The turmoil that hit the US banking industry in early 2023 and resulted in the collapse of several banks was a pivotal moment, particularly for midsize institutions. In the span of just four weeks in March 2023, banks beyond the country’s 25 largest experienced more than $220 billion in deposit outflows,1 as customers moved funds to larger institutions perceived as more stable. The crisis exposed a vulnerability: Some banks discovered they were susceptible to outflows in concentrated pockets of clients with larger deposit balances.
Since then, a performance gap has emerged. Among midcap banks (with assets of $10 billion to $100 billion), those that rely more on retail deposits have done significantly better than peers reliant on commercial or wholesale funding (Exhibit 1). Retail deposits are typically more granular than other types of deposits, composed of funds from many individuals. This makes them more stable. Midcap banks with such granular, low-cost retail deposit bases didn’t just weather the 2023 crisis more effectively; they also outperformed in 2024. Institutions with above-median retail deposits as a share of total deposits delivered net interest margins that were 44 basis points higher, on average, than peers more reliant on commercial or wholesale deposits. The retail-focused banks also experienced asset growth that was more than twice as fast as that of their peers. If midcaps with greater dependence on wholesale or commercial funding had achieved the same performance as peers with more retail-focused deposit bases, they would have generated nearly $10 billion in additional net interest income in 2024, representing an increase of nearly 20 percent.
Why are retail deposits so resilient? One factor is customer inertia: Individuals are typically less sensitive than businesses to interest rate changes, and they tend to keep their money where it is parked. Another major driver of this resilience is the strength of consumer relationships. Consumers born before 1965—baby boomers and the Silent Generation—account for the largest share of consumer deposit balances in the United States, making them essential to near-term funding stability (Exhibit 2). Still, their importance will diminish over time, as older consumers’ share of deposit balances is expected to decline from 39 percent in 2023 to 20 percent in 2035. At the same time, younger consumers are critical to future growth. According to McKinsey Panorama, by 2035, millennials and Gen Zers are expected to account for 43 percent of retail banking revenue, up from 32 percent in 2023. Over this period, Gen Z alone is projected to more than double its share of consumer deposits, to 16 percent. Banks that effectively engage both ends of this generational spectrum will be best positioned to build a stable, granular deposit base that supports long-term value creation.
For midcap banks, however, winning over consumers is becoming increasingly difficult, as they are not people’s top choice for a primary financial institution, as we explore in the next section. That’s especially true for younger generations, who perceive less value in midcap banks’ offerings. This challenge is not just a consumer banking issue; it is a strategic imperative. A resilient, scalable retail funding base can serve as a growth engine that enables commercial-banking expansion. With retail and commercial banking becoming more interdependent, the ability to fund one with the other is an increasingly important factor in banks’ ability to compete effectively in the market.
Given these challenges, we examined results from the 2024 McKinsey Consumer Financial Life Survey of roughly 5,000 individuals2 to identify trends shaping midcap banks’ competitiveness. In the next section, we outline five key trends that emerged from the survey, including many challenges facing midcap banks. Then, we outline steps midcap banks can take to modernize their branches, pursue an AI-driven digital transformation, build a digital marketing machine, focus on high-value customer segments, and refine the product portfolio. These steps will help midcaps expand their reach beyond older customers, enhancing their value proposition with younger generations, strengthening their deposit base, and improving performance.
Trends affecting midcap banks’ performance with retail customers
The survey results showed that midcap banks face numerous challenges, including declines in primary-bank relationships with their customers, an aging customer base, trouble with cross-selling, and a heavy reliance on physical channels in an increasingly digital world. But it’s not all doom and gloom: On the bright side, consumers see midcap banks as excelling in customer service, beating out all other types of financial institutions.
Losing out on primary banking relationships
As retail deposits are becoming more important in the banking sector, the unfortunate truth is that midcap and smaller banks, including community banks, are experiencing a decline in their role as consumers’ primary financial institutions. These banks accounted for just 15 percent of primary checking accounts in 2024, down by nine percentage points since 2015 (Exhibit 3). Over the same time frame, mega and regional banks have increased their share of primary checking accounts by ten percentage points and three percentage points, respectively.
The shift reflects the older-than-average demographics of midcap customer bases and changing generational preferences. Today, 42 percent of customers at midcap and smaller banks are baby boomers, a higher share than at larger banks and in the US population overall. Meanwhile, only 32 percent of customers at midcap and smaller banks are millennials or Gen Zers, compared with 50 percent for megabanks and 40 percent for regional banks. Among these younger consumers, more than half have a megabank as their primary financial institution, while just 25 percent have a midcap bank as their main provider. If midcaps don’t find ways to improve their relevance to younger consumers, they may face long-term funding challenges, given that weaker primary relationships reduce opportunities to deepen engagement and build loyalty.
Struggling with lower perceived value than bigger peers
In the battle to become consumers’ primary financial institution, perceived value is essential. Among all types of financial institutions, midcap banks are rated the lowest on this dimension (Exhibit 4). Only 27 percent of consumers who have a midcap or smaller bank as their primary bank say it provides extremely good value, compared with 37 percent for regional banks. What’s more, over the past decade, the perceived value of mega and regional banks has increased more than it has for midcap and smaller banks, likely driven by improvements in digital experiences and more targeted consumer incentives.
The gap in perceived value is especially pronounced among younger consumers. These groups are often the most digitally engaged and value-conscious, underscoring the urgency for midcaps to adapt to evolving expectations. This challenge could set in motion a cycle in which midcaps are seen as less competitive, receive less share of wallet, and, in turn, have fewer opportunities to demonstrate their value.
Room for growth in cross-selling
Midcap banks are less savvy at cross-selling than their larger competitors (Exhibit 5). The gap is relatively small for savings accounts, but it is significant for credit cards, mortgages, and brokerage accounts—products that typically generate higher revenues (including noninterest income) and profits than simple checking or savings accounts.
Winning at customer service
Now for some good news: Midcap banks outrank all other types of financial institutions when it comes to customer service (Exhibit 6). Even as many consumers shift balances and product relationships to larger banks, midcaps’ service stands out for its high quality. In our survey, 36 percent of respondents said they switched to a midcap bank because it offered better customer service, compared with 22 percent for megabanks and 28 percent for regional banks. The figure for midcap banks rose 11 percentage points over the past ten years, the largest improvement across the board, while megabanks and credit unions experienced declines. Similarly, 40 percent of midcap banks’ primary customers said they switched because their financial institution makes it easier to bank, up 14 percentage points over the past decade. The emphasis on service creates a distinct advantage, but one that midcaps must work to protect and scale.
Still reliant mainly on physical, not digital, channels
While midcap banks stand out for their customer service, that strength is supported by an operating model that remains heavily reliant on physical channels. But the world is changing: Digital channels are now the most common method for consumers to access banking services across all types of financial institutions. Customers of midcap and smaller banks are less engaged online. Just 65 percent of these customers report using digital as their primary servicing channel, compared with 73 percent at megabanks and 70 percent at regional banks (Exhibit 7).
In contrast, midcap and smaller banks lead in dependence on service with a human touch: 22 percent of their customers say they rely most often on branch tellers or call centers, more than any other bank type. While this can reinforce trust and loyalty, it also adds to cost pressures and limits the scalability of core services. This reliance on physical channels also presents a challenge in terms of millennial and Gen Z consumers. These groups are more likely than older generations to cite superior mobile apps and online banking as a driver for choosing a primary bank. While service-oriented physical channels have likely helped midcaps succeed with older generations, their limited digital capabilities become a compounding disadvantage as they struggle to attract younger consumers.
Five moves to help midcap banks win over consumers
Considering the challenges that midcap banks face in building a sustainable retail franchise, particularly with millennial and Gen Z consumers, the strategic imperative is clear: focus investment and execution where it matters most. Larger banks have the advantage of a significantly greater investment capacity to scale digital experiences and build integrated platforms. For example, US megabanks spend about seven times as much on technology as the country’s top five regional banks do, and the gap is even wider when it comes to midcaps.
Still, midcaps can compete by playing smarter, including by pooling resources through industry consortiums or cooperatives, adopting proven third-party solutions, and concentrating spending in areas of greatest impact. For example, one consortium provides a shared innovation and vendor platform for midsize banks to collectively evaluate, co-invest in, and deploy fintech solutions, helping participants accelerate adoption at lower individual cost. Another organization has brought together a network of banks to invest in and pilot emerging technologies tailored to smaller institutions. These models enable midcap banks to overcome the inherent scale disadvantage by tapping into shared infrastructure and coordinated innovation, ensuring they are not left behind in the race for digital relevance.
Individually, midcap banks can pursue five strategic moves toward the high-impact consumer relationships that have proven to be key drivers of performance. These include transforming branches into productivity hubs, digitizing the most important customer journeys, building a robust digital marketing engine, capturing more of the high-value business owner and mass affluent opportunity, and tailoring the product portfolio to amplify strengths. Each move is aimed at resolving specific consumer-facing challenges while reinforcing midcaps’ unique advantages in service, relationships, and agility.
Modernize branches to drive sales, moving beyond just offering great service
Despite a reputation for personalized service, midcap branch operations are often not optimized for customer acquisition or relationship deepening. That’s why midcap banks should consider transforming their branch operations from mere service hubs to productivity-driven sales engines. Midcaps lag behind their larger peers in terms of branch productivity: By our calculations, midcaps trail mega and regional banks by more than ten percentage points on this measure, reflecting a missed opportunity. If midcap branches had improved productivity at the same rate as bigger competitors, they would have brought in as much as $200 billion in additional deposits over the past five years.
To bridge this gap, banks should equip their frontline staff with advanced tools such as analytics-powered lead generation, targeted customer lists, and real-time insights to guide outreach. Additionally, implementing structured routines, including daily huddles and individualized coaching supported by gen-AI-driven platforms, can help prioritize high-potential opportunities and enhance customer interactions.
Branches remain a key channel for bringing in new customers, particularly for midcaps, which acquire up to 80 percent of new accounts via branches and just 8 percent via digital channels, according to Finalta by McKinsey. In comparison, mega and regional banks acquire nearly 30 percent of new accounts digitally.
With that in mind, midcaps probably don’t need to prune their branch networks just yet. In fact, a disciplined footprint expansion strategy can further amplify impact by capturing growth in high-potential markets and reinforcing brand presence. These efforts are important for engaging younger, digitally native consumers, too. While these consumers may be less inclined to visit branches frequently, many still open new accounts in person, making it essential that their branch experiences feel relevant, tech enabled, and high value.
Pursue an AI-driven digital transformation focused on high-impact journeys
Agentic and gen AI are powerful technologies that hold the promise to reshape the banking industry and boost productivity, and midcap banks can’t afford to ignore them. However, realizing AI’s full potential requires more than just a few isolated use cases. It requires a fundamental transformation in how a bank operates. Beyond just automating processes and improving efficiency, top-performing banks integrate AI into their strategic planning. They set ambitious goals across all business units, with a focus on high-impact areas that align with their core strategy. These banks ensure that major AI initiatives are led by business executives who work closely with technology leaders to design and implement solutions that meet specific business needs.
Of course, midcap banks don’t have the same spending power as megabanks, and their AI transformation efforts may not be as fast or wide reaching. Instead, midcap banks can adopt a strategic, phased approach that relies on cost-effective solutions and partnerships. Key strategies include focusing on high-impact, targeted AI initiatives that address specific business needs; using cloud-based AI services to reduce infrastructure costs; collaborating with fintechs and technology vendors to access innovative AI solutions; and implementing open-source AI tools and frameworks to reduce costs. By taking a pragmatic and focused approach, midcap banks can overcome resource constraints to achieve meaningful AI-driven transformation.
It’s important to remember that, even as deep-pocketed institutions have made substantial investments in large-scale digital platforms, these have often resulted in limited returns, especially when those efforts were not anchored in specific customer needs. Rather than spreading resources thin, midcaps should focus their transformation budgets on the digital journeys that matter most. These include routine service interactions such as transferring funds, paying bills, depositing checks, resetting passwords, and viewing balances. While most midcap banks’ apps have these functionalities, to move the needle, they must be easy and intuitive. When these core journeys are digitized effectively, they reduce pressure on call centers and branches while significantly boosting customer satisfaction. This targeted approach is especially critical for engaging younger consumers, who expect seamless digital interactions.
At the same time, digital is about more than just future generations. In our 2024 survey, 47 percent of midcap customers said they wouldn’t consider opening an account with an online-only bank, compared with 36 percent of customers at megabanks. However, this resistance is declining: In 2020, 66 percent of midcap customers expressed an unwillingness to bank with an online-only institution. This 19-percentage-point shift reflects a growing openness to digital banking among consumers of all ages.
Crucially, midcaps must pursue digital transformation without sacrificing the quality of their customer service. Their success has historically rested on strong relationships, personalized attention, and responsiveness, traits that cannot be lost in the shift to more automated and self-directed channels. The goal should be to extend this high-touch experience into digital contexts, blending intuitive design with thoughtful service to maintain trust and satisfaction at every touchpoint.
Build a digital marketing machine
Consumers, particularly younger ones, expect to be able to switch seamlessly between channels—for instance, starting a task on an app and completing it at a bank branch without needing to repeat information. As digital journeys become even more important in banking, midcap banks must be able to attract, convert, and retain customers online. Among younger generations, 79 percent of millennials and 70 percent of Gen Zers cite mobile apps or other digital platforms as their primary access point for banking services, compared with 61 percent of baby boomers.
Capturing this audience requires a precision-targeted marketing strategy. Midcaps should invest in a performance-focused digital engine that uses data analytics to identify high-intent prospects, engage them with relevant content, and convert them through seamless onboarding. This approach includes integrated tactics such as SEO, social media, retargeting potential customers for conversion, referral programs, loyalty initiatives, and personalized email campaigns. Each stage of the process should be closely managed to minimize losing customers and maximize return on investment.
In the context of limited investment capacity, using shared data platforms or marketing utilities may allow midcaps to access more sophisticated targeting capabilities without requiring the same up-front tech investment as larger peers. Beyond attracting new customers, these tools are powerful levers for improving engagement and retention. Performance marketing supports efficient lead generation, while referral and loyalty programs deepen customer relationships and help reduce churn. Targeted digital outreach can also help midcaps proactively manage term deposit renewals, engage dormant customers, and connect with those undergoing life changes such as moving, marriage, or starting a family.
As midcaps scale these digital capabilities, it’s essential they maintain what has historically set them apart: high-quality service. The most effective marketing strategies will combine digital channels with the human touch, reinforcing trust and delivering a cohesive experience that balances efficiency with the relationship-focused service that customers expect from midcaps.
Focus on effectively serving high-value customer segments
Midcap banks don’t need to compete across all customer segments to succeed. Focusing on affluent and mass affluent individuals,3 including small business owners, whom midcaps already serve through their commercial franchises, represents a significant opportunity. These segments often have more complex financial needs, opening the door for midcaps to deliver greater value through integrated offerings.
Midcaps can enhance their wealth and business banking capabilities by acquiring a registered investment advisor or partnering with an established wealth manager to broaden the suite of advisory services available. Equally important is for midcaps to more tightly integrate their commercial and wealth offerings to address the personal and business needs of small business owners. Seamless pathways from commercial accounts to personal wealth services reinforce loyalty and drive a deeper share of wallet.
Building this proposition requires investment in foundational capabilities. Granular customer segmentation, deep analytics, and robust relationship management tools are essential to identifying high-potential customers and tailoring engagement strategies. Streamlined onboarding, coupled with a consistent experience across channels, can help midcaps cross-sell to their customers more effectively. In-branch bankers and relationship managers must also be equipped with the training and tools needed to recognize wealth management opportunities and deliver consultative advice.
Midcaps can enhance the client experience by combining personalized service with technology. For example, hybrid wealth models that blend automated financial planning tools with human advisors can increase efficiency while preserving the high-touch service these clients expect. Embedding technology into the broader wealth experience will be critical for midcaps as millennial and Gen Z consumers acquire more assets. Ultimately, strengthening the high-value customer proposition allows midcaps to play to their core strengths while expanding their relevance to a profitable customer segment.
Refine the retail product portfolio through specialization
Midcap banks often make the mistake of trying to compete across all product categories, offering the same range as larger banks. However, this approach can stretch resources thin. Additionally, some consumers intentionally unbundle their financial lives to optimize for cost, convenience, or features. Midcaps can embrace this trend by becoming the preferred specialist in certain areas (for example, best-in-class small business banking or a specialized unsecured lending product) and win loyalty for those targeted services.
A critical step is to identify which products are most aligned with target customer segments and business objectives. For instance, strengthening the value proposition of products such as home equity lines of credit for affluent and mass affluent consumers can help deepen those relationships. Meanwhile, offering digitally seamless products such as savings accounts designed to be accessed primarily through an app, or credit card options tailored to younger consumers’ lifestyles, can help engage those who prioritize ease of use and innovation. Rather than attempting to compete on every front, midcaps should focus on a few key products that drive acquisition and retention.
This refined approach is important given midcaps’ room for growth in categories such as savings, credit cards, and retirement products, areas that present significant opportunities, especially as younger generations accumulate wealth and look for providers that meet their evolving needs. By concentrating efforts here, midcaps can better serve both their core base and the next generation.
The 2023 regional banking crisis underscored the risks of overreliance on concentrated deposits. Since then, retail deposits have become a cornerstone of stability and long-term resilience. For midcap banks, reinforcing the retail franchise is essential not only to weather volatility but also to capture the generational shift reshaping the industry. With baby boomers expected to account for a smaller share of banking revenues, millennials and Gen Zers are emerging as the engines of future growth. These younger consumers carry heightened expectations for value, convenience, and tech savviness.
The institutions that thrive will be those that modernize branches, digitize the most important customer journeys, build engines that convert and retain customers, elevate offerings for high-value clients, and refine portfolios with intent—while also finding smarter ways to overcome structural disadvantages in investment scale. These moves, grounded in the right capabilities and executed with discipline, offer midcap banks a path to lasting growth.
