How Successful Banks Are Preparing for 2024’s Rapidly Changing Landscape

Just six weeks into 2024, the banking industry is getting ready for the upcoming battles: the CFPB has issued a new proposed role on overdrafts, the Federal Reserve has provided insights into its rate policies for 2024 and banks have reported full-year 2023 earnings. But even with these developments upending some projections, certain trends are proving fundamental.

Competitive forces in the banking industry appear to be changing more rapidly than ever. More money in motion, lower switching costs, a rising cost of funds, migration to digital, increased regulatory scrutiny and the rise of AI are converging, all within a backdrop of economic and socio-political uncertainty.

Banks and credit unions will face tough investment choices in placing the right bets in a fluid environment. While the winning hand may not reveal itself for some time, one prediction seems certain — we will see greater separation between leaders and laggards in banking over the next 18 to 24 months.

While most of the industry will seek to drive operational efficiencies and cost reductions in 2024, progressive banks are opportunistically increasing investments in key capabilities that will create advantage. History shows that this advantage can become more pronounced in challenging times when competitors are simply hunkering down.

What priorities should rise to the top in the crucial period ahead? Here are four key areas that banks should consider elevating on their agendas.

1. Delivering Business Impact from Major Transformations

A majority of banks have embarked on major transformation drives across four key areas: data modernization, core system upgrades, digital platform enhancement or post-merger integration. For some, these resource-heavy initiatives are multi-year plays to build essential competitive capacities over time.

However, with growing cost pressures, these complex projects may face demands to demonstrate tangible, near-term returns that justify continued spending.

What you can do: Banks should pinpoint high-impact use cases that can speed realization of benefits, reassess transformation roadmaps for phased deployments that extract value faster and combine with operational efficiency programs.

Banks need to find a balance between pursuing modernization goals and showing concrete value from their initial accomplishments. For example, rather than executing a complete data overhaul in two years, banks can prioritize “use cases” that rely on a narrower set of data assets. This generates ROI through better customer intelligence while systematically upgrading the broader environment.

A real-world example: PNC sets an example of how to balance optimization with essential progress. While on track to realize $400 million in 2024 savings through internal efficiency gains, PNC also continues investing to enrich customer experiences. The bank is moving ahead with an integrated digital transformation — “to deliver the right combination of convenient self-service and human expertise customers still rely on for more complex needs.”

Effective institutions realize transformation for its own sake no longer suffices. Financial institutions must have a sharp focus on step-by-step priorities that transition them to modern systems while also sustaining momentum through early benefits.

2. Competing for Deposits in the Battle of Engagement

The fight for core deposits grows increasingly fierce, now at the front of most leadership agendas. With climbing funding costs, account outflows and margin squeezes, every financial player is looking for an edge to attract, retain and expand customer deposits. Yet simply dusting off the old playbook of promotional teaser rates no longer suffices to triumph in today’s competitive backdrop.

A 2023 McKinsey Panorama study revealed that two groups — “young/high income” and “middle age/high income” — control over 60% of potential deposits at risk of moving, with the former boasting a switching rate 3x higher than the latter. The analysis goes on to conclude that banks that understand and cater to the unique needs of each customer/segment stand to attract more deposits versus peers.

While pricing and rates stay important, I believe the war for deposits should shift focus, toward customer engagement. This means providing tailored solutions and experiences based on behavior. Such personalization and product innovation are likely the key factors in securing deposits going forward.

A real-world example: Smart institutions focus on engaging customers with tailored solutions that benefit both parties. Ally Bank’s “Savings Boosters” showcase this approach’s power. Over 600,000 Ally customers now use goals-based savings tools that align with their individual needs. Adoption of these customized experiences has doubled the likelihood that Ally wins a greater share of wallet through additional product relationships.

The personalization trend promises to accelerate. As banks give customers more control over their financial lives with tailored insights and tools, they earn trust and loyalty that transcend temporary rate incentives.

What you can do: The winners in the intensifying battle for deposits will be those that use rich customer insights to demonstrate they have each person’s best interest at heart. Taking steps to build engagement and trust today will yield dividends in the form of higher account balances in the future.

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3. Customer Journeys Become the Focal Point

Customers have many financial objectives in life, like increasing savings, reducing expenses, or improving credit health. These goals evolve over time as people’s financial situations change. Achieving these “jobs to be done” requires more than a single action — it’s a journey.

What you can do: In 2024, financial institutions will get better at pinpointing customers’ most critical financial journeys. They will then curate products, tools, trackers and content to accelerate progress along those paths. Rather than pushing generic product offerings, financial institutions will help customers articulate their goals and customize solutions to expedite achievement.

Of course this will be a phased approach, initially concentrating on the top priority journeys identified. The key is coordinating across channels and products to facilitate the complete trip. An added benefit for banks is heightened customer loyalty and deeper relationships with those who allow the bank to help them with these journeys.

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4. Targeted Offers that Demonstrate True Personal Value

The days of the banal, generic marketing banner are numbered (what a bummer). In many cases, customers are simply tuning out to bank marketing banner ads, even if there is sophisticated behind-the-scenes targeting occurring. As it is, even targeted marketing banners on the authenticated site convert only around 1%.

Customers feel like banks are just trying to sell them stuff with marketing banners, so it makes sense that not many people actually click on them. The only real reason to keep using banners is that banks can show them at high volumes, meaning a small percentage of clicks still adds up.

What you can do: In 2024, we may witness the start of a new marketing concept: Personalized Engagement Marketing. Banks can leverage their knowledge of individual customer transactions and behaviors to deliver personalized offers that demonstrate precise personal savings based on spending patterns. This represents a powerful shift — fundamentally evolving the customer engagement model between banks and consumers.

This type of data driven personalization represents the future of bank marketing. Leveraging rich data and analytical capabilities, financial institutions can craft targeted advice that can anticipate customers’ needs. This personalized advice resonates not only because it originates from the customer’s own transaction activity, but also because it is highly tailored to the customers’ behaviors and needs. Targeted advice grounded in a person’s own behavior converts because it demonstrates the bank understands them and has an intention to improve their financial life.

Looking Forward in 2024

Banks are faced with tough investment choices in 2024. Exacerbating the fiscal tension is that these choices will have an enduring impact on the bank’s competitive posture and financial outcomes. Banks need to purposefully focus on abilities that enhance what they offer customers and provide unique value. Even with so much uncertainty, one thing stays the same — only cutting expenses won’t work.

The leaders will prepare to take advantage of changes in the economy, technology and rules. They’ll build skills not just to keep up, but to improve their unique offerings. Banks that accept change and new ideas can avoid getting stuck, even as fights escalate over deposits, trust and customers. With tougher competition ahead in 2024, forward-thinking banks will focus on strong customer loyalty and service, growing farther apart from lagging banks.

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