Home Slider 2024 Is Set to Be Another Transformative Year for Financial Services

2024 Is Set to Be Another Transformative Year for Financial Services

by internationalbanker

By Prakash Pattni, Global Managing Director for Financial Services Digital Transformation, IBM

 

 

 

 

TThis has been an exciting and tumultuous year for the financial sector. An increased focus on ESG (environmental, social, and governance) commitments, the rise of macroeconomic uncertainties, a renewed concern about risk management and the rapid spread of automation have all helped transform an industry that has traditionally been cautious and resolute. What seems certain is that 2024 is going to be no less transformative, especially from a technology perspective.

The financial-services sector has always been an early adopter of new technologies, so it’s little wonder that artificial intelligence (AI) has quickly gained widespread deployment. As a result, generative AI (GenAI) is now a critical requirement in the digital toolbox for IT (information technology) suppliers, and it is increasingly being seen as a table stake. Consequently, these advancements will spur further developments in 2024, and we will likely see several key trends emerge in the new year.

Fintech-and-bank AI collaboration

Generative AI has dominated the financial-services technology conversation in 2023, and this is set to continue next year. We see an influx of fintech (financial technology) start-ups offering generative AI solutions, and venture capitalists are increasingly interested in investing in them. But it is also clear that there is a lack of understanding about how to implement these solutions and overcome the many challenges AI represents. In response, we will see fintechs and banks work closely together to develop innovative, customer-centric products and services, such as AI-powered investments and fraud-detection systems they can bring to market.

Established banks are often challenged regarding innovation and agility due to legacy technologies, processes and systems. Working with dynamic start-ups is part of the answer, as they can offer the desired level of innovation at speed. With generative AI, banks want assurances that their clients’ data are protected and not absorbed into broader models that their competitors can use. These challenges are not always fully apparent to fintechs working with AI in regulated industries, as they often lack the banks’ expertise and experience, and AI poses additional hurdles for them. These challenges can be overcome by collaborating with partners such as IBM that understand the requirements of regulated industries and how to work with the banking community at large to co-create solutions. Solving these difficulties will create manifold opportunities, allowing fintechs to grow and banks to deliver better customer services and solutions. For example, compliance and security checks to meet the demands of regulators take time, resources and investments away from customer-facing solutions. Applying AI to these problems can reduce costs and risks, freeing time and investment to focus on other areas.

Generative AI can also help fintechs unlock new revenue streams to help the financial-services sector grow and gain competitive advantages. However, to fully leverage AI, fintechs should embed it into their business models and processes from the start, helping them differentiate themselves by being more agile and responsive to customers’ changing needs.

Furthermore, banks are adopting more business-process “as a service” (aaS) solutions. So, instead of building their own solutions, they are digitising end-to-end business processes by integrating solution providers, including fintechs, and their capabilities. We are seeing this in areas such as trade finance and wealth management. Expect to see fintech collaboration and ecosystem integration grow as we move forward.

Sustainable finance

Sustainable finance is another important trend that is likely to gain momentum. Banks are increasingly using data and generative AI to assess the sustainability of their lending portfolios and develop new sustainable-finance products and services. This is driven by regulatory requirements and consumer demands for more sustainable banking options.

The global market for green finance is expected to reach $3,650 billion by 20311. This represents a significant opportunity for banks to generate new revenue and grow their businesses. With the implementation of generative AI, banks can access data for more accurate and faster analysis and reporting. However, the mandate for banks is not only to provide green financing but also to help the whole economy move to a greener footing, resulting in banking chief executive officers (CEOs) coming under more pressure to do something substantive (and visible) in the sustainability space. We are already seeing an increase in the number of sustainability fintechs, such as Yayzy—a fintech that provides detailed assessments of the sustainability impacts of customer transactions. For example, they create detailed assessments of airlines – flight purchases, factoring in the type of aircraft, cabin class and the airline’s sustainability efforts to provide accurate carbon footprints to guide financial decisions.

Banks will, therefore, make more financial decisions based on sustainable finance. There will also be more reporting on their carbon footprints and with whom they work, including their partners. IBM is already helping its customers in the financial-services sector develop the AI-based tools needed to make this a reality.

Digital currencies

Although we’re just beginning the generative AI journey, the banking sector is further along with decentralised finance (DeFi). We’re seeing much more focus on central bank digital currencies (CBDCs) as they gain traction, with central banks exploring the possibilities of issuing their own regulated digital currencies. There have already been pilot tests of a digital euro token in Spain.

This is shifting the focus away from cryptocurrencies and toward DeFi becoming mainstream and, over time, more normal, especially as additional central banks issue digital currencies. This will lead to the creation of more solutions. As DeFi wallets develop cross-chain functionality, we will see more applications that facilitate cross-border payments, reduce fraud and speed up activities such as anti-money laundering (AML) checks.

The momentum for regulated digital currencies will grow in 2024 as banks look to incorporate them into their architectures, helping them to become the new normal. However, there are still technical challenges to overcome to ensure blockchain-based solutions can meet the needs of real-time payments if they are to truly become mainstream.

Biometric payments

Wearables and biometrics have been reoccurring trends in recent years, and the rise of the Internet of Things (IoT) will continue to lead to new and innovative ways to make payments. Payment friction remains a key challenge for banks and fintechs, largely through using one-time passwords and other verification methods to prevent fraud. Wearable technology combined with digital biometric identities will help reduce this friction while limiting fraud.

As Web 3.0 develops and delivers a more decentralised, secure and user-centric World Wide Web (WWW), users will own and control their digital identities. This, in turn, will help to solve many of today’s problems. For example, if someone moves to another country today, his or her credit rating in the new country starts from scratch, and the individual must start to rebuild it, as there are no credit agencies with global coverage. With Web 3.0 and digital identities, credit scores can be linked to digital identities, avoiding the need to rebuild credit scores.

However, as these types of technologies are increasingly linked to identities, the protection and security of these identities will become paramount. While banks currently use standard encryption methods to protect this data, they must revisit this as quantum computers develop.

The quantum-computing advantage

Another important emerging trend will be the rise of quantum computing. Quantum-computing technology is maturing rapidly and, in the future, can potentially drive a technological revolution across financial services. Unlike classical systems, which use binary digits (or bits) to store information, quantum computers use qubits. While the bits in today’s electronics can only have a value of either 0 or 1, a qubit can have both simultaneously.

Quantum computers are accomplished at solving the sophisticated math problems used in today’s encryption algorithms. Thanks to this property, among others, quantum computers will be uniquely suited to solving problems involving high degrees of complexity and many variables interacting in complicated ways. However, quantum threatens existing encryption algorithms, so banks must upgrade to quantum-safe or post-quantum encryption. In response, we are already seeing a rise in quantum fintechs, and banks are developing quantum-safe environments to store and secure data.

The banking sector in 2024

It is clear that 2024, following 2023’s progress, will be a year of change. We will see a mixture of regulatory requirements and innovative technology developments—from further adoption of AI due to increasing collaboration and increased sustainability reporting to regulated digital currencies, enhanced biometric payments and developing conversations on the future prospects of quantum computing.

Generative AI will continue to be the dominant conversation in financial services and banking, and the growing importance of sustainability will doubtless impact all areas of financial services, while CBDCs and wearables will reshape how and where consumers conduct transactions.

Managing change is never easy; managing it at scale can be even harder. That’s why the financial-services sector must work with technology partners with proven track records of supporting industry players to implement next-generation technologies, such as AI, safely and effectively. An inability to make the most of the new and evolving range of next-generation tools risks ceding market share to competitors.

 

Reference

1 Allied Market Research (AMR): Sustainable Finance Market by Investment Type (Equity, Fixed Income, Mixed Allocation, Others), by Transaction Type (Green Bond, Social Bond, Mixed-sustainability Bond), by Industry Verticals (Utilities, Transport and Logistics, Chemicals, Food and Beverage, Government, Others): Global Opportunity Analysis and Industry Forecast, 2021-2031.

 

 

ABOUT THE AUTHOR
Prakash Pattni is the Global Managing Director of Financial Services Digital Transformation at IBM. Prakash brings financial-services experience gained across technology and finance and has led numerous initiatives, including public-cloud transformation, agile and product-model implementation.

 

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