The year 2023 was a turbulent one. The macroeconomic landscape was unpredictable, marked by periods of high inflation, rising interest rates, and slower growth.

We are seeing signs of improvement in early 2024. Inflationary pressures are abating, and major governments have signaled that interest rate cuts may be coming. The US, in fact, appears to be heading for a soft landing. However, uncertainties remain around China's economic outlook, with future loan book impairments rising and affecting consumer confidence in the banking sector. All of this is happening against a backdrop of a fast-changing technology, data, and cybersecurity landscape that banks need to navigate. 

Banks need to tread carefully throughout 2024, and place their strategic bets to capture the new opportunities for growth and expansion that technological advancements are bringing. But this year is not just about managing near-term headwinds; banks must also invest in long-term value creation. 

We've identified 10 trends that will impact banking in 2024 and beyond. They are divided between short-term and long-term areas of action. 

Short-term critical areas that will impact bankers in 2024

Volatility is the new reality in banking

Organizational flexibility and agility are key survival tools. Banks should constantly monitor and adjust balance sheets; establish faster and more effective governance and decision-making processes; and build agility into all technological capabilities.

Battle for deposits and low-cost funds

The rising interest rate environment over the last two years bore witness to a battle for deposits. Current Account and Savings Account ratios have declined for many markets. The fight for low-cost funds will only intensify in 2024. Winning this battle will require developing a range of tactical and strategic capabilities, including flow-of-funds monitoring, implementing smart and dynamic pricing, utilizing salesforce analytics for relationship managers, and developing hyper-personalized solutions for customers.

Drive productivity enhancements

Macroeconomic headwinds and rising inflation resulted in many retail banks seeing an increase in their cost-to-income ratios. Banks should assess the efficiency of their operating models, as well as the productivity levels of their frontline, mid-office, and back-office teams, to identify measures for improvement. Accordingly, banks should deploy various levers, such as demand elimination, process reengineering, adopting automation, and optimizing the organization, with a focus on low-hanging opportunities.

Develop forward-looking risk management

With continued economic headwinds, retail banks will see elevated credit risks in their portfolios. The banks that will win will go beyond traditional backward-looking risk management to more forward-looking risk management practices. Some of the leading retail banks globally with a low proportion of non-performing loans have invested heavily in developing early warning systems and behavioral credit models. This, for example, involves leveraging internal and external data to predict at-risk customers, even at a pre-delinquency stage, using transactional or cash flow analytics. 

Long-term value creation areas that will impact banks in 2024

Embracing artificial intelligence

Artificial intelligence (AI), including generative AI, is quickly becoming an integral part of doing business. According to a 2023 Gartner survey, 55% of companies that previously deployed AI will now consider AI for every new case. With this in mind, banks need to quickly adopt and scale these technologies.

Pushing beyond existing AI technologies, banks can turn to generative AI to further enhance the customer experience through the high personalization of services, increase operational efficiency through automation and smart solutions, and open new opportunities through better usage of data. 

Build and monetize fintech capabilities

Investment and capital have dried up over the last few years, but the stronger fintechs have survived and will continue to make progress. However, banks have become and will get even better at developing and deploying their own fintech capabilities.

By leveraging their more established brand and customer base, banks will opt to build their own fintech solutions and capabilities, as opposed to procuring these from third-party fintechs, so as to avoid the annual operational expenditure charges that typically come with the third-party approach. Furthermore, we expect to see banks monetize and sell their technological assets and fintech solutions to others as a new revenue line.

Generation Z — The clock is ticking

As the buying power and influence of Generation Z (Gen Z) grows, traditional banks are facing the challenge of tapping into the Gen Z wave, particularly with 83% of Gen Z being frustrated with the traditional banking experience, and 34% of them believing that these banks do not understand their needs. 

Gen Z is different even from young millennials. They want more transparency, personalized attention, democratized information, equitable treatment, and optionality. Starting on the path to winning over Gen Z should be a priority for banks in 2024. 

Continued digitization of payments and new cross-border advances

Revenue from global payments is growing rapidly with the increased adoption of digital payment methods across the region. Additionally, we continue to see the rapid advance towards cross-border quick response (QR) payments, biometric authorizations, and real-time payment rails. In addition, payment services supported by technological solutions can generate powerful customer insights and business intelligence. Working out how to compete with payment providers for market share is one of the urgent topics for banks to address in 2024.

Reimagine small and medium-sized enterprise banking

The common belief is that unsecured lending to small and medium-sized enterprises (SMEs) is too risky, smaller SMEs are too expensive to serve, and larger SMEs are too difficult to penetrate. Yet, SMEs are a good source of low-cost funds and a significant revenue pool in most markets.

Banks should continue to reimagine their SME business models, adopting beyond banking services, true straight-through processing digital propositions, and ecosystem banking. These are made possible today by changing customer behaviors, technological advancements, and increasing cross-industry convergence trends respectively.

Organize around customer centricity

Banks are evolving from a product-push dynamic towards being more customer centric. The product-push dynamic is no longer sufficient as markets mature and customer expectations rise. Yet, many incumbent retail banks fail to make the paradigm shift in breaking out of their entrenched product-distribution construct, towards organizing around customer segments to deliver tailored propositions. Undertaking such a shift entails targeted changes to operating model, including new performance measures, analytics, and processes, as well as changes to the customer experience cum product development cycles.