How to Gain an Edge Making 2024 Financial Targets

Posted by Paul Davis on Jan 16, 2024 11:15:00 AM


Financial institution executives who found 2024’s budget cycle particularly vexing are in good company. The unrelenting pace of technology, regulatory, and economic change makes allocating resources and meeting financial goals especially challenging. Time will tell if this is simply the “new normal,” but most internal processes have yet to adapt to these new demands.

SRM’s newly published trends report explores several areas banks and credit unions should consider as they set about achieving their 2024 goals. Some of these may help avoid unpleasant mid-year surprises; others could free up dollars to plug inevitable gaps or fund newly identified urgent needs. So here goes…

Many – if not all – financial institutions evaluating artificial intelligence solutions, which has taken root in the financial services sector roughly a year after entering the conversation.

Generative AI’s rapid ascent is the perfect illustration of an annual budget cycle’s limitations. Machine learning, chatbots, and similar technologies have populated financial institution roadmaps for several years. ChatGPT’s introduction in late 2022 changed the game entirely. Just a year later, an EY study found that 99 percent of financial institutions have already deployed, or are planning to implement, AI capabilities.

Connor Heaton notes that leveraging AI in daily operations quickly progressed from a promising initiative to an immediate expectation – any leadership team avoiding this path is viewed with skepticism. Of course, many questions remain, including where to implement the technology and what guardrails are needed.

Regulation will inevitably play a key role in artificial intelligence applications – the process has already begun with the White House’s recent executive order on AI’s safe development and use. We expect initial regulatory guidance to be a broad patchwork that agencies will refine over time. Future budgets should provide for such investment, even if its exact form remains a work in progress.

While AI represents a new frontier, our experts also believe that longstanding battles over credit card interchange will continue and may intensify in a what that could impact revenue in the second half of 2024. Though debit interchange draws fewer headlines, it is a more-substantive P&L driver for many small banks and credit unions. 

Russ Bourne points out that a Federal Reserve clarification to debit routing rules, which took effect in July, requires at least two unaffiliated networks be made available for card-not-present (CNP) transactions. It’s a subtle distinction that can carry significant revenue implications. 

Thanks largely to e-commerce, CNP transactions have contributed a growing share of debit volume for some time. This underlying trend can mask mix and rate issues FIs may overlook without a detailed volume analysis. Unique variables like geography and merchant mix also factor into the equation.

The recent rule change serves as a prompt for financial institutions of all sizes to ensure their network strategies are aligned with present-day conditions. Resulting adjustments could help fund additional 2024 investments.

Another thing to consider is an audit of your digital products and offerings. Cody Harrell recently highlighted the necessity of conducting an unvarnished appraisal of your financial institution’s market position and digital footprint, including a clear mapping of the current state to long-term aspirations. Such a “digital audit” can serve as a guide for execution and inform messaging to executive teams and boards.

Through this process, banks and credit unions can determine whether they’re engaged with the appropriate partners, identify new collaborations necessary to achieve intended objectives, and generate a list of actions to close any identified gaps.

This process could uncover some P&L opportunities for the current year. Not tackling it will almost certainly limit opportunities for the next one.

The Bottom Line

Given the business world’s increasing pace of change, incremental adjustments to annual budgets will almost certainly be required over the course of the year; a financial institution’s ability to operationalize such changes can be a key to success.

Our new report goes into greater detail, and shares more areas to consider, offering banks and credit unions a head start on factors to consider.

Topics: Digital Banking, Vendor Contract Negotiation, AI, Artificial Intelligence, Bank Vendor Management, Credit Union Vendor Management, Interchange, Regulation, Debit Cards

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