Changes in technology, consumer tastes, and government policies have all contributed to a dramatic evolution in financial services trends during the past few years. Several key developments will likely shake up the industry in the next year and beyond.
We’ll be taking a closer look at 10 financial services trends and how financial institutions respond to them.
Contents
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10 Key Trends That Will Transform the Financial Services Industry in 2024
Key Takeaways
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Digital transformation, driven by fintech and mobile apps, is revolutionising the financial services industry, challenging traditional institutions like commercial banks and investment banks.
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Data-driven insights help financial institutions personalise services, manage risk, and optimise processes, ultimately improving the bottom line and customer support.
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Open banking, enabled by regulatory requirements, allows third-party developers to create innovative products and services using financial data, benefiting customers and financial systems.
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Compliance with increasing industry regulations, such as ESG and consumer protection, is crucial for financial services in 2023 and beyond to avoid penalties and maintain customer trust.
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Social responsibility and sustainability are becoming key factors in customers' choices, with many seeking financial institutions that support their ethical stance and contribute to economic growth.
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Improving security is a top priority for financial services businesses as cybercrime and fraud rise, with the industry being among the most breached in 2022.
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Artificial intelligence (AI) and generative AI are being leveraged to increase productivity, drive innovation, and provide personalised experiences, which is what customers feel they need.
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Operational efficiency levers, such as IT modernisation, product rationalisation, and a hybrid workforce, are being used to reduce costs and improve business performance.
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Optimising the customer experience through engaging digital experiences and loyalty programmes is crucial for customer retention and gaining a competitive advantage.
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Customer loyalty and retention are top priorities for financial services businesses, with many using data analytics and personalised interactions to promote trust and encourage repeat purchases.
10 Key Trends That Will Transform the Financial Services Industry in 2023
With the rise of fintech and digital-only providers, customers' access to financial services is constantly evolving, and businesses in the industry have to keep up the pace.
Financial services businesses are under increasing pressure to innovate and continue to provide a convenient and competitive service to their customers while maintaining their existing customer base.
To sum it up, the financial services sector is evolving rapidly, and it's important to understand the implications of these changes for businesses and their customers.
1. The Digital Revolution
Digital transformation is one of the primary drivers of rapid change in the financial services sector. The development of digital technology has had a dramatic effect on the provision of financial services, opening the door to new entrants while forcing more established businesses to change or be left behind.
Fintech businesses use technology to provide innovative banking and financial services to customers, challenging the status quo in the industry.
The fintech industry has exploded in recent years, with dozens of new startups providing anything from investment management software to new ways of making digital payments.
Due to their low overhead costs, digital-only providers can provide customers with lower fees and more enticing interest rates. They can also offer various remote-accessible services, such as robo-advisory, mobile banking apps, and online banking.
Customers using these platforms can manage their finances quickly and easily, thanks to the convenient and optimised user experience.
How are financial institutions responding to the digital revolution?
As a result of its rapid growth, financial services companies are investing heavily in technology to modernise their products and services and engage customers better. This has seen several financial institutions provide entirely digital banking services, including loan and mortgage applications, account opening, and more.
Additionally, financial institutions are working with fintech startups to offer their clients cutting-edge products and services. This entails looking into how blockchain technology and cryptocurrencies can be used to increase the security, effectiveness, and transparency of their business practices.
2. Creating Opportunities with Data-driven Insights
The use of data-driven insights is becoming increasingly prevalent in the financial services industry. With the right technology, businesses in the financial sector can now access valuable data on customer habits, financial transactions, and other relevant key indicators.
This information can improve risk management and regulatory compliance, as well as enable a better understanding of customer preferences and requirements.
Personalising financial products and services is another area that can greatly benefit from data-driven insights.
Research has revealed that 78% more customers would remain loyal if their bank offered personalised service. This emphasises the need to tailor your services to each individual customer to provide more relevant experiences.
How are financial institutions benefiting from data-driven insights?
Data analytics is helping financial institutions detect and control risk. Monitoring financial transactions for fraudulent dealings, spotting unusual patterns, and anticipating risks are all part of this process.
Optimising processes through the analysis of data is also a viable benefit. Some examples include using customer traffic analysis to better place branches, using cash demand forecasting to better place ATMs, and automating administrative tasks to cut down on inefficiencies.
3. Open Banking
Another major development that is sweeping through the financial services sector is open banking. With open banking, banks make their data and APIs available to third-party developers to improve their products and services.
Statista predicts an almost 50% annual growth rate in open banking users from 2020 to 2024, with Europe's market being the largest. In 2021 alone, 47% of financial institutions launched open banking APIs, and another 25% did so last year.
With the positive influence that accessible data has on both customers and financial businesses, it's not hard to see why this trend is likely to continue.
Wide acceptance of open banking is in part due to regulatory changes, including the EU's PSD2 directive, which demands that banks make their APIs available to third-party developers. As a result, there are more opportunities in the financial services industry for fintech and entrepreneurs to exploit by using bank data to build innovative products and services.
How are financial institutions responding to open banking?
Financial institutions are responding to open banking in several ways. Many embrace it as a channel for expanding their services, while others are wary of its risks and challenges.
Overall, open banking optimises cloud accounting processes.
Over 72% of businesses rated connecting to bank accounts as a vital part of their cloud accounting service. Another 58% have the same view concerning real-time transactions, all made possible with open banking connections.
The same study also revealed that, by using these services, 77% of businesses can now accurately monitor their financial position. This demonstrates the game-changing potential of open banking for businesses.
4. Compliance with Increasing Industry Regulations
The demand for banks and other financial institutions to be compliant and manage risks throughout relevant touchpoints has increased due to stricter regulatory and reporting obligations.
And in 2023, 79% of banks expect an increase in financial regulations.
This points towards financial service businesses improving their existing processes to meet compliance standards as regulations concerning ESG, consumer protection, and security emerge. It could mean creating audit trails for disclosure delivery and using robust data analytics resources to manage risks and obligations.
Several financial companies have been subject to hefty fines recently for failing to meet various regulatory benchmarks.
In 2021, financial businesses that fell short of compliance standards and due diligence were penalised a total of $2.7 billion.
Additionally, there has been an increase in the amount of private data sent between systems and locations used by financial services companies. This is a direct result of their workforces becoming more dispersed and digitally linked.
The growing number of digital channels, along with customers' desires to employ their preferred methods of contact, is making it more difficult to enforce regulations. But security and compliance should not require businesses to sacrifice usability.
Another significant recent regulation is the FCA's Consumer Duty Regulations, which aim to improve the treatment of customers across the financial services industry. The regulations require businesses to act in the best interests of their customers, prioritise their needs, and deliver better outcomes.
5. Social Responsibility
As more people become aware of environmental and social problems, they seek out financial services businesses that support their strong ethical views.
According to a recent survey, over 86% of UK customers want companies to join intervention efforts against the mental health crisis.
Another survey found that 34% of consumers are concerned about poverty and inequality, 31% are worried about racism, and 42% of customers want firms to do something about the climate emergency.
Yet another study claims that over one-third of millennials are interested in investment products that take ESG factors into account (with 19% for Gen Z and 16% for Gen X).
How are financial institutions contributing to social responsibility?
Two examples of green finance products that have benefited from the growth of the sustainability movement are sustainable investment funds and green bonds. Investors can get a significant return on investment while upholding their social responsibilities.
Another effective method of encouraging ethical behaviour is rewarding customers who meet certain environmental goals. Companies in the financial services industry do this via green initiatives in their customer loyalty programmes.
For instance, some financial institutions and credit card companies have introduced dedicated financial services loyalty programmes. These programmes reward customers for making environmentally friendly purchases with registered accounts.
Incentives may include:
- cashback offers,
- higher interest rates, or
- rewards points
that can be exchanged for green products or services.
Businesses also partner with non-profit organisations to solve issues that matter to their target demographic. By doing so, they are creating awareness for social issues and helping customers make greener choices about their spending and investment behaviours.
6. Improving Security
Recent years have seen an upsurge in cybercrime and fraud with the rise of remote work and digital transactions. The bad news is that financial organisations often suffer disproportionate losses from cyberattacks.
According to Flashpoint, the financial services sector was among the most breached industries in 2022. Over 254 million records were compromised, with financial and insurance institutions across the globe suffering over 566 data breaches.
Banks stand to lose a lot of customers and capital if their data security is breached. Research shows that:
60% of users will stop using banking applications if they experience digital disruption. This is because of the high value of the customers' financial and personal information.
To add to that, 42% of organisations report being unable to expand into new channels due to digital fraud.
Concerned regulatory agencies have since offered new recommendations and regulations meant to encourage businesses to implement industry-standard procedures for cyber security and incident reporting.
Security must be a top investment priority for financial services companies for the foreseeable future. You need to engage with partners that share your commitment to data privacy and security and also optimise your internal processes.
How are financial institutions improving security?
Financial services businesses are implementing stronger authentication protocols, such as multi-factor authentication, to ensure that only authorised users can access their systems and data.
Proactive vulnerability management is another strong approach to financial cybersecurity. It involves running regular security audits to eliminate vulnerabilities and enhance security. These audits can be done in-house or by a third-party security expert.
7. Using AI to increase productivity and drive innovation
This is one of the most important technological developments in the financial services sector.
According to IDC's 2026 forecasts, boosting their foresight with AI and ML (machine learning) will increase productivity by 25% for over 85% of businesses.
AI has the potential to dramatically enhance the efficiency and innovation of the financial services industry. It can offer channel recommendations, which involve identifying which method will work best for each individual consumer. This can eliminate service inefficiencies and improve the customer experience.
How are financial institutions benefiting from AI?
Besides business processes, AI’s far-reaching impact extends to financial services businesses looking to boost customer loyalty with reward programmes. They can leverage AI-powered predictive modelling to analyse customer data, including spending patterns, purchase history, and demographic information.
This analysis reveals the preferences and behaviours of customers and helps you offer personalised incentives that are more likely to resonate with them. Customers earn relevant rewards for their loyalty and increase their engagement with the financial provider’s offerings.
8. Operational efficiency levers
Businesses in the financial services and insurance industries explore cost transformation to combat a potential economic crisis. Cost transformation involves identifying areas where costs can be reduced or optimised to improve business performance, profitability, and competitiveness.
What operational efficiency levers are financial institutions using?
There are several cost transformation levers that are measurable using business outcomes. These levers include IT modernisation, product rationalisation, and a hybrid workforce.
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IT modernisation is a cost transformation lever that you can deploy to improve efficiency and reduce costs. This may entail modernising outdated systems or switching to more advanced, cloud-based platforms that provide better functionality, scalability, and affordability.
Modernising your IT infrastructure lowers the costs of maintaining outdated technology and increases overall productivity. -
Product rationalisation is another cost transformation tool that businesses use to streamline their offerings and cut costs. Simply review the products and services your company provides and identify which ones don't contribute to your profitability or strategic objectives.
Eliminate or combine these offerings to cut back on expenses related to product development, marketing, and support. -
Hybrid workforce: Creating a more adaptable and economical workforce means combining full-time employees with independent contractors, external resources, or freelancers.
Maintaining a hybrid workforce reduces the costs of maintaining a sizeable full-time workforce and boosts your workforce's agility and responsiveness.
9. Optimising the customer experience
Younger demographics have more influence on financial services and expect engaging and rewarding digital experiences. Modern customers now expect seamless, instant accessibility from the digital experiences they engage with daily.
70% of customers said they would leave their present bank for another that provides a superior digital experience.
You can meet their demands by focusing on developing digital self-service and mobile-friendly solutions that offer customers access to financial services whenever and wherever they need them.
How are financial institutions improving customer experience?
A financial services loyalty programme can deliver hyper-personalised experiences and added value to your customers. Almost 90% of companies provide some sort of loyalty programme to reward repeat consumers.
For years, industry giants like Barclays (Blue Rewards) and CitiBank (ThankYou Rewards) have used loyalty programmes to drive sustained growth for their businesses.
With loyalty programme elements like gamification, which can increase brand engagement by 47%, it’s not hard to see why businesses are investing in this effective approach to incentive marketing.
10. Drive towards customer loyalty and retention
Customer loyalty and retention have become more important to financial services businesses in recent years.
According to one study, over 80% of senior decision makers in the financial sector say they prioritise customer loyalty.
The realisation that customer engagement is crucial to financial institutions' success is a major factor in the current trend towards customer loyalty and retention. Businesses in the financial services industry are investing in customer retention by fostering an atmosphere of trust and loyalty among their customers through personalised interactions.
The impact of data and analytics on understanding consumer behaviour and preferences is also a key factor driving this change.
A staggering 97% of organisations leverage predictive analytics in their customer loyalty strategies. 65% also believe that predictive analytics improve personalisation efforts.
You can meet customer expectations by using data and analytics tools to identify their needs and tailoring your service delivery accordingly.
The push for customer loyalty and retention is a good sign for the financial services sector as a whole. It will place more emphasis on giving customers extra value and help create mutually beneficial relationships.
How are financial providers driving customer loyalty and retention?
Financial service providers are adopting creative techniques to engage, reward, and retain their customers. Several innovative strategies have emerged over the years, and Zions Bank’s “Pays for A’s” is a great example.
The customer loyalty programme is designed for students and gives them the chance to earn cash rewards for every “A” grade they get.
- Middle, junior high, and high school students get $1 for every “A” on their report card added to their Young Savers Account.
- The students also stand a chance to go on and win scholarship savings accounts.
- Even students who don’t have a bank account still get a reward (.50 cents) for each “A.”
Rewarding them for academic success means the bank is directly encouraging them to do even better. It's also building goodwill with the students, increasing the likelihood that they will remain customers in the future. Besides building lasting relationships with a young demographic, the loyalty programme also incentivises parents to become loyal customers.
The Future is Here
The world of finance is constantly evolving. The financial services trends we’ve discussed will further expedite this change, significantly reshaping the market in the coming years.
You can't afford to lag behind, even for a second, or you risk losing customers as the world rapidly evolves around you.
Customer loyalty is more valuable than ever in today's marketplaces, where consumers can choose from several financial service providers and solutions. Learning about your customers' preferences and providing a loyalty programme tailored to those needs and requirements helps you secure their loyalty and thrive no matter what the future brings.
FAQs
What are the main drivers of digital transformation in the financial services industry?
The digital transformation in financial services is driven by mobile apps, AI, and fintech innovations, challenging traditional commercial banks and investment banks. Rising interest rates and regulatory requirements also push institutions to adopt new technologies to improve their bottom line.
How are financial institutions using data-driven insights to improve their services?
Financial institutions leverage data-driven insights to personalise services, optimise processes, and manage risk, enhancing customer support. This includes using AI and generative AI to analyse customer data, ensuring customers feel valued, and boosting brand loyalty and repeat purchases.
What is open banking, and how does it benefit consumers and financial institutions?
Open banking allows third-party developers to access financial data via APIs, promoting innovation. Customers feel empowered by personalised services, while commercial banks and insurance companies benefit from improved financial systems, enhancing their bottom line and meeting regulatory requirements.
What are the key regulatory changes impacting the financial services industry in 2024?
Financial services in 2024 will face increased regulatory requirements, including ESG and consumer protection standards. Central banks enforce stricter compliance to ensure economic growth and stability. Institutions must adapt their operations to maintain trust and avoid penalties from high-level regulators.
How are financial services businesses addressing the need for greater social responsibility?
Financial services businesses focus on social responsibility, offering green finance products, and supporting ethical causes. Insurance companies and commercial banks are integrating ESG factors into their operations, aligning with customers' values, and contributing to broader sustainability goals.
What steps are being taken to improve security in the financial services sector?
Financial institutions implement robust security measures like multi-factor authentication and proactive vulnerability management. By prioritising security, they protect sensitive data, ensuring customers feel secure and maintaining trust in financial systems, which is crucial for brand loyalty.
How is artificial intelligence being leveraged to enhance productivity and innovation in financial services?
Artificial intelligence (AI) and generative AI are revolutionising financial services by automating tasks, enhancing customer support, and offering personalised experiences. AI-driven insights help investment banks and insurance companies improve operational efficiency, positively impacting the bottom line.
What operational efficiency measures are financial institutions adopting to reduce costs and improve performance?
Financial institutions are modernising IT infrastructure, rationalising products, and adopting hybrid workforces to enhance efficiency. These measures reduce costs and streamline operations, ensuring institutions remain competitive and can adapt to high interest rates and economic challenges.
How are financial services businesses enhancing the customer experience in the digital age?
Financial services businesses use mobile apps and digital self-service platforms to enhance the customer experience, ensuring accessibility and convenience. Leveraging AI to personalise interactions boosts customer satisfaction, encouraging brand loyalty and repeat purchases in a competitive market.
What strategies are financial institutions using to drive customer loyalty and retention?
Financial institutions use data analytics to personalise customer interactions, promoting trust and brand loyalty. They offer rewards programmes with incentives for repeat purchases to give customers value. High-level customer support and innovative services also play crucial roles in retaining clients.
Mark Camp | CEO & Founder at PropelloCloud.com | LinkedIn
Mark is the Founder and CEO of Propello Cloud, an innovative SaaS platform for loyalty and customer engagement. With over 20 years of marketing experience, he is passionate about helping brands boost retention and acquisition with scalable loyalty solutions.
Mark is an expert in loyalty and engagement strategy, having worked with major enterprise clients across industries to drive growth through rewards programmes. He leads Propello Cloud's mission to deliver versatile platforms that help organisations attract, engage and retain customers.
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