As 2023 draws to a close, the UK banking industry approaches a juncture facing economic uncertainty, political unpredictability, margin pressures from technology investments, and rising customer expectations.
Uncontrollable external factors will heavily influence the UK banking industry in 2024. Political instability across Western democracies intensifies, eroding public trust in institutions. With nearly 70 elections planned globally next year, unpredictability will test structures, confidence, and bottom lines.
Banks face an unpredictable operating landscape in 2024. Over the next year, their strategic priorities and initiatives will continue to focus on fortifying profitability, streamlining operations, and leveraging emerging technologies to innovate and withstand market turbulence.
Cognizant’s 2024 banking outlook examines five priority areas likely to shape the industry over the next 12 months. For each, we detail the fundamental dynamics at play, and steps banks can take to ready themselves amid the challenging landscape.
1. Ongoing uncertainty will test bank resilience
Heightened economic and political uncertainty in 2024 will likely produce uneven performance across UK banks. Interest rates could peak in the year’s first half before moderating, but policy missteps risk triggering a recession or renewed inflation. A severe downturn would spark volatility and collateral devaluations, especially in illiquid markets.
Impending leadership changes and tightly contested elections in major economies could significantly sway economic tides globally. This uncertainty manifests risk for UK banks. Market volatility directly impacts trading income and shapes credit conditions.
There is a risk that policy errors could trigger a recession or re-ignite inflation. An economic slowdown could spark collateral value adjustments and volatility, especially in illiquid markets. Further, with UK household finances weakening, retail banks’ mortgage and unsecured lending books may incur more significant credit losses.
UK banks must reinforce risk management capabilities and balance-sheet resilience to weather the instability. Core priorities include:
- Re-evaluating liquidity and capital adequacy
- Enhancing risk modelling techniques
- Tightening underwriting standards
- Stress-testing credit portfolios
2. Banks to optimise operating models for profitability
With profitability in focus, for the above reasons, it is business-critical for UK banks to fine-tune operating models to improve efficiency. This strategy entails resolving the friction between legacy infrastructure and new digital channels while placing customers at the centre of delivery models.
Many UK banks still rely heavily on the traditional branch network, even as digital banking processes greater transaction volumes. This coming year, UK banks will advance strategies to reinvent physical channels into versatile hubs offering value-added services like financial planning. The emphasis will be on right-sizing the branch footprint rather than wholesale closures. As profitability takes priority, banks will likely pare down marginal locations.
UK banks are forging partnerships, launching digital banks, and rearchitecting legacy IT systems to enable omnichannel delivery. The push is towards lower-cost digital self-service combined with relationship management through remote channels. Open Banking also continues to gain momentum, with regulators progressively lowering barriers to consumer data sharing. This presents opportunities for banks to expand offerings by synthesising financial information from outside institutions.
Establishing the appropriate digital-physical equilibrium remains a critical imperative in 2024. Many UK banks acknowledge this balancing act is currently a work in progress.
With profitability in the spotlight – and a key performance indicator in 2024 – UK banks will embrace cost discipline through digitisation, automation, and streamlining bureaucracy. Collaboration with fintechs and hyper-scalers will also grow more disciplined and value-driven. Banks will adopt technologies to improve efficiency rather than chase innovation for its own sake.
3. Embracing new technology to innovate
While operating models have to be continuously redesigned to focus on profitability, UK banks will continue to invest in emerging technologies over 2024 to bolster competitiveness. Two priority focus areas are DevOps and next-generation artificial intelligence.
DevOps 2.0 has been dramatically enhanced with the use of gen AI as the quality of software engineering and rapid delivery has taken an incremental step forward.
As customer demand for personalisation heightens, generative AI will become integral to the UK banking experience. Potential applications include:
- Customising financial advice
- Enabling conversational interfaces
- Streamlining lending decisions
- Identifying transaction fraud faster
- Generating insights from data
Given that OpenAI’s leading model, ChatGPT, only turned a year old in November, we can expect this market to mature in 2024, as banks determine what’s hype and useful and will ultimately drive greater profitability. We expect this market to be flooded with hundreds of mind-blowing AI tools
UK banks continue to harness innovations around embedded finance and Banking-as-a-Service partnerships to deliver hyper-tailored offerings. Hyper-scalers are natural partners for co-creating value through open data sharing between banks and fintech apps which expands distribution networks through embedded financial services.
4. Adapting to the evolving workforce
Banks are still burdened by legacy work cultures that must match the values and priorities of younger employees.
With talent competition intensifying, nearly all major UK banks have publicly committed to hiring more early-career staff. However, their work cultures must evolve to engage, develop and retain these younger professionals.
Steps already underway include mentoring programmes to foster intergenerational collaboration, digital skills boot camps, introducing diverse talent pipelines, and building inclusive cultures. But most UK banks admit this culture change remains a long-term undertaking.
Their 2024 human capital agendas will likely emphasise continuous reskilling. With the half-life of professional skills shrinking, banks plan sizeable investments in upskilling, reskilling and cross-skilling existing workforces throughout 2024. The emphasis is on data, AI, cloud computing, and other digital capabilities to underpin the productivity gains required.
5. Managing risk in an evolutionary environment
UK banks face a growing imperative to reinforce risk management and compliance capabilities in 2024.
Key areas of focus include:
- Capital and liquidity adequacy - Regulators stipulate higher capital and liquidity coverage ratios to improve the UK banking sector’s resilience against market shocks. Banks are bracing for tighter supervisory scrutiny by stress testing models and ensuring prudent buffers.
- Data and model risk - With risk models emerging as a source of vulnerability after COVID-19, UK banks are working to enhance model risk management and data governance. Assumptions on deposit stickiness and lending behaviour may need reevaluation, given the uncertain economic outlook.
- M&A risk - After recent upheavals the perils of complexity, scale and interconnectedness, regulators are signalling a lower risk appetite for large M&A deals in 2024 absent compelling synergies. However, market pressures could incentivise some to consider consolidation.
- Technology and cyber risk - With open banking and embedded finance gaining steam, UK banks are honing capabilities to identify and mitigate third-party outsourcing risks, cyber threats, and data privacy issues. Emerging technologies like AI and the cloud can augment risk management processes and introduce new attack vectors.
For more insights, explore our Outlook 2024 series – which includes Banking and Cards and Payments – visit the Banking section of our website or contact us.
