Banking industry outlook for 2024: Perspectives on Key Trends

As the banking industry rebounded from the pandemic, they entered a period of new challenges and opportunities.

MACRO DEVELOPMENTS: Market, Regulatory, Competition and Technology

In the current business operating environment, there are few concerns around inflation leading to higher interest rates, which makes it expensive for banks to borrow and lend. Some markets have also seen instability in the value of Treasury bonds/ Govt securities. Geo-political tensions and global supply chain disruptions have only added to the confusion. It is expected that the later part of 2024 might witness a reduction in inflation and provide banks with some relief on the rates. Credit quality might also see improvement over time. Another development is the increase in frauds and exposure of bank vulnerabilities. Governments may strengthen the regulatory requirements. Banks will look to strengthen their balance sheets, and this could lead to higher M&A activity for the banks to achieve greater scale, stability, and ability to meet the regulatory thresholds.

On the technology front, the technology front has thrown up some exciting new innovations in Artificial Intelligence, Blockchain, Metaverse, and other digital technologies. Banks are enthused to embrace them, but there are uncertainties and challenges that need to be resolved.

THE RESPONSE: Dual Approach of Building Multi-Dimensional Resilience and Preparing for Growth Ahead

To navigate the road ahead, banks shall adopt a dual approach of building strong resilience and preparing for growth in the competitive environment.

Building Resilience is of paramount importance, and 4 key dimensions include: 

• Financial Resilience: Bring down the cost to income ratio.
• Operational Resilience: Build exceptional risk management and protect against frauds/money laundering.
• Digital/ Tech Resilience: Build strong digital foundation to scale capabilities and stay strong against Cyber-attacks, Data privacy and vulnerabilities.
• Organization Resilience: Build capability to be agile, adaptive and get right talent.

Driving Growth revolves around customer centricity, innovation, and industry collaboration and 4 key themes include:

• Purpose-Led and Lifetime Value for customers: The focus of banks will be to ensure   financial wellness for its customers over their lifetime. Deep personalization is key to retaining and expanding customer base. Leveraging data and insights to build personalized customer journeys, life-stage products (deposits, loans, insurance), and AI led financial advice will continue to be an area of focus for banks.
• New Models & Products: Collaboration would be key. This could include collaboration with Fintechs to explore Open Banking services and collaboration with other industry players for embedded finance will be the way ahead. However, the benefits from this should be balanced with the risks and vulnerabilities that could be exposed due to these developments.
• Sustainability is a global mandate and opportunity. This shall lead to strengthening the ESG ecosystem in the banks and the launch of new products promoting sustainability initiatives.
• Banking for All: Financial inclusion, enabling banking services through physical and digital service delivery to the less served population and business sectors will be a key focus. Specific products for each consumer segment will be key for sustained growth.

While there are many trends influencing this industry, this article explores trends gaining momentum in 5 key techno-functional domains (1. Generative AI, 2. Digital Payments, 3. Decentralized Finance, 4. Lending and 5. Sustainability) that could influence the priorities of Banking in 2024.

1. GENERATIVE AI IN BANKING:

Gen AI is the talk of the town. So, let’s start with its impact in Banking. It is certainly an enabler for improved efficiency, productivity, and innovation. However, both benefits and risks associated with this technology will be looked at. 

• The industry will see a race amongst the banks to embrace this technology rapidly to improve customer interactions and employee productivity. Top use cases of adoption include:
  • Customer Service (Chatbots/ Customer Interactions assistance) with near human like interactions with LLMs. This technology will also help provide digital banking to rural areas with conversations extended to their local/native language.
  • Reporting (Compliance reporting, Adhoc reports and information summaries/ extracts) & Automation for business processes such as KYC and underwriting.
  • Information Analysis, Summarization, and Inferences (Assistants to Wealth Managers etc.)
  • Developer Assistants (Coding, Testing etc.)
  • Creative Marketing content generation (Image/ Text creations)

• Generative AI is a double-edged sword when it comes to risk management.
  • AI/ML is and shall be increasingly used to detect fraud and money laundering. This trend is expected to gain traction. However, Gen AI shall throw up more fraudsters creating deep fakes in voice, text, and artificial transactions and this can pose a challenge. Hence, AI is both a risk and an opportunity to address frauds and risks.  

• Expect research focus in handling core financial service functions such as making decisions on investment decisions, trading decisions, asset selection etc.
  • Combinatorial Approach in AI Models: The future is expected to explore the combination of Predictive AI and Generative AI to explore the power of both quantitative analysis from historical data and Sentiment extraction of market/analyst/company reports to arrive at more accurate decisions in core financial functions.
  • Data Monetization: Banks shall also look at monetizing their data by providing insights as a service from their archives/historical data by building custom LLMs.
  • AI Embedded: Product vendors will embrace this technology into their core banking capabilities by default.
  • Banking domain specific LLMs shall gain momentum, which shall have greater language capability in in financial domain.
  • Multi-Lingual support: Countries will build LLMs in their native language to extend chat support in their region.
  • Creative Use Cases: To give an example, recently, a company launched LTM (Large Transaction Model) to pour through huge volumes of transaction data to build patterns on fraudulent transactions and this was tested to be more effective. Another company built a LLM to match potential sets of companies that may be interested in each other for a partnership/ merger/ collaboration.

2. DIGITAL PAYMENTS - FAST, SECURE AND BORDERLESS

Digital payment networks are building capabilities to support a wide range of payments such A2A (account to account) P2P (person to person), digital wallet payments, crypto payments, and BNPL integrations.

• Countries across the world shall strengthen the underlying digital market infrastructure to make digital payments seamless, instant, and secure. This shall make financial services more “Inclusive” and “Accessible” to all.
  • Peer-to-Peer payments can happen with a universal payments’ identifier (or a QR code) of receiver and bank account details need not be shared or used by sender.  
  • Even Cooperatives and credit union banks are rapidly embracing such digital payment features. 

• Cross-Border Payments shall become seamless and instant. This would also make it possible to use “real-time exchange rates” and “receive payments like a local”. International Payment Settlement Agencies (like Amex, MasterCard, Visa, and others) and Networks (like Swift) shall strengthen their network connectivity for streamlining cross-border payments. 

• Embedded Payments – Increasingly, we shall observe digital payment capability being embedded into cars, social media sites besides online digital stores.
• Numberless and Virtual Cards – To prevent frauds, banks shall explore more of numberless or virtual cards designed for online usage. In numberless cards, card number and CVV details are not printed, and secure information is managed by the user through an app. In virtual cards, the usage is designed for online, and numbers are generated for one-time use.
• Central Bank Digital Currency (CBDC)- Many countries will explore creating their own digital currencies. A central bank digital currency is a digital currency issued by a nation’s central bank, and is denominated in the sovereign currency, like physical banknotes and coins. Instead of relying on intermediaries such as banks and clearing houses, money transfers and payments could be made in real time, directly from the payer to the payee. There are advantages that countries would like to explore such as proof transaction, tax collection and combatting crime. However, data privacy and security concerns must be well taken care of.

3. DECENTRALIZED FINANCE: Blockchain for Crypto Currency and Beyond

Blockchain became popular with the advent of bitcoin. Security, Transparency in money trail and instant processing are obvious advantages in its adoption. The world is now looking at this technology beyond crypto currencies and coins.

• Blockchain Beyond Bitcoins: Interesting use cases leveraging Blockchain for financial world includes:
  
  • Digital Bonds, Equity Issuance
  • Digital Trade Finance | Letter of Credit | Tokenized Credit Notes
  • Instant Cross Border Settlement
  • Tokenized Loyalty Platforms
  • Property Registrations
  • Digital Twin of Physical asset (like tokenized Gold)
  • Digital asset management (Data, Documents, Photos, Videos, Music, ...)

• Crypto Currency & Payments
  • With crypto currency gaining popularity, banks are expected to launch crypto wallets, crypto cards, and crypto payments for purchases.

• Strengthen the underlying Crypto Infrastructure
  • Banks & Financial Services organizations, Fintech companies and Technology Product companies shall collaborate to build a strong blockchain network to help execute financial product smart contracts for institutional crypto assets while maintaining security and regulatory requirements.

4. LENDING: Digitized Lifecycle and Customized/ Flexible Products

Lending is the core to the success of a financial enterprise. Digitization of lending and enhanced lending products are key.

• Digital and Algo driven:
  • Lending processes shall continue to become increasingly digital with digitization for rapid onboarding, algorithms for credit decisions and portals/conversational interfaces for servicing.

• Niche & Sector specific Lending:
  • SMB Lending and Advisory gaining traction –Around the world, more than 50% of the working population are employed in small and medium sized enterprises and this sector contributes around 35-45% of GDP in several countries. Banks have realized that there is a big potential to build niche products/services to this sector. Specialized lending and insurance products to provide easy, quick credit to this sector will gain impetus. At the same time, this sector does come with heightened risk perception that needs to be dealt with. For micro loans, credit decisioning shall automatically approve. Digital solutions shall come into place to help SMBs manage their cash flow, make easy payments, and provide marketplaces for their trade and services.
  • Agriculture and Education are sectors, that Banks shall provide specific lending products. Agriculture loans to farmers help build good security and government financial organizations will continue to focus on this. Education loans and Youth Banking help bring the younger population into the formal banking environment, help them make quick payments to education expenses.

• Buy Now Pay Later (BNPL) – This buzzword is catching up very fast. This feature helps push consumer spending. This shall become available in different variants – Special BNPL cards at merchants, BNPL for Online transactions and B2B trades using BNPL. Recently, a leading money transfer company partnered with a Fintech to launch “Send Now, Pay Later”, an interesting variant. To mitigate the credit risks, banks shall limit this facility to small/ micro transactions. Governments are also expected to advise banks to ensure that these BNPL loans are safeguarded against adverse outcomes.

5. SUSTAINABILITY: Embracing Mandate and Exploring Growth

Sustainability is a key focus area of every enterprise. There is both a governmental push and emphasis and organizational priority to minimize carbon emissions. There are broadly 3 areas that banks shall look to focus on:

• Systems and Methods for Sustainability Governance: Organizations are firming up their methods to track, measure and improve their carbon footprint. This includes data sources/ data providers, carbon consumption computations, and reporting templates. Some banks are integrating the data from multiple sources and providing them as a service with added tools for custom analysis, scoring, tracking, and reporting.
• Sustainability linked Lending & Bonds: Banks are encouraging sustainability actions through lending for green initiatives such as climate action projects, reforestation, plastic removal, buying homes with green-certificates and others. Sustainability linked bonds (SLBs) and funds are becoming more attractive in the market.
• Carbon Marketplace: The future might witness international carbon marketplaces designed to allow for the trading of voluntary carbon credits and instruments, which helps connect capital with climate-related products.

There are interesting times ahead, and banking enterprises shall be quick to tap into the emerging opportunities, while preparing itself for risks and growth through a resilient and adaptive organization.