AI was one of the buzziest words in the financial industry in 2023, and that won't be changing in 2024. Indeed, AI technology will only continue to mature as companies figure out how to put it into action. From integrating new digital technologies to navigating an intricate web of customer expectations and regulatory shifts, financial institutions should be prepared to adapt. Read on for insight into the seven biggest changes awaiting the financial sector in 2024.
1. Increased use of AI technologies.
The financial services industry may be further along in its AI journey than other industries, but finserv companies are still unclear on how to best exploit the vast potential of AI. Senior-level executives expect artificial intelligence, including machine learning and generative AI, to be the most transformative technology in the coming years. Now to learn to harness it.
Banks have progressed from preliminary exploration to identifying use cases and developing prototypes of generative AI for targeted applications. AI has the potential to improve customer interactions, create efficiencies in an organization's operating model, better analyze credit risk, and more. The problem many businesses face is figuring out how to access the benefits of AI while establishing much-needed protocols to prevent adverse outcomes.
[There are four types of AI that are key to financial services. Learn how they can improve your organization.]
2. A stronger focus on the overall customer experience.
Bank leaders and business operations teams focused on customer lifecycle management are dealing with the friction caused by frequently changing regulations. Throughout the customer journey, institutions are challenged with meeting customers' growing needs and expectations, especially in extending the value of existing financial products or offering new ones. While customer engagement used to happen at physical bank branches, customers now expect seamless digital experiences and personalized products. Excellent customer service is a major competitive differentiator in a time when customer loyalty has become harder to earn.
In Accenture’s The Future of Asset Management: Business models and strategies for 2025, participants discussed their intent to expand their product offerings. "P art of this expansion will be fueled by hyper-personalization, as customers look for products and services tailored to their specific goals and timelines.” To that end, 74% of asset management executives said they're considering expanding their offerings to go beyond investment products. And, where they do intend to maintain their focus on investment, 83% agree that their firm is actively looking to expand into new investment products.
3. More challenging fraud and cyber security threats.
Generative AI is also seen as a potential threat that will allow hackers to perpetrate more sophisticated money laundering and fraud techniques. At the same time, AI is also seen as an opportunity to fight against them. In a 2023 KPMG AI study, fraud detection and prevention is viewed as the number one application for generative AI in financial services, and 77% of financial services executives say this is an area where the new technology is likely to be applied at their organization.
Because of this, executives are making modernizing their legacy infrastructure a top priority. They are widening the definition and scope of risk management beyond credit and operational risk functions to other functions like cybersecurity, third-party vendor risk, ESG and climate risk, and model risk. Implementing private AI in risk detection helps detect emerging threats and reduce false positives, and machine learning can pinpoint vulnerabilities that might be missed by manual oversight.
4. Expanded use of business process automation.
Automating manual processes that are inherently inefficient, risky, and rigid is critical to organizational resilience and improving operating margins. But replacing legacy systems is often not an option. To save time and costs, organizations need to find better ways to use the resources they already have to achieve this. Many are looking to technologies like robotic process automation (RPA) that can connect existing legacy systems to automated workflows to keep them usable.
This kind of automation gives organizations the power to improve banking operations, better fulfill compliance requirements, enhance business agility, and improve processing time. It helps cut down on repetitive tasks and disconnected processes while improving customer satisfaction, giving financial institutions a leg up in a competitive landscape.
[Concerned about data privacy in the AI era? Learn how private AI can help you improve your organization while keeping your data secure.]
5. Boosted spending on technology and supporting roles.
In a report on a survey of CEOs, Gartner recommends that CIOs leading their organization's digital transformation initiatives need to support their CEO's short-term growth goals by doubling down on IT projects that impact customer experience and operational efficiency in order to maintain a competitive edge. In addition to increasing tech spending, many firms will prioritize hiring top talent to help them implement new technologies like AI while also working to develop the skills of current employees. Embracing agile practices, scaling initiatives across the organization, and offering comprehensive training programs will all be key to making the most of this spending.
6. New regulations under Basel III endgame. Maybe.
The Basel III endgame convergence is driving up capital requirements for banks. This regulatory pressure ensures greater resilience in the banking sector but also necessitates careful capital management and could limit certain types of lending or investment activities, with expected higher capital requirements for all banks.
Meanwhile, as of mid-January, the US Federal Reserve System is contemplating changes to key parts of the new regulations, thanks to opposition from the banking industry. Opponents of the regulations say the additional strain on banks could negatively impact consumers and will add to banking industry challenges. The Federal Reserve collected public input in a survey that they say will guide their decision-making on issues like operational risk.
7. More global economic challenges and geopolitical risk.
In 2024, major elections in the US and UK and ongoing wars will increase geopolitical risk across industries. Financial services organizations will have to navigate a period of significant transition that could have an impact on revenue and growth due. Higher interest rates and increasing profitability will present short-term opportunities, but challenges like rising bad debts, stringent capital requirements, and the evolving investment landscape demand strategic investments in technology. Smart technology investments will deliver on three top-ranked areas in a quest for resilient growth: operating margins, risk management, and customer lifecycle management.
Improving legacy systems is key to growth and transformation in banking in 2024.
For business and IT leaders, digital transformation in the financial services industry continues to pose a challenge but is necessary to keep pace with changing regulatory requirements, consumer demand, and budget constraints. It's also important to prevent operational areas from growing their expenses unintentionally. In the typical boom and bust cycle, banks can feel pressure to roll out new financial products, services, and business lines. This can lead to banks deciding to add headcount to handle manual tasks, use spreadsheets and email instead of automation, and add to their tech stacks in ways that don't integrate well with the company's existing workflows.
Retaining customers will be an important factor for maintaining profits, which makes delivering an excellent customer journey and overall experience even more vital. AI and automation technology will play a key role in that effort as well as in reducing operational costs and improving risk management. Legacy system modernization that equips organizations to capitalize on these technologies will be a top 2024 priority for those working to build a runway toward future success.
[Do you know the top AI use cases in financial services? Are you prepared to navigate the AI risks coming your way? We wrote the AI Handbook for Financial Services Leaders just for you.]
