The banking and capital markets industry faces a confluence of challenges as it enters 2024. Macroeconomic headwinds from slowing global growth and diverging economic conditions will test banks’ ability to generate income and manage costs. Meanwhile, disruptive forces reshaping the foundational architecture of the industry show no signs of slowing. Higher interest rates, reduced money supply, more assertive regulations, climate change, and geopolitical tensions are among the key drivers transforming the competitive landscape.
The exponential pace of new technologies also influences how banks operate and serve customer needs. The impact of generative AI, industry convergence, embedded finance, open data, digitization of money, decarbonization, digital identity, and fraud prevention will grow significantly in importance. Banks must contend with these forces while also navigating talent shortages, regulatory changes, and capital constraints. Executing strategic choices with conviction and agility will determine which institutions thrive.
Navigating the Changing Macroeconomic Environment
A slowing global economy coupled with divergent economic conditions across regions and sectors will challenge the banking industry. The IMF expects world GDP growth of just 3.0% in 2024 as advanced economies like the US, Eurozone, UK, Japan, and Canada see tepid growth of 1.4%. Meanwhile, inflation is projected to remain above central bank targets in most countries. Central banks will fine-tune monetary policies through 2024 after undertaking aggressive tightening cycles to combat inflation. Interest rates are expected to peak and then decline in the second half of 2024 in major jurisdictions like the US, Canada, UK, and Eurozone.
These macroeconomic factors will test banks’ ability to generate income and manage costs in new ways. Net interest margins will decline for most banks as deposit betas catch up to lower policy rates. Loan growth will also be modest given higher rates, inflation, and weakening household finances. Revenue growth levers will be constrained, forcing institutions to pursue new sources of value. Regional and smaller banks concentrated in CRE lending or dependent on a single deposit mix will face particular challenges.
Forces Reshaping the Industry
Multiple disruptive forces are reshaping the foundational architecture of banking and capital markets. Higher interest rates, reduced money supply due to quantitative tightening, more assertive regulations, and climate change are driving transformation. Geopolitical tensions also introduce uncertainties.
Technological changes accelerate at an exponential pace. The impact of generative AI, industry convergence, embedded finance, open data, digitization of money, decarbonization, digital identity, and fraud prevention will grow significantly. Banks must contend with these forces while navigating talent shortages, regulatory changes, and capital constraints.
Competition also intensifies as traditional boundaries blur and customer expectations evolve. Deposits have become fiercely competitive. Digital wallets and account-to-account payments are disrupting payments. Buy now pay later is democratizing access to credit. Private capital challenges banks’ role in credit provisioning and talent attraction. These competitive dynamics will force strategic reevaluation.
The report analyzes implications for each banking segment:
- Retail banking faces deposit outflows, higher funding costs, slower loan growth, and declining loyalty. Banks must strengthen customer relationships, power personalization with data and AI, and harness emerging technologies.
- The payments ecosystem evolves rapidly. Card economics face threats from fee regulation. Governments promote financial inclusion. Industry convergence and open banking erode competitive edges. Fraud prevention challenges intensify.
- Wealth management grapples with market volatility and saturated markets. Firms must revamp advice, retool platforms, expand offerings like alternatives, and acquire next-gen talent.
- Corporate and transaction banking sees muted commercial lending but opportunities in digitization, embedded finance, trade finance modernization, and climate transition advisory.
- Investment banking experiences modest growth led by advisory/issuances. Trading lags; scale benefits large US players but European and boutique players resurge. Private capital challenges various business lines.
- Market infrastructure faces intensifying competition requiring dual listings, data/technology leadership, and ancillary revenue expansion like carbon markets. T+1 transition consumes resources.
Technology and Innovation Priorities
The report outlines several technology and innovation priorities for banks:
- Harness data and AI to power personalization, risk management, and operational efficiencies while ensuring trust, transparency, and responsible use.
- Adopt cloud-native platforms and migrate infrastructure to reduce latency, execute orders faster, and monitor transactions across participants.
- Evaluate generative AI use cases strategically for productivity gains while mitigating risks. Focus on coding, fraud detection, and customer service applications.
- Strengthen digital identity, authentication, biometrics and enhance fraud detection to address evolving cyber and financial crime risks.
- Modernize platforms, payments rails, and trade infrastructure with APIs, blockchain, RTP/ISO 20022 to improve client experiences and unlock new revenue streams.
- Develop talent fluent in technology, cross-industry trends, and specialized domains to sustain innovation and client relationships. Consider LLMs for coding tasks.
- Support climate transition through green financing, carbon markets development, and sustainability advisory services.
In conclusion, 2024 will test banks’ ability to navigate macroeconomic headwinds and disruptive forces reshaping their industry through strategic choices, agility, and leadership in technology and innovation. Those that elevate customer relationships, operational excellence, and competitive differentiation stand to emerge stronger.