For those of you who may have missed it, the analyst firm Forrester just issued their report on what they believe the coming year holds for banks. Granted, there’s no crystal ball out there and, as we have all seen, experts have been struggling for years with predicting where the economy is headed. So, while I think many predictions should be taken with a grain of salt, I do think that what Forrester believes lies ahead is pretty much on the money (no pun intended).
Where do we begin? With three US bank failures in the US and the last-minute rescue of a major Swiss bank. That certainly does not bode well for tranquility in the banking sector for the coming year. As usual, an air of uncertainty looms, hinting at potential challenges for banks in retaining deposits as they grapple with sustaining profit margins. The promising, yet uncertain and untested realm of AI technologies adds a layer of complexity; these technologies, according to Forrester, pose as many risks as they do benefits. Regulatory agencies find themselves compelled – by some of the inventors of these AI-powered technology solutions themselves – to take a more active role, especially in the US, where open banking finally garners long-overdue attention.
30% will shift deposits from primary institutions
Forecasts hint at a potential shift as thirty percent of customers consider redirecting their deposits away from their primary banks. An uncertain global economic outlook, combined with persistently high interest rates, continues to exert financial pressure on banking customers in the coming year. Having once reaped the benefits of increased loan interest rates, banks again find themselves now facing heightened scrutiny for not passing on similar benefits to consumers. Anticipating this, regulators are poised to clamp down on unfair savings rates and tighten controls. In response, cash-strapped banking consumers will do what they always do; vote with their feet. Challenger banks will seize the opportunity to attract these disenchanted consumers, capitalizing on the discontent surrounding savings rates. Apple Card’s introduction of a high-yield savings account, for example, successfully drew over $10 billion in deposits by promising a premium experience and cultivating an encompassing digital financial ecosystem for customers.
Technologies come with risk
Open banking, fostering the freer flow of funds, takes center stage in 2024 and prompted by the CFPB’s proposed rule on personal financial data rights, is challenging traditional banking models. Established banks find themselves compelled to reimagine their value propositions, seeking innovative ways to showcase their worth in the evolving landscape, fostering deposits, and nurturing loyalty in a competitive environment. Yet, despite intentions to invest in open banking technology, the majority of US banks falter in delivering consumer-facing solutions. And, it’s no wonder. With its promise comes risk; to financial privacy and the security of consumers' finances, as well as resulting liabilities.
Furthermore, the fintech and traditional financial sectors pivot towards niche customer segments, striving to differentiate themselves in a saturated market. “While some fintechs collapse or pivot due to challenges in funding, and targeting niche audiences, others discern opportunities in designing inclusive financial products and experiences catering to specific needs or infrequent but impactful customer journeys.”1 Herein lies a tremendous opportunity for those banks, community banks in particular, that leverage their personalized (yet convenient and expedient) banking offerings, particularly through their online presence.
Within this landscape driven by digital transformation, the risks posed by AI-driven technologies are becoming more apparent (and perhaps exaggerated? No one really knows yet, do they?) every day. While the benefits of generative AI (genAI) are obvious in terms of driving customer experience, risk management, data management and more, without robust controls, it could prove catastrophic, leading to disastrous outcomes for banks. Despite banks’ efforts to pilot and regulate genAI usage, rogue operations might inadvertently breach privacy, copyright, or bias protocols, and regulatory scrutiny to name just a few. Forrester’s security and risk team foresees a rise in data breaches and fines attributable to AI-generated code security flaws, warning banks of potential repercussions if stringent governance is not in place. I agree wholeheartedly. GenAI is, at the moment, a loose cannon not only in terms of its uses, but what regulators will do (or at least try to do) to ensure “fair practices”in banking functions, such as the unbiased review of credit applications, as well as the protection of the customer’s personal data.
In the end, Forrester emphasizes that “failure to act is, unequivocally, a failure itself. That banks must cultivate trust in their technological endeavors, prioritize stakeholder trust, educate staff, uphold privacy principles, and institute appropriate governance to navigate this evolving terrain.”2 Easier said than done, I think, but both possible … and necessary.
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1,2,Forrester. Predictions in Banking: 2024.