After decades of slow-but-steady consolidation, from 14,000 banks to around 4,000 today, the future of the U.S. banking sector is in focus. In a year already punctuated by geopolitical and economic uncertainty, one advantage stands out: it pays to be big.
When looking at Price-to-Book (P/B) ratios, the top performers in each market are almost always the largest, whether it’s JPMorganChase in the U.S. or RBC in Canada.
Why? Strategic scale – the top banks use their size to do what their little siblings cannot: amortize innovation, outpace disruptors, and stay a step ahead on regulatory imperatives.
We expect that the future of banking will look like a barbell: on one end, a handful of megabanks that drive the market, and a few bold super-regionals that climb into the ring. They are the standard-bearers for digital infrastructure, and they dominate the deposit market, holding a persistent 20+ basis point advantage in deposit cost against their top regional competition. On the other end, a strong contingent of community banks, with deep local roots and a fiercely loyal customer base.
In between? Turbulence. This regional tier of banks will face existential pressure to pick a lane, and pick it yesterday. For many, M&A will be the only course of action.
Three forces are accelerating the rush for scale and M&A. First is the innovation arms race – driven by hyper-personalized apps, seamless digital journeys and the quest to scale AI. Meeting these expectations takes billions in sustained tech investment. JPMorganChase alone spends $18B a year on technology to put distance on the field. For smaller banks, that sort of price tag is well north of their reach, and the gap compounds every year.
Second is disintermediation and the funding chasm. Non-banks are cherry-picking profitable opportunities, like private credit, fintech, and embedded finance. These niche offerings are eroding banks’ traditional revenue streams and putting them under pressure. For banks with scale, complexity becomes a competitive weapon (such as global transaction banking, integrated cash management), backed by sticky, low-cost deposits. Outside of that small circle, the economics get brutal – funding costs spike and the hunt for yield accelerates, which leads banks to take on more risk to make the math work (i.e. commercial real estate).
Lastly, most banks should have the regulatory green light to act, with the new administration already reshaping the M&A landscape. Acting FDIC Chair Travis Hill has signaled faster deal reviews: Look no further than Capital One’s $35B acquisition of Discover, stuck in limbo for over a year, but cleared and closed just 4 months post-inauguration. Right on its heels, Congress voted to nullify the OCC’s 2024 rule banning expedited merger reviews, and separately, the FDIC voted to rescind its merger policy statement. With regulatory sentiment shifting, banks hovering just below critical asset thresholds have gained confidence that plans to make bold moves into the next tier will not be thwarted by a draconian view of M&A.
Here’s how the future could play out: The handful of super-regional banks with an opportunity to challenge today’s big four, including the likes of PNC and U.S. Bank, can compete if they move quickly to acquire scale and deepen local density. These banks are no strangers to this strategy. Just 3 years ago, U.S. Bank acquired MUFG Union Bank for $8B, picking up 1M west coast clients and helping to narrow the gap in cash management. Super-regionals that think big and act fast can rewrite the map with one move.
For banks in the regional tier – who continue to see an upward trend in non-performing loans – the calculus is cold: Scale up aggressively through strategic M&A or prepare to become someone else’s synergy. An immediate assessment of tech stack, regulatory posture, and culture will be a pre-requisite before making a decision, but speed is key. “Ready” beats “Reactive” every day of the week in M&A.
This need for speed includes the post-merger integration process. As seen with RBC’s acquisition of HSBC’s Canadian affiliate last year, a close and convert on the same day isn’t a far-off fantasy in a regulated industry like banking – it’s possible with a culture of execution. AI can help banks move at pace, rewriting the rules of dealmaking by accelerating diligence, synthesizing communications, and even reverse-engineering legacy systems. Yet, our research reveals AI is used more in the pre-deal stages, with the average level of gen AI adoption among dealmakers at 30% this year, up slightly from 24% last year.
Not every bank needs pure scale to win—some will thrive by going narrow and deep, and winning a niche. Whether through a standout product (like high-yield savings or Small Business Administration loans), a differentiated experience like unique perks or features, or serving a well-defined demographic with tailored services, there will be lanes for smaller banks to thrive. By going deep rather than wide, these banks can build moats focused on customer intimacy rather than scale.
The pace of play is accelerating. Clarity and speed are competitive advantages. In this environment, indecision is a decision, but almost never the right one. At one end of the barbell, size will remain an advantage, enabling the next generation of experiences, AI enhancements, and operational leverage. At the other, focus will fuel customer loyalty and resilience.
The middle? That is where the consolidation will happen. What will your bank’s endgame be?