27. December 2023 By Nehir Safak-Turhan
Market outlook for the banking sector in 2024 – the rising tide of change
The banking industry is in a state of constant flux. Whether you are talking about digitalising value creation at banks, creating positive customer experiences, grappling with the concept of new work or increasing economic efficiency, the banking sector faces a number of challenges. An unbiased look at the market provides insights into the key drivers in banking. It increases our focus on the fundamentals while also allowing us to draw conclusions regarding opportunities and challenges in the year to come. In this blog post, I give my outlook on the technology trends for 2024 that will play a central role in banking. Transforming information into intelligence is our bread and butter, which is why the predictions we make here are not random but based on a solid foundation of knowledge.
Technology as a key catalyst in the banking sector
In 2024 technology will remain a key driver of innovation in banking. Data-driven business models and personalised banking, AI-based use cases, ecosystems and platforms as well as blockchain-based solutions are all key technology drivers for 2024. At the same time, the transformation and digitalisation of the banking sector is gaining pace thanks to an increased adoption of cloud technologies, with the goal being to move forward with efforts to modernise the system landscape. Another key technology driver is the push for the use of AI applications in banking. As bank-specific use cases grow and mature, the benefits of using artificial intelligence (AI) in the banking sector are becoming clearer and clearer. Whether you are talking about automation or new use cases, AI will receive a significant boost and be one of the trending topics in the sector in 2024.
Here is an overview of the main technology drivers:
1. Personalised banking:
Data-driven business models are taking on a growing strategic role in terms of customer retention and loyalty. The individual needs and requirements of customers can be identified by analysing, evaluating and anticipating data, allowing banks to create personalised financial services that generate added value for the customer. Banks can offer a seamless experience and personalised offers along the customer journey by further building on and digitalising the omnichannel strategy at all critical customer touchpoints. This is made possible by data analytics along with AI, which also opens up a wide variety of use cases in and around personalised banking.
Advantages and USPs of personalised banking:
- Greater market and customer penetration thanks to data-driven transparency regarding customer needs and requirements.
- Targeted communications along with financial and other services increase customer reach
- Next best action/next best offer increases the potential for cross-selling/upselling
2. AI in banking:
AI is making its way into the world of finance, where it is increasingly becoming a key factor on the competitive marketplace. This technology allows banks to gain in-depth insights from data and develop completely new business and application models. Powerful models can be used to process a range of data from different sources such as text, images, videos and audio files, opening up a whole host of potential applications in the banking sector. To name a few examples, AI-based models can be deployed to detect and block suspicious activities (money laundering, fraud) more quickly, while data-driven models can be used to streamline investment decisions and create user-friendly customer experiences. Targeted automation can also help make the value creation process at banks more efficient and deliver gains in productivity by replacing resource-intensive workflows. The large number of AI-driven use cases in banking, many of which have their origins in the startup scene (fintechs), is leading to an increase in the range of AI-based financial services on offer. Along with that, the greater availability of services increases the rate of adoption of innovative technology. Last but not least, AI-driven use cases will influence the pace of innovation in banking far beyond 2024.
Advantages and USPs of AI in banking:
- Better cost-to-income ratio (CIR) driven by gains in productivity
- Process optimisation and automation of manual workflows
- Greater resilience and enhanced fraud prevention
- Compliance and implementation of regulatory requirements
- Higher-quality service and customer processes
- Increased customer penetration thanks to personalised services
- Greater resilience (fraud prevention, risk management/default and market risks, IT security).
3. Open banking:
The opening up of the capital market to non-banks and near-banks is not a new phenomenon. Lawmakers have established a number of regulatory requirements (including PSD2) in recent years to lay the groundwork for third-party providers to operate as service providers on the banking market. This marked the advent of the open banking era. Technological innovations such as digital ecosystems (including API interfaces), platforms and portals are what make open banking possible in the first place. One should also expect to see a convergence of bank-related and non-bank services in 2024 because the financial market is so attractive for third-party providers and due to the further opening up of the sector to non-banks. Deeper vertical integration of banking services and industry will also lead to the emergence of new business models. In particular, there is still room for growth in embedded finance and banking as a service (BaaS), which offers opportunities from a revenue and growth perspective.
Advantages and USPs of open banking:
- New revenue and growth streams opened up by portals, platforms and ecosystems
- Convenience, customer experience and vertical integration as the basis for data-driven, personalised services
- Connectivity and mobility as key push effects
- Expanded reach and increased customer penetration driven by network effects
4. Transformation and modernisation:
The increasing pace of the digital transformation along with the modernisation of IT systems to boost performance and agility will be the focus of decision-makers in 2024. Why these two issues? Because banks cannot maintain the basic foundation needed to stay competitive from a value creation perspective if they have or operate highly complex IT systems, silo landscapes and rigid architectures. The high level of cloud technology maturity and best practices in legacy modernisation are the driving forces behind IT modernisation. The path to the cloud will raise basic questions when it comes to best practices, issues relating to switching providers, managed cloud for banks, compliance and data protection, IT security (including technical measures, architectures) as well as provider dependency and vendor lock-in. Beyond that, it will also define the parameters for a cloud move. If a company takes a holistic approach to assessing these challenges, it will gain a significant competitive edge when it comes to implementation.
Advantages and USPs of transformation and modernisation projects:
- Modernisation of old, obsolete core systems and silo landscapes
- Enhanced resilience and agility
- Real-time data processing (data analysis and evaluation)
- Compliance and implementation of regulatory requirements
- Automation and standardisation of the process landscape
- Positive customer experiences and time-to-market
- Innovative, data-driven business models for faster growth and higher revenue
Conclusion
New customer requirements, economic variables such as interest rate movements, the economy and competition as well as increasing regulatory hurdles, particularly in relation to sustainability, are other important factors that will affect the banking sector in 2024. The high price sensitivity of financial services, competitive pressure to attract and retain customers as well as growing customer demands in terms of conditions, convenience and customer experience will present banks and financial service providers with a number of new issues that need to be resolved. Meeting them requires the ability to make changes on the fly and a short time-to-market. Ensuring resilience and focussing on new opportunities to grow and generate revenue based on data-driven business models will give companies an edge over their competitors. Technology is not an end in itself when it comes to solving the problems outlined above. Rather, it is a key catalyst and tool to address the challenges and opportunities in the banking sector.
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