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Following the collapse of Silicon Valley Bank (SVB), an institution once deemed “too big to fail,” 2023 was a challenging year for the banking industry.
Amid rising inflation rates, SVB’s announcement that they would be selling $2.25 billion in shares to help offset the eroding value of their bond portfolio triggered a bank run, becoming the third-largest bank failure in U.S. history.
Seeing this ripple effect in the global economy, how will financial institutions navigate uncertain markets and avoid a similar fate?
Emerging banking trends show a positive outlook on efforts to mitigate these risks and regain customers’ trust. From digital transformation initiatives to embracing technological advances, let’s explore the trends shaping financial services in 2024.
As 2024 progresses, Deloitte expects global inflation to drop to 5.2% this year. A 2024 report by Wells Fargo agrees, believing the U.S. will help lead a gradual global economic recovery later in the year. They expect the economic slowdown to reduce consumer spending and inflation, and policymakers to cut interest rates as a result.
Regarding bank profitability, the outlook for earnings growth isn’t as strong as investors anticipated, according to J.P. Morgan Chase economists. The expected slowdown, likely to concentrate in the business sector, may cause a decline in hiring and spending. On the positive side, the lower interest rates will reduce borrowing costs for households and businesses, prompting more loan activity.
Slow revenue growth and higher funding costs present challenges to banks in 2024, according to Deloitte. Net interest income for banks didn’t soar as expected, where several of the nation's largest institutions forecast a drop this year.
In a Barron live coverage report, JPMorgan Chase said it expects net interest income (NII) around $88 billion this year, a slight drop from its $90 billion in 2023. Similarly, Wells Fargo predicts their NII down 9% from last year. To make up for NII shortfall, Deloitte explains banks will seek to raise fees through various channels, such as credit card late fees and overdraft fees.
These changes, however, are not without backlash. In response to complaints, the Consumer Financial Protection Bureau (CFPB) proposed a new rule in 2024 to prohibit non-sufficient fund (NSF) fees on declined transactions.
Use this free Net Interest Margin Planning Template for agile decision-making and plan interest-earning assets at the product level.
As federal fund interest rates rose, so did interest rates on high-yield savings accounts and other deposit accounts.
Yet, even as rates hold steady and cuts are expected in 2024, banks may continue increasing their annual percentage yield (APY) on deposit products to mitigate high inflation. Offering higher deposit rates on accounts is an effective way to attract more customers and funding.
In our recent livestream, “Adapting to Rising Interest Rates with Vena,” we discussed how rising interest rates affect financial products and institutional strategies and what banks are doing to attract new customers and maintain their customer base.
As high interest rates progress into 2024, financial institutions should develop an impact model of these rate adjustments in their net interest margin (NIM) planning.
On the banking services side, artificial intelligence (AI) applications are expected to make a significant impact on the banking industry. With more automated systems providing around-the-clock availability and service, AI tools may become the secret weapon to banks’ resilience.
Using chatbots to address queries and resolve issues is enhancing customer experience and operational efficiency. Deloitte’s research suggests that generative AI can boost productivity for front-office employees by up to 35%.
In addition to virtual assistance, AI-powered analytics are also helping businesses assess credit risk and detect customer patterns more accurately. According to S&P Global, 40% of financial services rely primarily on machine learning for fraud detection and financial forecasting. Finance teams can use these integrations to minimize manual processes and streamline their workflow.
Neobanks or “challenger” banks are steadily rising as more fintech companies merge into the banking industry via digital-only services. As of 2024, there are over 300 challenger banks worldwide, with Europe boasting the highest with 110.
In response, traditional banking institutions are stepping up their digital services. The reduction of local bank branches and the rise of virtual subsidiaries, such as HSBC’s First Direct and Scotiabank’s Tangerine, have intensified the competition.
Open banking data or “open banking” also presents profitable opportunities for the future. This practice of sharing customer data with third-party financial services providers has revolutionized how banks operate, allowing many to extend their services and create new revenue streams.
With access to open banking data, banks could develop and tailor offerings based on their customers’ behavior. These data-driven decisions can also help build a competitive advantage, where a bank’s innovative products begin attracting new customers and standing out in the market.
Still, data sharing has potential challenges, such as privacy concerns and identity theft. A Discover Global Network report revealed that 45% of consumers are uncomfortable sharing their accounts and personal info with third parties. This shows how important transparency is for customers.
Learning from past breaches and hack attempts, including the 2023 cyberattack of ICBC, the largest bank in the world, more banking institutions are strengthening their security measures. In the financial industry alone, the average cost of a single data breach is nearly $6 million.
As more “know your customer” (KYC) regulations are put in place (and fines for noncompliance), advanced security protocols are increasingly relevant in banking. Two protocols in particular are multi-step verification and biometric authentication or “digital ID features,” such as facial recognition and fingerprint scanning.
Additional steps in client screening, as well as AI integration, are providing more secure and convenient access to banking services, making fraud and cyber threats easier to detect and prevent.
Environmental, social, and governance (ESG) efforts have become increasingly relevant to organizations, consumers, and investors, especially among finance and operations professionals.
Our industry benchmark report, The State of Strategic Finance, found that 75% of finance professionals believe ESG is important to business strategy.
In response to this higher prioritization of ESG efforts, companies should define clear ESG goals and how these sustainable efforts align with both their business values and stakeholder expectations. Examples of this may include the demonstration of lowering carbon emissions or prioritization of workplace diversity, equity, and inclusion (DEI).
With financial reporting software, financial institutions can develop specific ESG reports to track and measure the environmental impacts of their organization across fiscal years.
Not only must banks continuously adapt to evolving consumer preferences and create innovative products, but staying ahead of the curve also requires preparation for interest rate fluctuations and unpredictable financial markets. Vena helps banks navigate this effectively through agile budgeting and forecasting solutions.
With AI-powered tools and deep integration capabilities, Vena helps finance teams improve reporting, streamline workflows and empower strategic decision making.
