AI and Digitalisation Pose New Risks for the Global Banking Sector

The global banking industry is entering a critical and challenging phase as rapid digitalisation, the expansion of artificial intelligence (AI), climate-related vulnerabilities, and increasing cyber threats reshape the sector. A new report from S&P Global Ratings indicates that these developments will present both opportunities and structural pressures for banks worldwide. The report highlights that the gap between strong and weak banks is likely to widen, with technology adoption becoming a key differentiator.

Digital Transformation: A Turning Point for Banking

The rise of AI-driven financial technology companies has significantly disrupted the traditional competitive landscape. These new entrants, unencumbered by outdated infrastructure, are quickly gaining market share. As a result, a bank’s competitive position is no longer determined by the number of physical branches it operates, but by its ability to effectively integrate and deploy AI.S&P’s assessment emphasises that the future strength of a bank will depend largely on how intelligently and efficiently it adopts AI and data technologies.

Financial Performance Under Pressure as Costs Rise

The transformation to AI-driven banking is capital-intensive. Banks must invest heavily in advanced computing capabilities, cybersecurity systems, cloud-based infrastructure, and skilled technical teams. Additionally, there is an increasing reliance on specialised third-party vendors.

Despite the rising costs, the long-term benefits are clear:

S&P expects these structural advantages to support long-term profitability, even if the financial burden remains significant in the short term.

Risk Management: New Hazards and New Tools

AI-enabled banking introduces a range of non-traditional risks, including:

• Algorithmic errors and decision biases
• Data privacy concerns
• Vendor-related vulnerabilities
• Increased exposure to cyberattacks

At the same time, these technologies can enhance banks’ risk management capabilities. AI tools allow for more precise identification of credit risks, quicker fraud detection, and real-time monitoring of market fluctuations. This duality—introducing new risks but also offering stronger controls—will significantly impact credit quality, reputation, market stability, and operational performance.

Credit Loss Outlook: Rising Stress Through 2027

S&P Global Ratings anticipates global credit losses will increase over the next two years:

Most of this stress is expected to stem from the Asia-Pacific region, primarily due to uncertainties surrounding small businesses in China and growing consumer credit risks. However, S&P notes that these losses will remain manageable as banks are entering this period from a position of relative strength, bolstered by improved regulatory oversight, stronger capital buffers, and healthier balance sheets.

The Road Ahead: Balancing Innovation and Stability

The report concludes that AI is neither an entirely positive nor purely negative force; rather, it signals a structural shift that requires thoughtful investment and strategic clarity. Banks that responsibly integrate AI—focusing on robust cybersecurity, transparency, compliance, and customer trust—are likely to emerge stronger. On the other hand, institutions that lag in digital adoption may face shrinking market share and declining profitability.

As the global financial environment evolves, banks’ core challenge will be clear: innovate rapidly, but manage risk even more quickly.