The banking market is in upheaval. Merger and acquisition activity has picked up in the past few years as a range of factors from regulations to low interest rates to FinTech disruptors affect the industry. And the growing demand for digital capabilities and data security is leading almost 9 percent of all banking consumers to switch banks—with the greatest migration away from regional, mid-sized, and local banks.

Two factors in particular will determine which banks can survive. The first is innovation. Consumers are demanding innovative digital capabilities, and are increasingly making decisions to switch banking relationships and deposits based on banks' demonstrated and perceived innovativeness. Investing in digital capabilities and building awareness of those capabilities is crucial.

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The other factor is consumer trust. As consumers increasingly pursue mobile and digital shopping and payments options such as frictionless commerce, they are also becoming more discerning about who they can trust with data security. And studies show that consumers trust established financial services firms to safeguard their data and privacy much more than they do new-age digital commerce players. For banks, their role as a “trusted agent” for consumers could prove to be a key point of differentiation in a difficult market.

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For financial services players, there is little time to waste. Our research indicates a radically restructured US banking industry by 2026, one in which the total number of banks drops by as much as 25 percent, most of them small and mid-sized local banks. The ones that survive will be those that improve their digital capabilities to increase their customer base and deposits.

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