From Davos to Digital Transformation: The Key Trends that Will Define the Global Financial Services Sector in 2024

World leaders gathered at the Davos World Economic Forum in January and told us what we already know – that the global economy is still highly volatile. Geopolitical conflicts, disruption to Red Sea trade routes, high-profile elections, energy price hikes and the ongoing climate crisis were just a few of the factors cited by policymakers and thought leaders as contributing to the current sense of unpredictability and fragility.

Author: Alessandro Hatami

Christine Lagarde, president of the European Central Bank, summed up the sentiment in Davos when she said that the post-pandemic period has been “strange, extraordinary and difficult to analyse”. While the consensus at the Forum was that consumption, trade and inflation began to stabilise in 2023, Lagarde warned delegates:”It is not normality that we are heading to” in 2024.

For the financial services sector, all of the above developments have an inevitable and immediate impact on their businesses. The Red Sea crisis alone, for example, could drive goods inflation up by 2% – forcing banks to delay interest rate cuts.

The re-election of Donald Trump as US president would also probably redefine the US’s relationship with Europe and the rest of the world. But such seismic shifts only tell part of the story. For banks and fintechs, the pursuit of a ‘new normal‘ is not just defined by the Davos 2024 headlines but also by the technological revolution unfolding in parallel.

Sometimes, these two strands overlap – with macroeconomic factors determining how much investment and attention financial services companies can give to digital transformation. But other times, the advancing technology seems like an unpredictable and unavoidable force for change – driving deep-rooted disruption that needs to be embraced to survive.

Either way, financial services companies mustn’t get dazzled by the Davos agenda and neglect the 24/7 job of business transformation. So, looking ahead, what are the key tech-powered trends likely to define the next 12 months?

1. Fintech fallout on its way: Thanks to the current VC desert, fintechs that rely on equity investment to grow have seen their financial muscle wither like bodybuilders coming off steroids. With growth grinding to a halt, many will not be able to meet the targets they set out in the previous rounds – resulting in flat and down rounds. Depending on how long the lack of VC investment runs, some fintechs may even fail in 2024 – as their finances dwindle. The ones that secure investment will be profitable or able to demonstrate a clear trajectory towards profitability and returns (not just growth for growth’s sake). A case in point is Starling Bank, which saw a sixfold increase in profits in 2023.

2. Opportunist and strategic M&A activity to increase: Some fintechs continue to be transformative and sustainable businesses – but have seen market valuations slide because of the downturn. Klarna is a high-profile example. As a result of these bargain basement valuations, some will become the focus of private equity and corporate investments. PEs will see cut-price fintechs as a tactical financial opportunity, expecting valuations to pick up post-crisis. Corporate investors, meanwhile, will spy an opportunity to accelerate transformation by integrating acquisitions with existing business capabilities. Not to be overlooked, big tech may view M&A as a way to secure entry into financial services. PwC expects wealth management, insurance and payments to be hot targets for M&A and states that 47% of financial services CEOs are planning to make acquisitions in the next three years.

3. Incumbent banks could prosper: It hasn’t been a great few years for incumbent banks, which have tended to be characterised as slow to change and poor on customer experience. But with a reduced threat from fintech rivals, established businesses could do very well in the new financial climate. Aside from the neutered fintech challenge, banks can look forward to customer deposits earning them more. If their risk models function effectively, an increase in borrowing from employed cash-strapped individuals will increase their headline profits. Of course, banks won’t want to brag about their profits – for fear of politicians imposing a windfall tax.

4. Mobile Banking becomes a key battleground: Last year, the banking industry shed 60,000 jobs and closed hundreds of high street branches. More brick-and-mortar banks will shut in 2024 as banks seek to reduce costs. Instead, banks increasingly rely on getting customers to sign up for mobile apps – but this reduces their differentiation from fintechs and neobanks like Monzo, Revolut and Starling. It has also created a window of opportunity for companies like JP Morgan Chase. This transformation became very real for the 1600 Lloyds banking Group branch staff to be laid off in the coming months – the bank said this move was driven by the fact that only 8 percent of its 21 million customers rely on branches alone for their banking needs. With the tipping point reached in real life vs digital banking, expect traditional banks to ramp up their efforts to win mobile banking customers – with improved CX and incentives.

5. The normalisation of crypto: Despite all the scandals, smoke and mirrors, the crypto economy is not going away. In fact, it is moving towards the mainstream – as evidenced by former chancellor George Osborne joining cryptocurrency exchange Coinbase as an adviser. Banks and governments know that there is a lot of money in crypto, but the sector remains anarchic and opaque. So, regulation will accelerate. In parallel, countries will seek to legitimise the crypto sector by introducing Central Bank Digital Currencies (CBDCs). At this stage, the Eurozone looks ahead of the pack in this regard – though the Bank of England is moving forward slowly. With tighter regulation and the introduction of CBDCs, consumer confidence (and investment) in crypto will return. In a few years, the FTX debacle will be seen as a turning point in crypto’s fortunes. And the regulators are getting serious: the FT calculated that in 2023, crypto and fintech groups were fined $5.8bn in a global crackdown on illicit financial practices.

6. Increased investment in banking resilience: In the year to June 2023, the UK financial services sector experienced 640 cybersecurity breaches – up from 187 the year before. At a global level, Fastly recently released a report stating that businesses lost, on average, 9% of their revenue over the last 12 months due to the cyber attacks they experienced. This figure rises to 11% for UK firms. Based on responses from almost 1500 IT decision-makers, the research revealed that financial services firms suffered more than any other sector – with respondents reporting an average of 50 attacks in the last year. Nearly one-third (29%) saw customer accounts compromised. Against this backdrop, expect greater attention to banking resilience. In the EU, the Digital Operational Resilience Act (Dora) came into force on January 16, 2023, but organisations have until January 2025 to become compliant. Dora aims to introduce a comprehensive framework for digital operational resilience for European financial institutions. This will change the way many bank boards think about tech resilience.

7. Banking as a Service pioneers to take AI initiative: You won’t find a ‘future trends’ article that doesn’t reference AI, so profound is the anticipated impact of this technological revolution. Indeed, it was a key talking point at Davos, with leading economists predicting generative AI will “increase productivity and innovation”. Of course, not everyone will benefit to the same degree – so financial services firms need to get the building blocks in place that will secure them a competitive advantage. The key to being a serious player in generative AI is control of data – not just linear transactional data. Leadership in gen AI will go to players with access to the richest array of data about usage, timing, patterns, goals, etc. This puts specialised banking-as-a-service platforms in pole position because they are collating data from banks, consumers and businesses in a way that can unlock game-changing insights. Key areas where this is gaining significance include personal financial management.

Final Thought: Investment in Talent Is Key

One high-profile theme at Davos was the issue of skills, with “investments in jobs, skills and people” a key talking point. Across numerous sessions, Davos explored “creating good jobs and giving people the skills necessary for the future economy”. Recent research from FDM Group has highlighted that this is a key issue for the financial services sector, particularly regarding digital capabilities. The future may be all about AI, crypto, cybersecurity and mobile apps, but countries and companies that don’t provide the necessary investment and incentives in talent will fall behind.

By Alessandro Hatami, managing partner of strategic consultancy Pacemakers.