The telephone was invented in 1876 by Alexander Graham Bell. It took a century for landlines to reach every household. Modern-day inventions spread much faster: the microwave, for example, reached saturation in 30 years, while the tablet reached 50% penetration in five years. Artificial intelligence (AI) went from zero to hero in no time at all and is viewed by experts as the fastest-adopted business technology in history.In the final installment of the three-part year-in-review series, we review three more key trends and challenges that have shaped the financial industry in 2024 and look at some of the strategies community financial institutions (CFIs) have adopted to overcome them.1. Continued Digital AdoptionThe number of digital banking users has soared in recent years, reaching over 60MM in 2024. According to a PYMNTS Intelligence report, 60% of millennials, 57% of Gen Z, and 52% of Gen X primarily use mobile banking apps. To meet the increasingly sophisticated demands of digital-savvy consumers, CFIs have continued to invest in digital transformation projects. According to Bank Director’s annual technology survey, 61% of respondents stated that leveraging technology is a strategic priority for their Boards.CFI Strategies:
- Embracing product innovation. Digital adoption has fueled significant product innovation in the banking sector. Forward-looking CFIs have leveraged opportunities to offer services such as digital wallets and mobile payment solutions; real-time payments; financial dashboards that consolidate accounts, loans, and credit card information; and embedded finance models, such as strategic commercial partnerships, niche lending opportunities, and payments.
- Transforming branches. Despite the increased use of digital, customers still crave human interaction, particularly when conducting more complex transactions. Many CFIs have integrated digital capabilities into their traditional branches and shifted their focus to providing expert advice rather than simple transactions.
2. AI and Automation With its ability to process vast amounts of data and generate insights, AI has the potential to revolutionize the financial industry. There is a general consensus that AI will deliver innumerable benefits — a recent study by Citi estimates that AI could boost the banking industry’s profits by 9% by 2028. Adoption, however, is slow. Some of the most common use cases include fraud detection and prevention; customer service-enhancing capabilities, such as chatbots and virtual assistants, and analytics to provide tailored product recommendations; credit risk assessment; streamlining and automating back office operations; and regulatory compliance and reporting. Regulatory scrutiny and lack of resources are often regarded as the greatest barriers to adoption.CFI Strategies:
- Exploring the pros and cons. Most CFIs could be said to be in the AI “discovery” phase. According to a study by Arizent, 61% of community banks and 47% of credit unions are “still learning and collecting information” before making any decisions. Some institutions are developing use cases and criteria for evaluation, such as the potential value, cost, and associated risks.
- Implementing gradually. CFIs that are further along the AI continuum are testing the waters with small-scale projects. These include improving employee efficiency, identifying suspicious account opening activities, or automating to extract relevant data from scanned documents to feed the loan origination systems.
- Partnering with fintechs. Many CFIs partner with fintech companies to access AI tools, reducing the need for in-house development. For example, one credit union partnered with an AI platform to personalize its customer experience, while another CFI leveraged a fintech’s AI capabilities to detect scams that were targeting their elderly customers.
3. Persistent Cybersecurity Risk With increased technology adoption, CFIs are more vulnerable than ever to an evolving array of cyber threats, from phishing attacks and malware to ransomware and data breaches. Nearly 96% of respondents in the Conference of State Bank Supervisors’ (CSBS) annual risk survey rated cybersecurity as either an “extremely important” or a “very important” risk, the highest internal risk. CFI Strategies:
- Adopting preventative measures. No single security action makes an institution bulletproof. Instead, CFIs have implemented several measures to reduce their vulnerabilities, such as multifactor authentication for all access points, eSignature verification, endpoint monitoring, increased employee training and simulations, customer education, penetration testing, and incident response planning. What’s more, 81% of CFI leaders would consider using AI to prevent and detect cyberattacks.
- Conducting third-party due diligence. Third-party vendors create obvious additional risk exposure for CFIs. To reduce this exposure, the vast majority of CFIs assess the cybersecurity practices of their partners, with 95% of respondents to Bank Director’s 2024 Risk Survey saying they assess the cybersecurity practices of their third-party vendors.
CFIs have faced many challenges and opportunities this year, including the rise of AI, continued cybersecurity threats, and the need to move down the path of digital transformation. In this climate, many CFIs are leveraging technology to better protect and serve their customers, striking a balance between digital capabilities and the personal touch for which they are known.
