on their investments and some pressure on profitability due to intensifying competition.
Measuring Tech Readiness: Who’s Best Positioned?
As previously mentioned, we contend that analyzing the relative tech prowess of different banks is more important than trying to calculate the impact on the entire industry.
The banks in our coverage with the highest relative technology readiness scores are also a good indicator of banks that are best positioned to benefit from tech.
We find that money center banks have a major leg up on R&D, given their scale advantage. We find that JPMorgan, Citi, and Bank of America have the strongest technology readiness scores and are best positioned to gain market share in the upcoming decade. These three banks can be thought of as being in the highest tier in terms of their technological readiness.
Wells Fargo WFC ranks relatively weak in terms of its tech readiness compared with its money-center peers, which isn’t a big surprise given the issues that have plagued the bank in recent years. For regional banks, US Bancorp and Truist rank relatively well compared with their peers in terms of tech readiness.
Bank of America and US Bancorp USB are our preferred picks given their technological readiness and current valuation, but investors shouldn’t overlook other tech-ready banks like JPMorgan and Citi, either.
US Banking Coverage Estimated 2025 Tech Spending and Morningstar Bank Relative Technology Readiness Scores
What US Banking Industry Trends Mean for Investors
As digitization, data, and AI reshape the US banking industry, financial advisors should review their clients’ exposure to the industry. Start by examining underlying holdings to assess how much of a portfolio is allocated to banks and related institutions.
Also consider using Economic Moat Ratings to evaluate whether those holdings have a durable competitive advantage in an increasingly tech-driven environment.
For portfolios that include individual equities, portfolio analysis tools can help determine how swapping specific holdings might improve overall positioning. In a sector undergoing such ongoing transformation, ensuring exposure is both intentional and resilient is key to long-term portfolio success.