High interest rates, still-too-high inflation and an ongoing cost-of-living crisis has put enormous pressure on American consumers and the financial institutions that serve them over the past year. Add to that increasing regulatory scrutiny and proposed legislation that impacts everything from traditional banking products and services to the use of emerging artificial intelligence technologies —and 2023 has left banks facing the new and complex challenges of unchartered territory.
Yet as with any challenge, there comes opportunity. The financial institutions that will succeed in the year ahead will seize this moment in time to truly— finally—adapt to meet the needs of today's banking customers. Here are our Top 5 predictions for what's in store in 2024.
1. Banks will increasingly partner with fintechs to accelerate digital modernization and remain competitive.
For years now, non-bank digital-first financial players have been eating away at the customer base of traditional financial institutions. Inefficient, inflexible legacy infrastructure coupled with bureaucracy, backlog and conflicting goals have stymied banks' speed to market with in-demand digital offerings.
At the same time, fintechs have come to grips with the tough realities of our highly regulated and scrutinized financial services industry and now understand that banking is, well, hard. And when fintech funding hit a new low in 2023, it got even harder.
In 2024, the build versus buy debate within financial institutions will be replaced with discussions around strategic fintech partnerships that allow banks to remain relevant in a highly competitive marketplace where customer loyalty is tied to the quality and efficiency of digital offerings. With the agility and speed of the right fintech partner, banks can get to market quickly with differentiated customer-centric solutions that increase stickiness and open up new opportunities to upsell and cross-sell and retain customers. Successful strategies won't be focused on what's "hot" in the marketplace but, rather, what's most important to their customers, whether that's simplifying the way customers open accounts, apply for loans or pay their bills.
2. The age of real-time payments will force banks to update legacy infrastructure.
As consumers and businesses alike look for faster, cheaper, easier ways to transact, we've seen a growing demand for real-time resolution, which right now lies mostly with the fintechs and largest financial institutions. This year's launch of the Federal Reserve Bank's real-time settlement system, FedNow, aims to change this, making real-time accessible to financial institutions across the board. Ultimately, banks will either choose to adapt—or risk losing customers to those that do.
However, many of the payment processing systems that are in use behind the scenes of a "modern" bank today were actually written in the 1960s and 1970s ... hardly modern in today's digital age. To compete in the years ahead, banks will need to take a hard look at their legacy infrastructure and invest heavily in modernization efforts leveraging SaaS providers that can provide the right technology and network access.
Real-time banking means that it will no longer be possible to run batch processing for every single transaction. It will also be increasingly challenging for banks to manipulate the days-long settlement cycles to create the illusion of real-time payments for consumers. Bank bill payment systems, which have no evolved in over 20 years, will be thrust in the spotlight, as competitors leverage real-time rails and begin sending real-time payments through TCH RTP and FedNow. And the entire funds availability policies at banks will need to be reworked to reflect the reduced risk of settlement.
The transition to real-time banking necessitates the adoption of cloud-based solutions, robust APIs and cutting-edge technologies to ensure that banks can keep pace with evolving customer expectations and emerging industry standards. Ultimately, upgrading infrastructure in 2024 will not be just about meeting current demands; it will be an investment in future-proofing operations.
3. Banks will demand more transparency from their third-party fraud vendors.
To be frank, when it comes to third-party fraud solutions, banks deserve better.
Most fraud vendors tout black box solutions, presenting them as their "intellectual property" on how to manage a bank's portfolio. They report on standardized metrics (detection rate, alert rate, FTE overhead, etc.) perhaps once a month, maybe once a quarter. And this is fine.
But as financial fraud becomes more intricate and more commonplace, and risk remains a deterrent for innovation, fine isn't good enough. To succeed in the year ahead, banks will need full transparency into the strategies, tactics and performance of their third-party fraud solutions.
Full transparency requires that a bank has the same level of insights as its vendor. That means if a bank is running a rules-based environment or running a model, it should know the exact model that's running, it's rules and configuration, and have access to performance data that speaks to every rule and every model on a daily frequency. A financial institution that is regularly reviewing and analyzing fraud data may detect patterns and loss types that a third-party vendor may be missing. Without this level of insight, it may take days, weeks or months to deploy a solution that specifically addresses an attack vector — and that's not good enough for the financial institution, its customers or its shareholders.
Transparency in the form of clear documentation, regular reporting and open communication channels allows banks to assess the reliability and accuracy of the fraud prevention tools on which they rely. Moving forward, this level of scrutiny will become even more critical as regulatory bodies worldwide increasingly emphasize the importance of robust anti-fraud measures.
4. Open banking will usher in a new focus on bank bill pay solutions to create customer stickiness.
The Consumer Financial Protection Bureau's Personal Financial Data Rights rule, which is the first proposal to implement Section 1033 of the Consumer Financial Protection Act, will likely go into effect mid-year next year. But it's certainly closing out 2023 with a bang.
Open banking legislation is intended to alleviate the challenges consumers face when trying to access and control their data so that they can work with a financial partner, including digital apps and third-party budgeting tools, that best suit their needs. In other words, it makes switching banks less difficult for consumers—and easier for fintechs to steal them away.
While some banks may see open banking as a threat, for those that embrace open banking as a means to finally deliver the superior digital experiences their customers crave, it's a huge opportunity. Most notably, with bank bill pay.
According to BillGO's latest consumer research, 74% of U.S. consumers want a single place to pay all of their bills. Yet the inadequacies of legacy bank bill solutions are driving consumers (and incremental revenue opportunities) away, resulting in a 43% drop in banks' share of the bill pay market.
By taking advantage of the interconnected network facilitated by open banking, banks can integrate their bill pay services with a wide range of third-party applications and platforms, allowing customers to manage their bills in one centralized location and providing a single source of truth for spending, saving and budgeting. Whether it's automating recurring payments, receiving real-time notifications or accessing bill payment history, open banking is a driver for a comprehensive and user-friendly bank bill pay experience. Adding bill pay to a bank's digital product suite will be pivotal to creating customer stickiness in a marketplace that open banking aims to make less sticky in 2024.
5. Banks will increasingly experiment with AI to enhance the customer experience.
While the concept of artificial intelligence (AI) solutions is no longer novel, financial institutions have yet to tap into its full potential. Heading into 2024, the growing availability of AI solutions and platforms, along with increased affordability, will lower hte barriers to entry for banks, encouraging them to explore and experiment with innovative AI-driven applications as they try to differentiate themselves with transformative customer experiences. One area ripe for testing will be bill payments.
With the ability to analyze vast amounts of data to understand individual spending patterns and preferences, AI will be used to create more personalized payment experiences, such as tailored recommendations, loyalty programs and customized offers. AI-driven chatbots will be more sophisticated in handling customer queries related to payments, improving customer service and providing real-time assistance for transaction-related issues. And we'll see some banks leverage AI's predictive analytics ability to help individuals manage their finances more effectively, assisting with budgeting and financial planning and providing insights based on spending patterns.
Entering 2024, there's much at stake for banks to remain relevant and compete in an ever-evolving marketplace. Even for financial institutions that have made considerable progress upping their digital offerings, the past year's influx of new technologies, new players and new legislation have left ample opportunities on the table. To succeed in the year ahead, banks will keep an open mind, evaluate necessary changes, maintain adaptability and seize opportunities to drive real growth.
Learn more about the impact of real-time payments on legacy infrastructure.
