Digital banking transformation: Accelerating into 2024

“The acceleration of digital transformation is one of those things that just can’t be stopped,” says Viren Patel, Industry Strategist for Financial Services and Insurance at Workday. 

A process many banks have either continued or started to undertake in 2023, as far as Kevin Pettet, COO of Banking Solutions at Bottomline is concerned, it’s not a question of “how much digital transformation will accelerate in 2024, but what form it will take”.

Below, we ask a host of industry experts – including Patel and Pettet – what trends they expect to see as the banking world continues its transformative charge into 2024, with comments from: 

• Prakash Pattni, Global MD for Financial Services Digital Transformation at IBM
• Kevin Pettet, Chief Operating Officer of Banking Solutions at Bottomline
• Kshitij Jain, SVP, Head of UK/Europe Analytics and Global Chief Strategy Officer for EXL Analytics
• Viren Patel, Industry Strategist for Financial Services and Insurance at Workday
• Wendy Li, SVP of Emerging Technologies at Marqeta

1. What prevalent digital banking transformations are you expecting in 2024?

Pattni: 

The financial and banking sector has undergone a significant digital transformation in 2023, driven by a focus on ESG commitments, macroeconomic uncertainty, a renewed focus on risk management and the rapid spread of automation. This transformation is expected to continue in 2024, with technology playing a leading role.

While we’re at the beginning of the generative AI (GenAI) journey, the banking sector is further along with decentralised finance (DeFi). We’re seeing much more focus on central bank digital currencies (CBDCs) as they gain traction and central banks exploring the possibility of issuing their own regulated digital currencies. There have already been tests of a digital Euro in Spain. 

This is shifting the focus away from cryptocurrencies and towards DeFi becoming mainstream, so we’ll move into the sphere of regulated entities where more people can use it online with established banks. 

This will lead to the creation of more retail solutions but also simplify cross-border payments. Fintech companies will explore ways to make it part of their day-to-day assets and digital currencies will see broader adoption due to legitimacy, further embedding them into society. 

The momentum for regulated digital currencies will continue to grow in 2024 as banks look to incorporate this into their architecture, helping this to become the new normal. However, there are still technical challenges to overcome to ensure blockchain-based solutions can meet the needs of banks and customers such as real-time payment processing.

Pettet: 

In my view, it’s not how much digital transformation will accelerate in 2024, but what form it will take. Digital transformation accelerated during COVID-19 as banks and businesses were forced to define new operating models in order to continue to operate and compete. At this point, digital transformation is the norm and will continue to be so. 

This point is evident as major banks reduce their branch footprints while increasing their investment in digital channels. In doing so, they’ve placed a heavy focus on differentiation by creating unique experiences and new value propositions for their customers.  

This will continue, but digital transformation will also accelerate with investments focused on reducing operating costs in 2024 and beyond, driven largely by the changing interest rate environment.  

The era of cheap deposits to fund lending operations is ending and banks need to find alternate revenue streams while reducing costs, which will drive where they focus their digital investment.  

Areas such as processing lending applications, customer onboarding, migration of cheque payments to electronic payments and customer support represent some of the areas where banks can focus digital investment to reduce operating costs in parallel to their investments in creating unique experiences and driving innovation.

Li: 

Throughout 2024, digital transformation will continue to change how credit, in particular, is applied for and assigned to consumers. 

Traditionally, there are high barriers of entry to accessing credit and lengthy approval processes and, even once an individual is approved, banks often issue credit cards with one-size-fits-all terms, rather than providing a tailored product based on that individual’s specific needs.

Recent digital innovations in embedded finance mean that shorter-term credit offerings such as buy now, pay later (BNPL) can give consumers immediate access to credit at checkout. 

Additionally, merchants and retailers can now issue their own embedded cards directly to customers as part of a credit card programme. 

These credit cards can be seamlessly integrated into customer shopping experiences, harnessing huge volumes of data to offer consumers contextualised, personalised rewards and an intuitive customer experience. 

2. Last year saw AI come on leaps and bounds. How will this impact financial services further in 2024 and what can employees expect?

Jain:

AI has been leveraged for different purposes by finance institutions in 2023; some have

mostly relied on AI to support the automation of back-office processes, whereas others have deployed AI to streamline and improve the customer experience. 

For those who have embraced generative AI, the goal may have been to not just streamline customer experience (CX), but enable hyper-personalisation.

For employees within banks and financial institutions, the adoption of AI may be met with some concern or distrust. Some will be asking, “will my job be replaced by AI?”. 

The honest answer is that AI does have great potential to remove or replace manual tasks and processes, yet the role of the ‘human in the loop’ will become more significant as AI adoption accelerates. 

The human-centred soft skills of empathy, and the ability to holistically appraise and provide feedback on AI outcomes to promote ongoing improvements, will be highly sought after in the year ahead.

For those working within customer contact functions, AI has the power to make their lives significantly easier. It has the capability to summarise and contextualise information about a customer, from across a multitude of structured and unstructured data sources, providing a more complete and joined-up view. 

GenAI in particular can be trained to identify which phrases or solutions lead to good customer service outcomes and serve those as prompts to agents. This leads to higher resolution rates and improved customer outcomes.

It also helps upskill new agents more rapidly – giving them access to knowledge in context, rather than through formal training programmes.

Patel: 

AI has upended financial services already and will continue to do so in 2024. For example, in accounting, AI is already being used to detect anomalies and provide intelligent recommendations. This helps drive efficiencies and scale, while freeing team members up to focus on more strategic initiatives.  

AI will also enhance and streamline risk assessments, especially regarding credit assessments and confident lending. AI-driven strategies will also empower and facilitate automatic trading. 

It is already enabling traders to create custom strategies that allow AI systems to trade on their behalf, which helps them respond faster to market trends. 

On the customer side, 24/7 customer service bots, trained accurately on good data, will be available to support customers at all hours of the day. 

Key to all of this, though, is ensuring responsible use of AI. The training of AI must be transparent and use of it must comply with regulatory requirements. 

However, our research shows that many businesses are facing a major AI skills gap, with 71% of finance functions hoping to increase their data scientist headcount to meet their objectives by 2030. As organisations continue to place a greater focus on AI, it’s critical that business leaders can trust their AI.  

Li:

GenAI is set to play an even more prominent role in the future of financial services, and 2024 will likely see accelerated innovation and integration of the technology. 

The emergence of so-called ‘predictive credit cards’ will use AI to anticipate consumer spending needs based on criteria such as past behaviour and how spending changes throughout the year, dynamically adjusting credit limits and offering tailored rewards accordingly.  

The technology can also be used for financial fraud detection, where it essentially acts as a co-pilot for security professionals. GenAI can almost instantaneously identify unusual patterns and then investigate the context by analysing sequential data and determining if fraudulent activity has occurred. 

This limits the need for lengthy manual checks, minimises the false positive alerts that waste time and, critically, makes digital banking platforms safer. As a result, security professionals can expect to be using AI tools daily, making their role easier and enabling time that used to be spent on data checks and analysis to be spent elsewhere. 

Additionally, engineers can expect AI to assist in generating tests, reviewing code and solving errors, which will make their roles more efficient and allow them to focus on higher-level tasks. This integration of GenAI is expected to delight employees and unlock their creative potential, leading to increased job satisfaction and innovation.

Consumers are also likely to become comfortable using AI, for example, to access a better overview of their personal finances by using tools to review transactions and even benchmark themselves against other cardholders in similar demographics. 

For example, consumers could ask a GenAI bot, ‘how much debt do I have compared to your available credit limits?’, or ‘what’s the best way to use my rewards points based on my recent purchases?’, and expect a personalised response instantly.

3. How much more will open banking become entrenched in finance?

Pettet: 

Open banking has primarily been industry-driven in the US vs. regulatory-driven as seen in other countries. It will continue to progress in the US but on a macro level at a cautious pace. 

However, the Consumer Financial Protection Bureau recently announced its Personal Financial Data Rights rule as the basis for establishing compliance standards and the framework for a more open ecosystem. They expect to finalise this rule in 2024 and quickly follow with implementation in an effort to accelerate progress.  

In the meantime, the larger banks will lead as the basis for their digital transformation efforts and, in doing so, create new business models and value propositions, while smaller banks will take more targeted or even wait-and-see approaches.  

Regardless, most banks will focus digital investment in preparing for open banking through developing open application programming interfaces (APIs) to enable secure data exchange between institutions, beginning to identify value propositions and customer segments to target and progressing thinking around privacy and security processes to protect customer data.  

Ultimately, banks are viewed favourably by their customers who believe they will safeguard their money and data. As a result, they are well positioned to expand their offerings beyond traditional banking services as open banking progresses in the US.

Patel:

I think 2024 may well be the year that open banking becomes a mainstay in the global financial landscape. As a technology, open banking enables a bank to safely share financial information with third-party financial institutions, through so-called open banking APIs.

Third parties like expense tracking companies, money lending firms and others use this data to develop wider product offerings. Ultimately, what this data exchange allows modern financial services providers to do is offer personalised and client-focused services. 

And like last year, 2024 will be another year where client-centric product and service development are paramount. My view is open banking will come to underpin much of the financial services sector’s future development, especially in terms of ecosystems and connected finance. 

And it is imperative, for any financial institution that wants to excel – let alone stay competitive – that they incorporate it from the ground up. 

4. What other digital transformation trends are you expecting to see in 2024?

Jain: 

One of the big barriers to digital transformation is legacy technology which also has a downstream impact, creating bad or incomplete data that further leads to sub-optimal user experience.

Generative AI has the potential to impact the economic case for legacy migration. GenAI (with humans in the loop) has the ability to translate legacy code base, create code documentation, testing automation, variable lineage etc. which contributes immensely to platform modernisation and, therefore, more effective and more pervasive digital transformation.

Pattni: 

Wearables and biometrics have been another recurring trend we have seen in recent years, and the rise of the Internet of Things (IoT) will continue to lead to new and innovative ways to make payments.

Payment friction as a means to reduce fraud remains a key challenge for banks and fintechs, and wearable technology will help to reduce this.

Privacy and security concerns are also associated with linking payment technologies to identity. Banks currently use standard encryption methods to protect this sensitive data. However, the rise of quantum computing could pose a new challenge as quantum computers could break these encryption methods. 

This applies not only to payments but to all sensitive data protected by traditional encryption methods. Banks, with the help of partners, are already working to develop quantum-safe environments to address this risk.

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