This year is shaping up as a tricky juggling act for financial institutions. Their aspirations for payment innovation and technological adoption could be hampered by outside forces such as increased competition, tougher regulatory requirements, and an increasingly volatile economic environment.
In 2024 Trends & Predictions: Tech & Infrastructure, Matthew Gaughan, Payments Analyst at Javelin Strategy & Research, delves into how FIs will manage their goal for technological adoption in a shifting environment as well as the challenges they will face in the new year.
Navigating Innovation in a Shifting Environment
In the next wave of evolution, many FIs will prioritize payment modernization. The previous decade saw a surge in digital payments, including contactless payments, real-time payment systems, and the emergence of mobile wallets. These advancements laid the groundwork for banks to implement more enhanced products and services.
According to Gaughan, payment modernization is more complex because of the potential impact on banks’ processes, operations, and business models. The road to modernization will require changes in banks’ workflows, beginning with customer onboarding, handling transactions, as well as fraud detection and regulatory compliance.
There is also risk in making a significant investment in upgrading infrastructure, implementing the necessary system integration, and recruiting specialized talent to oversee these new systems. A bank must proceed with caution and be prepared to have a long-game approach for this investment that drives enhanced efficiency, customer satisfaction, and more market share. A longer view of these objectives will ultimately offset the lack of short-term return on investment.
Modernization is not just about implementing new technology; it must be approached strategically and with the realization that the payoff will not be immediately seen.
“It requires long-term thinking, and financial institutions should be clear about those expectations and create realistic road maps for those investments,” Gaughan said.
Challenges FIs Will Face in 2024
When it comes to implementing payment modernization efforts, the implications will reach far beyond the financial and technological aspects. As the adoption of these new technologies grows, banks must be aware that they will ultimately be responsible if things go awry in any of their services or product offerings.
This is especially true if they partner with third parties to deliver services. FIs must be fully aware that they will be primarily responsible, financially and reputationally, if any data mishaps occur. Banks are the primary providers of these services, so customers naturally will lay the blame on the FI should something go wrong.
“Instant payments also mean instant problems. Banks need to be able to anticipate and address everything from fraudulent transactions to customer mistakes, such as entering the wrong recipient in or the wrong amount,” Gaughan said.
“If that happens, there needs to also be a recourse in place for customers who have encountered these issues. They need to be able to get their money back. Technology groups and strategy teams at banks should be anticipating these needs as they’re rolling out these new technologies.”
Beyond the customer experience, banks must also be aware of running into compliance issues and ensure they have the proper controls and precautions in place to detect and prevent fraud and protect customer data.
Along those lines, FIs need to gear up for the Consumer Financial Protection Bureau’s proposed “Personal Financial Data Rights Rule.” When finalized in late 2024, the rule will transform data practices within the financial sector.
With the rule, consumers will have the right to gain access to and share their financial information held by their FIs with approved third parties. They can also reverse authorization.
The implication for FIs is they could be on the hook for updating their current systems to comply with the new data access rule. Their technology will also be scrutinized to ensure that the rule requirements are met.
