Three Predictions that Will Power the Banking and Financial Services Market in 2024 | ISG

As we head toward the end of another tumultuous year – including major geopolitical conflicts, a mini banking crisis including the fall of some storied banks in Europe and the U.S., ongoing political uncertainty across many developed counties and significant macroeconomic headwinds for financial institutions around the world – it’s time to look forward for the Banking & Financial Services (BFS) industry. What can we expect in 2024?

Let’s start by looking back at the predictions I made for 2023 to see how accurate (or inaccurate) they were. Two of the three could be classified as true. Financial institutions did continue to develop new digital products and services – indeed this trend will almost certainly persist, even accelerate into 2024, since the expectations of consumers are showing no signs of slowing. And Banking as a Service has continued its rapid growth, with some research suggesting that, by 2030, more than half of loans and payments will be executed via non-financial institutions.

But I am not three for three. My third prediction for 2023 – that global regulators will unlock the door to greater cryptocurrency democratization – has not come to pass. Indeed, I would argue we are perhaps farther away from seeing the emergence of a globally recognized regulatory framework for digital assets. Authorities are prioritizing the prosecution of individuals and enterprises related to crypto exchange failures over building a consensus for encouraging activity in digital assets within a protective environment for consumers.

As we put a bow on this year – and acknowledge that (at least two of) last year’s trends will continue to be prevalent in the industry – let’s turn our attention to 2024.

Top 3 Trends for Banks and Financial Institutions

1. Cost optimization will remain the top priority.
   Given the challenging macroeconomic conditions driving lower consumer spending and the specter of looming defaults caused by stubbornly high interest rates, most financial institutions are looking for creative, new ways to reduce costs on a sustainable basis. The 2023 ISG Cost Optimization Study research shows that, despite the fact that 95% of the banks we surveyed describe enduring cost reduction as "important", "very important" or "extremely important," it is the number one area financial institutions are failing to meet business goals. Indeed, fully 64% of those surveyed also believe they are falling behind their peers in this regard. The reasons for the perceived underperformance are many and varied. Some common themes include a siloed approach, sub-optimal program governance, lack of cost transparency, stubborn ongoing costs associated with technical debt and ineffective change management.
   
   

   In the coming year firms will look at the problem differently and reframe the question to ask: how can we build and embed an enduring cost optimization culture across the enterprise to fund relentless transformation and improve KPIs? Doing so will involve many elements, including improving cost transparency via technology business management, agile/collaborative budgeting and FinOps, implementing a refreshed, robust data operating model and establishing a cost-focused culture as part of an enterprise’s DNA. Some will decide to go with a cost optimization center of excellence.

   Our research shows that institutions are achieving just two-thirds of their cost optimization targets, so fresh thinking is absolutely required.

2. Generative AI (GenAI) will spread quickly and chaotically.
   You will not be surprised that GenAI has made it into a predictions list – after all, it’s been on everyone’s lips for more than 12 months now. So what will be different in 2024? To begin with, we will see an exponential proliferation in use cases being tested across the Financial Services industry. To date, most have been related either to customer experience (including virtual assistants, tailored financial guidance for advisors, inbound call interpretations etc) or financial crime prevention (including fraud detection, anomaly analysis, mapping controls to risks, automated compliance monitoring). We can expect to see newer areas like content creation, summarization and translation, classification and categorization (for customers, transactions, credit risk assessment, ESG disclosures) and sales and marketing (with hyper personalized marketing, contextual recommendations, behavioural analytics) come to the fore next year. However, until a consensus emerges about the effectiveness of the technology in each use case and its associated return on investment, we will see financial institutions pushing their own strategies and looking for help understanding what others are doing.
   
   

   We will also see a shift in the way organizations view GenAI. Right now, it is seen as a capability that needs to be developed and deployed in a particular part of the enterprise. In 2024, banks will buy it as part of a solution. It will be embedded in a payments platform, included as part of a Contact Center as a Service offering or even within Salesforce. This will fundamentally change the game because it will force financial institutions to focus more on what business outcomes they want, rather than fixating on the tool itself.

3. Financial institutions will need to refresh their global capability center (GCC) strategy.
   As firms wrestle with the often-competing needs of improving digital customer engagement and optimizing costs, it is unsurprising that they are reviewing their GCC strategies. However, strikingly, to date we are not seeing a convergence of approaches across the industry. Some firms are looking to build a new GCC or expand existing facilities: ISG’s research suggests the primary driver for this is as part of an enterprise-wide cost optimization program. Others are planning to consolidate, reduce or even monetize their GCC footprint to increase process efficiency, typically via greater automation, or to fund other transformation initiatives. Still others are seeking to partner with third parties on a Build Operate Transfer basis to accelerate speed to value.
   
   Regardless of whether the GCC is run by a third-party provider or in-house team, the strategy is a function of many drivers. As 2024 begins, the key questions for financial institutions will be:
   
   1. How can we turn the GCC from a support function into a strategic value center?
   2. How can my GCC strategy help my talent and skills deficits?
   3. Can we leverage emerging technologies like artificial intelligence (AI), machine learning (ML), and business process automation (BPA) at scale through a GCC?
   4. What is the right location for a GCC, taking into account emerging skills, attrition rates and costs?

    
   We are also likely to see a shift in the work being conducted in GCCs. Our research shows that the vast majority of current GCCs are used primarily for corporate support functions, with procurement operations being number one. This has traditionally been driven by a focus on costs, and results have been somewhat mixed. Next year and beyond, financial institutions will increase the proportion of banking operations being performed in GCCs – cards and payments, regulatory compliance (including KYC) and even elements of asset and wealth management. This reflects the new high priority market drivers like business value, productivity, CX and business agility.

   From a location point of view, with more than 1,500 GCCs already established, India will remain the default option for many firms, but, with rising salary expectations and spiking attrition rates in the major GCC locations such as Bengaluru and Pune, 2024 will see significant growth in “Tier II” cities such as Vadodara, Nasik and Coimbatore.

2024 is shaping up to be another seismic year in financial services. Of course, it is impossible to be sure exactly how it will play out, we will certainly see firms pivoting to take advantage of new technologies, partners and market opportunities. But, then again, ‘twas ever thus.

ISG helps companies see around corners and prepare for the future. Contact us to discuss how you can get ahead.