AI trends 2024: Ramping up innovation, productivity, and CX
AI trends for 2024 include more personalized customer experiences and increased productivity as businesses incorporate generative AI into their processes.
A great example of banking industry challenges happened in June 2024. A ransomware group’s claims in June that it stole Federal Reserve data grabbed headlines. But when Lockbit released the stolen data, it turned out to be from Evolve Bank & Trust, not the Fed.
While security experts speculated about the group’s motives, the strange episode served to highlight the massive cybersecurity challenges the banking industry faces today. The Evolve data breach affected more than 7 million of its banking customers, employees, and partner customers.
According to Statista, the financial services sector was the second-most targeted industry by cyberattacks that resulted in data breaches between 2020 and 2024.But challenges facing the banking sector in 2024 go far beyond cybercrime. Macroeconomic factors that stifle growth, digital disruption, heightened regulations, and changing customer expectations are creating challenges on many fronts for the industry.
The top five banking industry challenges plaguing today are:
Cybersecurity challenges grow for banking industry
The risk of cyberattack and severe losses is rising, with the banking and financial services industry a prime target, according to an International Monetary Fund report.
“The financial sector is uniquely exposed to cyber risk. Financial firms—given the large amounts of sensitive data and transactions they handle—are often targeted by criminals seeking to steal money or disrupt economic activity,” the IMF said.
Over the past 20 years, the financial industry has experienced by more than 20,000 cyberattacks resulting in direct losses of $12 billion, the study found.
Ransomware, like the kind used in the Evolve attack, is a growing security challenge for banks. According to Statista, 64% of financial institutions reported being hit by a ransomware attack last year, up from 34% in 2021.
A KMPG banking industry survey found that 45% ranked cybersecurity as a top threat to growth over the next three years.
The growing threats require constant vigilance, comprehensive risk management, and continual ramping up of security measures such as access controls.
Due diligence of third-party security also is essential, as attackers can gain access banking data through a third party. Earlier this year, Bank of America said at least 50,078 customers were impacted by ransomware attack on the bank’s partner, Infosys McCamish Systems.
Generative AI in banking: benefits and challenges
Generative artificial intelligence promises to help the banking industry in many ways, including improving customer service, credit risk assessment, reporting, compliance, and fraud detection. Sixty-five percent of respondents in the KPMG survey said GenAI is a key part of their bank’s long-term strategy.
At the same time, it poses a number of risks and challenges to the banking industry if not carefully implemented.
“Companies across industries face gen AI risks, including the generation of false or illogical information, intellectual property infringement, limited transparency in how the systems function, issues of bias and fairness, security concerns, and more,” a McKinsey & Company report warns.
According to a Deloitte Digital report, generative AI threatens to could make it easier for criminals to create fake identities and phishing messages, making authentication more challenging. Chatbots can become privacy risks and avenues for data exposure, too, the report notes.
Deloitte advises banks and financial firms to integrate deepfake detection into their anti-fraud systems and collaborate with third-parties to bolster their authentication and and fraud detection models. The firm also suggests training employees to detect account takeovers and privacy limitations for chatbot use.
Keeping up with customer needs + expectations
The banking industry has been undergoing digital transformation for years now as customers needs have evolved away from brick and mortar banks to digital channels. In 2024, banks need to double down on their transformation efforts.
Seventy-one percent of U.S. banking consumers preferred using mobile apps or online banking, according to a 2023 study by the American Bankers Association. Mobile apps were the most popular channel for the fourth year in a row.
“Mobile banking use accelerated during the pandemic and has only grown in the years since as people continue to enjoy the convenience of banking on the go,” said Brooke Ybarra, ABA’s senior vice president of innovation strategy.
Not surprising, the ABA study showed that the demographic most often using mobile banking are Gen Zers (57%) and millennials (60%). Only 4% of these digital natives prefer visiting a branch compared to 16% of boomers.
But banks can’t just roll out a mobile app and count on satisfied customers. Today’s consumers expect a high degree of ease and personalization, which requires a customer-centric mindset to keep up with their changing preferences.
In its report, Deloitte says banks need to find ways to use customer data to boost personalization, but that legacy systems and data privacy concerns have made that challenging in the past.
Banks should strive to be “the go-to hub for most of consumers’ financial needs,” especially as economic uncertainties weigh on customers more heavily, Deloitte said.
The never-ending compliance challenge for banks
As a heavily regulated industry, compliance is a constant issue for banks. From international capital frameworks and cybersecurity requirements to anti-money laundering laws and consumer privacy rules, banks face complex, evolving regulatory challenges.
The industry is keeping a close eye on the so-called “Basel III endgame,” a proposal to raise capital standards for large banks. The new rules would be a sea change for US banks, wrote Adam Girling, Principal, Financial Services, Ernst & Young LLP, wrote.
“The proposal would modify how the largest US banks think about regulatory capital and extends more granular, rigorous requirements to US regional and midsized banks,” he added.
Another new banking regulation in 2024 is the final rule issued by federal agencies for the Community Reinvestment Act. The update is designed to encourage banks to expand access to credit and banking services to low- and middle-income communities.
Compliance requires ongoing governance and comprehensive risk management with a robust control framework. Best practices include:- Perform regular audits and compliance reviews
- Ongoing compliance training for employees
- Monitor regulatory development and changes
- Implement advanced technology to automate compliance processes
- Hire either internal compliance officers or tap external compliance experts
Retail banking: Lions and bankers and fintechs, oh my!
Fintechs threaten the status quo. Unlike banks, they are unencumbered by legacy, regulations, and in most cases, even the need to make money. Retail bankers need to adapt and focus on customer relationships to compete.
The fintech surge
The growth of financial technology means consumers have a lot more choices and traditional banks have a lot more competition.
Fintech is a broad space that includes nimble startups that offer digital banking and payment services. Fintech examples include Plaid, which connects user bank accounts to apps like Venmo, London-based Revolut, which offers mobile banking and an investment app, and Ant Pay’s Alipay payment network in China. Many fintechs offer free checking and high-yield savings accounts.
Banks have found success in partnering with fintechs, a mutually beneficial trend that isn’t slowing down. While banks gain technology and insights, fintechs gain customer trust and market reach, a Thomson Reuters article noted.
While the banking industry is focused on digital transformation, moving away from legacy systems is challenging. A research report by Oxford Economics for SAP found that many mid-size banks struggle with outdated infrastructure that can’t scale. Nearly half reported technical deficiencies make it hard to expand their business, while 45% said legacy tech hampers employee performance.The report also found that many banks are in investing in cloud technologies and AI to help them remain competitive. Cloud benefits reported by survey respondents include improved agility, improved customer experience, optimized processes, and lower costs.
Banking industry challenges bring opportunities
Banks are facing tremendous tests in 2024 amid so much technological change, growing fraud, and an unpredictable economy. Still, those that focus on innovation and resilience can seize growth opportunities.
In fact, two thirds of respondents in the KPMG bank survey said they’re confident in their institution’s growth prospects.
The path to growth for banks is accelerating their enterprise transformation to be the bank of the future,” wrote Peter Torrente, US Sector Leader, Banking and Capital Markets, KPMG LLP.
Modern technology platforms are key to helping the financial sector manage the next wave of banking industry challenges by allowing them to leverage advanced technologies to improve operational efficiency, increase customer retention, and boost resilience, he said.
