2024’s Industry Outlook: Community Bankers’ Top Challenges, Investments and Opportunities

In the wake of a tumultuous 2023 for the U.S. financial services sector, marked by persistent inflation and rising interest rates, the banking industry is gearing up for a challenging yet promising 2024. Last year, larger banks heavily invested in digital sales and self-service, while simultaneously, regional institutions faced public collapses, prompting some consumers to reassess their allegiances. Nevertheless, community banks, ever resilient, found innovative ways to compete with national players despite the hypercompetitive market.

CSI’s Banking Priorities Survey—which asked community bankers nationwide about their strategies and priorities for 2024—captured their pulse and plans for the year.

In this blog, we explore how bankers are gearing up to tackle some of the complexities of 2024 and position themselves for success. Check out the interactive 2024 Banking Priorities Executive Report for a deeper dive into the strategies and emerging opportunities associated with a changing technology landscape, digital acceleration, cybersecurity, regulatory changes and more.

What Did Bankers Identify as Top Issues for 2024?

Bankers identified high interest rates and fraud as the industry’s top two issues this year.

2024’s Foremost Challenge: High Interest Rates

According to findings from CSI’s Banking Priorities Executive Report, 35% of community financial professionals listed interest rates as the most pressing issue, surpassing all other concerns.

Impact of High Interest Rates on Community Banking

The surge in interest rates, a consequence of the Federal Reserve’s efforts to curb inflation, has created a challenging environment for community banks. Consumer prices rose by 3.7% from Sept. 2022 to Sept. 2023, prompting multiple adjustments in the Federal Funds rate. Starting from near-zero in the first quarter of 2022, the rate surged to the 5.25% to 5.5% by the end of 2023—a significant increase of 100 basis points since Dec. 2022.

This substantial shift fueled speculation about a potential recession, leading many community banks to adopt a cautious approach. The impact of higher interest rates is multifaceted, affecting loan portfolios, funding sources, net interest margins and overall revenue for banks.

Strategies in Motion

The effects of higher interest rates are nuanced, varying based on factors such as the composition of loan portfolios and funding sources. One noteworthy consequence is the strain of an inverted yield curve, where short-term borrowing costs for banks outpace returns from long-term loans.

This phenomenon is squeezing the net interest margin for many community banks, especially those relying on short-term borrowing. It also slows lending demands, thereby impacting overall revenue. Customers seeking higher yields may also shift their money to other accounts, affecting banks’ liquidity and ability to make new loans.

In response to this challenge, banks are deploying various strategies, such as offering competitive interest rates on deposits and exploring new interest income opportunities.

Tackling the #1 Challenge Head-On

Recognizing the potential economic downturns associated with a high-interest rate environment, banks are adopting a cautious stance in extending loans. This economic uncertainty is prompting a prioritization of digital account opening and related technologies, emphasizing gaining new accounts and low-interest deposits.

Institutions should evaluate opportunities within their existing market and portfolio. Offsetting decreased interest revenue requires strategic thinking, prompting some banks to seek higher-yield investments such as loans with variable interest rates. Diversifying portfolios through resources like lending marketplaces is another avenue institutions are exploring to weather the effect of high interest rates.

To mitigate the pain of high interest rates, institutions should evaluate opportunities within their existing market and portfolio.

2024’s Second Most Significant Challenge: Fraud

Fraud also remains a significant concern, securing the second-highest position on the list of critical challenges facing bankers in 2024.

Impact of Fraud on Community Banking

The evolving tactics of fraudsters parallel the evolution of technology in daily life. According to a recent PYMNTs report, at least 40% of financial institutions are witnessing an upswing in financial crime.

Financial professionals commonly associate fraud with various avenues, including cards, wire transfers, checks and phishing.

Strategies in Motion

Where the threat of fraud looms large, proactive strategies can help safeguard against it.

  • Wire Transfer Fraud: While 86% of respondents express confidence in their wire transfer fraud prevention measures, the speed and finality of wire transfers make them an attractive target. Employee and customer education play a pivotal role in mitigating the risks associated with wire transfer fraud.
  • Check Fraud: Spurred by the manipulation of government relief checks during the pandemic, the resurgence of check fraud also highlights the need for increased customer education and advanced technologies like positive pay and direct deposit.
  • Phishing: Recognizing the concern around phishing, institutions need to invest in and optimize their strategies for recognizing it. Regular assessments and updates should be conducted to stay ahead of evolving phishing techniques.

Tackling the #2 Challenge Head-On

Artificial intelligence (AI) has accelerated criminal capabilities in recent years; however, institutions can leverage the same technology to strengthen their defenses. In fact, specific forms of AI and machine learning (ML) have been used in banking for years, particularly for fighting financial crime.

The AML Modernization Act of 2020 mandates the adoption of AI within financial networks to identify relationships between fraud and money laundering. Anti-fraud and AML technologies utilizing AI, coupled with a holistic approach to cybersecurity, including customer education and multi-factor authentication, form a toolkit to combat the surge in fraud and ensure the integrity of the industry in 2024.

What Are Bankers’ Top Technology Investments for 2024?

Financial institutions are doubling down on digital-first technology investments to meet the evolving needs of a convenience-driven, tech-savvy clientele. As revealed in our Banking Priorities Executive Report, bankers are prioritizing digital tools and efficiency drivers to stay competitive in 2024.

2024’s Leading Investment: Digital Account Opening

At the forefront of technology investments lies digital account opening, with 41% of bankers acknowledging its importance. In today’s fast-paced environment, providing customers a seamless and convenient experience is non-negotiable for long-term success. Digital account opening streamlines the process for both consumers and businesses, enabling banks to acquire new deposits and onboard new clients swiftly while delivering a superior customer experience. Its high placement also underscores the imperative for institutions to increase deposits in today’s interest rate environment.

Strategies in Motion

As institutions strive for competitiveness and relevance, enhancing customer identity verification processes took center stage, with 52% of bankers voting to prioritize this process in 2024 to drive customer engagement. Prioritized investments here stem from bankers recognizing its dual role in facilitating digital account opening and fortifying cybersecurity.

Community bankers are doubling down on technology investments to tackle the unique challenges coming in 2024.

2024’s Second Highest Ranking Investment: Efficiency with Automation and AI

Efficiency remains a critical component of banks’ technology strategies, with automation and AI as key enablers. Garnering 39% of the vote, efficiency drivers like automation and AI are revolutionizing banking operations. AI and ML, hailed as 2024’s most impactful technologies by 44% of respondents, promise significant productivity gains across various domains, from customer service to risk management.

Strategies in Motion

The rise of generative AI tools, which we discuss further below, offers the potential for heightened efficiency in the banking sector. Today, by harnessing automation, banks can streamline processes, enhance customer interactions and bolster fraud detection efforts.

What Are Bankers’ Top Opportunities for 2024?

Bankers are strategically engaging with consumers and embracing transformative trends that promise to redefine banking operations and customer service in the years to come.

2024’s Greatest Opportunity: Harnessing the Power of AI and Machine Learning

For community banks grappling with limited resources, AI-powered tools present a unique opportunity to level the playing field against big banks by offering assistance and smart automation. Generative AI applications, in particular, hold the promise of hyper-personalized, around-the-clock service, enabling banks to leapfrog their capabilities and retain a competitive edge. From virtual assistants to content creation tools, the applications of generative AI are vast, offering banks newfound agility and efficiency in meeting customer needs.

Strategies in Motion

Strategically deploying AI and ML can unlock productivity gains, streamline processes and empower banks to make data-driven decisions. By embracing these deep learning technologies, institutions can position themselves as leaders in innovation and customer-centricity, driving sustained growth and profitability in an ever-evolving landscape. However, time will tell how regulations and successful use cases permeate the industry.

2024’s Second-Greatest Opportunity: Embracing Open Banking and BaaS

As consumers demand genuine interactions and seamless financial services, embracing open technologies is imperative. Open Banking and Banking as a Service (BaaS) offer a gateway to enhanced collaboration and innovation, empowering banks to tap into new markets and deliver value to customers.

Open banking facilitates seamless partnerships between banks, fintechs and neobanks, fostering a culture of innovation and adaptability. Banks can harness data and streamline processes through strategic API integrations, as well as introduce innovative solutions tailored to their unique market needs.

Open banking and BaaS present a valuable opportunity for community banks in 2024.

Strategies in Motion

BaaS, in particular, presents an opportunity for smaller asset banks to enhance operational capabilities and expand into new markets. By leveraging the foundation of open banking, banks can unlock new revenue streams and deliver cutting-edge financial services to their customers.

However, banks should approach open banking and BaaS with careful consideration, ensuring alignment with their institution’s strategic objectives and customer needs. Rather than chasing shiny objects, banks should focus on building robust partnerships, leveraging existing integrations, and prioritizing customer-centricity in their innovation efforts.

Navigating the Road Ahead for Community Banking

As the banking industry charts its course through 2024, strategic foresight and adaptability are key. By confronting challenges head-on, making strategic investments and embracing emerging opportunities, banks can pave the way for sustained growth and competitiveness.

Despite the challenges, a spirit of resilience prevails among community financial professionals with 91% of bankers expressing overwhelming optimism for the future. From digital banking to AI and open banking, bankers are strategically engaging consumers and capitalizing on emerging trends, demonstrating measured confidence in navigating the ever-changing financial landscape.

Want the Full Results of the 2024 Banking Priorities Survey?

This blog only scratches the surface of the depth of information uncovered in the 2024 Banking Priorities Survey. Bankers have provided a wealth of knowledge regarding their technological investments, latest strategies and emerging trends spanning modern banking, cybersecurity, compliance and beyond. Unlock the complete 2024 Banking Priorities Executive Report today.

Read the report

Allison Maddock serves as senior vice president and chief product officer, a role in which she leads CSI’s product management team to deliver solutions aligned with CSI’s vision and strategy. As a member of the executive leadership team, she uses her product management, strategy, operations and technology expertise to advance CSI’s products and services.

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