Global Banking Outlook 2024

Part 2 - Making savvy investment choices

In Part 1 last week, I made the point that making the right investment choices for high-impact change initiatives is tougher than ever. Competition for budget and resources is fierce for banks aiming to reduce their structural cost base and deliver on growth drivers. This is particularly important as global banks allocate only a third of technology-related investments to new initiatives, on average. And there is a wide variance across institutions - from 10% of the investment budget on new initiatives to over 50% in a few select global banks.

A tactical, piecemeal approach to cost cutting is not going to help banks achieve the ambition of 30% efficiency ratios I increasingly hear clients aspiring to. Nor will it allow them to achieve the levels of productivity and agility we are seeing from 'younger' banks in emerging markets that operate with a technology base similar to digital banks. So where do I expect banks to spend in the coming year? Here are four critical areas I expect to see continued and increased investment.

(1) Finally... Breakthroughs in technology and data modernization

A focus area in banks’ efforts to sustain and grow long-term profitability is the modernization of their technology and data platforms. Global banks are at different stages in their modernization journey and I am optimistic about many more 'breakthroughs' for next year. More recently I see an increased focus on data platforms, driven by regulatory scrutiny and the impact of AI and GenAI.

Cloud migration moves banks away from their legacy mainframe systems. Those that have done so realize benefits, including faster innovation cycles, easier data management and updated risk management. My conversations with clients highlight that cloud migration and its economics continues to be a discussion at Board level in banks, and there is a push for cloud adoption from the C-Suite, which is seen as a building block to accelerate digital transformation, manage and leverage data and make it easier to stay current.

Cloud adoption is an immediate opportunity for banks, but there are some longer-term investments to focus on too. The obvious example is generative artificial intelligence (GenAI). While applications for banking are still in their infancy, there is the potential to substantially improve operational efficiencies and employee experiences (in the near term), enhance customer experience, and drive new revenue streams (in the longer term). Recent EY research found that 78% of European banking leaders plan to increase spend on GenAI over the coming year. Majority of European financial services leaders expect Generative AI to significantly affect productivity and change roles – but many firms still lack plans to upskill their workforce | EY - Global

Assessing return on technology investment will be essential. It is also hard.

(2) Death and Taxes and Regulations

There is the adage that there are only two certainties in life (death and taxes) - for bankers we may want to add regulatory change to that list. Take AI as an example. Over 30 countries globally have already passed new regulations and over a dozen have proposed them; with the EU’s AI Act, President Biden’s Executive Order and China’s GenAI rules being the most prominent examples.

The finalization of the Basel III rules will take a lot of attention and bandwidth and will further strengthen the sector, but the endgame will add cost and capital.

In addition to implementing new rules, I also expect bank regulators to progress with their existing priorities. I expect they will keep the spotlight on fighting financial crime and on protecting resilience; particularly reviewing assumptions around deposit outflows and re-evaluating resolution strategies in response to the banking turbulence in 2023.

Rules on sustainability are expected to add to banks’ disclosure requirements and encourage lending to sustainable economic activities. Already, 87 banks across the globe have policies to divest from coal, with European and Asia-Pacific banks comprising around 50% and 35%, respectively, of the sample. Other areas include improving the consumer outcomes and strengthening board oversight.

In response to the changing regulatory landscape, banks continue to reshape their risk management approaches. This will require a range of actions from increasing the level of understanding that employees have of technology to improving stress testing methodologies. More on this in our Global Regulatory Outlook - https://www.ey.com/en_us/financial-services/regulatory-outlook

(3) In the end, it's all about the Customer

I expect no letup in retail and small to medium-sized enterprise customers demanding a seamless, multichannel, instant and personalized experience. Currently, digital native banks have generally been better able to meet these higher expectations, using data to provide better insights and experience to their customers. Non-bank players have integrated banking services into their customer value chains (embedded finance) in order to provide a seamless customer experience. However, according to a recent EY survey of global technology providers, 72% believed that the majority of financial products will be offered via non-financial platforms in the future. Embedded finance and future financial services | EY - US

As technological advances accelerate, banking customers expect their banks to keep pace. Strategies to do this will demand prioritizing investments in areas such as data analytics as well as building (and managing the risk of) partnerships with third parties. As banks transform, they must remember to place customer centricity at the heart of this process to improve their chances of success. Five ways to commit to customer centricity in banking transformation | EY - Global

(4) Caring for the next generation - sustainability and purpose

I expect a sharper focus on sustainability as the impacts of climate change become more visible. Already, 65% of chief risk officers across banks globally consider climate risk as the top emerging risk over the next five years. How bank CROs are responding to volatility and shifting risk profiles | EY - Global

EY internal analysis of banks’ sustainability plans found that European banks are setting the pace, from sustainable finance commitments to innovative products such as carbon trading platforms, but banks in other markets are in swift pursuit.

Beyond climate, I expect banks to increase their focus on becoming more purpose-led. This will be particularly important as new cohorts such as GenZ, born between 1997 and 2012, enter the workforce. This demographic, expected to make up over a quarter of the global workforce by 2025, is driven more by their values than any generation before them and expect similar standards from their employers. To attract them, banks will need to take a range of actions from transforming the learning experience to making radical progress with diversity, equity and inclusion. Why Gen Z talent will make or break the future of banking | EY UK

From technology and data to people and purpose, from customer and competition to sustainability and compliance, there is plenty to do for banks in the coming year. And all of that will be in a challenging operating environment, where macro-economic and geopolitical risks remain elevated.

I wish everyone a restful holiday. There is lots of work to do in the new year.

The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organization or its member firms.