The year 2024 is shaping up to be a pivotal moment for U.S. banks and credit unions, according to a new playbook from digital banking solution provider Alkami. “Strategies & Budgeting for Financial Institutions” describes a barrage of economic, technological and demographic forces converging to create unprecedented challenges and opportunities for financial institutions of all sizes.
How individual banks and credit unions navigate this complex landscape in 2024 will determine their competitiveness, profitability and even survival in the coming years. Those who effectively leverage data, build digital capabilities and forge strategic fintech partnerships stand to gain market share.
Lagging institutions risk extinction.
The economic outlook remains uncertain, which could spur consolidation across the financial sector. New regulations will increase compliance burdens. Fintech disruptors and big techs continue to threaten traditional business models. And perhaps most critically, younger generations have new expectations for digital financial services.
“The easiest customer experience isn’t one where you drive to the branch, find a parking spot, wait in line, ask advice and sign a piece of paper. It’s one where you simply activate the service you need in real time when and where you need it.”
— Brett King, bestselling author and futurist
This arising “battlefield” demands agility, customer-centricity and adopting an open mindset to change. Financial institutions must rethink everything from user experiences to back-office processes. In this time of flux, forging partnerships with innovative fintech solution providers will be key to competing at speed and scale.
The insights from Alkami include industry outlooks from Brett King, Jim Perry and Ron Shevlin.
Read more: Five Megatrends Impacting Banking Forever
Economic Volatility and Regulatory Scrutiny Challenge Banking
While inflation is cooling, households still face financial strain from rising costs according to recent data on delinquencies, foreclosures and personal debt levels. This economic stress on consumers spells uncertainty for financial institutions heading into 2024. Tighter lending and deposit rate competition resulting from continued high interest rates will squeeze bank margins.
At the same time, new regulations are adding to compliance burdens. Guidance around managing third-party vendor risks will compel greater due diligence. Requirements to collect small business lending data under the Dodd-Frank Act take effect. Cybersecurity and anti-fraud regulations continue proliferating in response to increasingly sophisticated threats.
“Adapting and adjusting to new technologies, evolving consumer expectations, sophisticated cyber threats and heightened regulatory scrutiny is just part of banking’s ever-changing environment.”
— Jim Perry, Market Insights, Inc.
This combination of economic and regulatory pressures may accelerate consolidation across the industry. Mergers and acquisitions provide avenues for efficiency gains, scale, risk mitigation and revenue growth. Many financial institutions are exploring these options — along with more fintech partnerships — to ready themselves for the challenges ahead.
Battling for Deposits in the Digital Age
The fight for deposits is intensifying amid rate competition from megabanks, neobanks and even technology giants like Apple. Consumers now readily shift funds digitally, as demonstrated by recent mass account closures at major banks sparked through social media.
Younger generations in particular have weakening allegiances to traditional institutions. Over a quarter of megabank customers may switch if a local bank offers better rates according to one survey. Yet shifting demographics present risks too — aging baby boomers control a large share of deposits that could move as they retire.
To compete, smaller institutions must digitize deposit acquisition while crafting personalized offers to build loyalty. Leveraging real-time data and predictive analytics will be key to understanding customer needs and introducing relevant products at the right moments.
“Financial institutions can capitalize on data analytics to prioritize marketing spend, track competitors, compare marketing results to industry peers, and activate the data using a multi-channel approach to include digital banking and mobile banking.”
— Mark Leher, director, product management, Alkami
Fintech solutions can aid this through digital account opening, automated onboarding, account aggregation tools and marketing automation. Big tech has conditioned consumers to expect speedy, digital-first experiences. Financial institutions must now deliver this to capture (and retain) deposits in the digital realm.
Banking Must Prioritize Reaching Younger Generations
As Baby Boomers retire, the generational wealth transfer will accelerate over the next decade. But younger generations are proving challenging for banks and credit unions to attract and retain.
Millennials came of age during the 2008 crisis and tend to distrust big banks. Fintech firms aggressively target them with digital offerings. But the even younger Gen Z cohort — digital natives in their teens to late 20s — poses the biggest threat as they now control hundreds of billions in spending power.
Gen Z embraces fintech solutions readily and has little brand loyalty to traditional financial institutions. Half use neobanks or money management apps. Many see no need for a primary bank relationship.
To connect with Gen Z, financial institutions must digitize and target products, marketing and user experiences specifically to this mobile-centric cohort. Social media outreach using financial influencers may help, as will device-optimized design and financial education content on digital platforms like YouTube.
Partnering with fintech firms can provide the agility to continually add features and experiences younger users expect. Without urgent focus here, local banks and credit unions risk permanently losing the next generation of lifetime customers.
Elevating the User Experience
Over half of customers now use digital channels as their primary method of banking interaction. Yet many financial institution apps and websites offer dated experiences that can’t match both the simplicity and feature depth consumers find in leading fintech apps.
User experience now makes or breaks consumer loyalty. Slow or clunky digital account opening, for instance, drives abandonment. Apps without robust money management tools or the ability to instantly move funds fall short of expectations. Even basic steps like logging in should match biometrics and one-click ease of big tech apps.
To meet rising user experience standards, financial institutions must redesign digital presence from front to back. This means not just sleeker mobile apps, but transforming back-office processes with automation and digitization for speed and seamlessness.
User testing and customer journey mapping will reveal points of friction. Fintech collaborations can rapidly deploy best-in-class capabilities at scale. Top user experience will require ongoing effort as expectations continue rising.
Harnessing Data for Personalization
Today’s consumers expect personalized, relevant engagement from financial institutions. Fintech firms and big tech organizations lead this through precisely tailored interactions driven by customer data analytics.
Banks and credit unions now need data strategies that build 360-degree customer profiles. Tracking detailed transaction histories and account holder behaviors provides a foundation. Advanced AI techniques can then generate shareable insights on individual user needs, life events and next-best actions.
“Personalization will evolve digital banking into a digital sales and service channel that anticipates users’ needs before they are conscious thoughts.”
— Allison Cerra, chief marketing officer at Alkami
Applied appropriately across channels, data personalization allows efficient 1:1 relationships at scale. This means tailored budgeting insights, location-based offers, proactive advice before account holders seek it out and more. Done ethically, data personalization demonstrates value and builds enduring engagement.
Partnerships Play a Crucial Role for Banks and Fintechs
Change is the only constant for financial institutions today. Fintech innovation, mobile lifestyles, economic shifts and compliance needs show no signs of slowing. Keeping pace amid such transformation is impossible alone.
This reality makes partnerships an essential strategic priority in 2024. Collaborating with specialized fintech solution providers allows institutions to integrate innovations rapidly without overwhelming internal resources.
The right fintech partners focus on speed and agility, providing the ability to deploy capabilities into the market seamlessly and quickly, relying on modern architectures that support growth and platform flexibility. Their real-world expertise and focus let financial institutions concentrate on customers.
“The most successful partners in the financial services space have a clear line of sight into future-proofing and mitigating risk as much as possible, from both a regulatory and market needs perspective.”
— Adam Craig, vice president, corporate development at Alkami
Areas like data analytics, digital account opening and onboarding, security, personal financial management tools, digital small business services, and natural language chatbots deserve partnerships’ attention for impact. The institutions that selectively outsource innovation will pull ahead of their peers.
The Road Ahead for Banks and Credit Unions
Financial institutions have reached an inflection point. Shifting consumer behaviors, employee mindsets and competitive forces necessitate digital fluency. But transitioning from reactive to proactive will determine market leadership.
Banks and credit unions must become adept at data-driven personalization, digital experience excellence and strategic fintech partnering. Investment in technologies like AI and security will become baseline budget requirements.
“We’ll continue to see a rise in digital spend from high-performing financial institutions,” says Ron Shevlin, chief research officer at Cornerstone Advisors. “In particular, 2024 will see a significant increase in focus and spending on machine learning as financial institutions experiment with Generative AI use cases and conversational AI tools as financial institutions deploy chatbots and intelligent, digital assistants to better support their members, customers, and employees.”
Change-averse cultures won’t survive the crossroads of 2024. But financial institutions that instill agility and customer-centricity will turn disruption into opportunity. For those who embrace this complex moment, the future remains bright. The rest risk fading as banking evolves.
The choices individual institutions make right now will set their trajectory for years to come. Now is the time for decisive action.