What will 2024 hold for financial institutions?

As overused as the saying ‘the only constant is change’ may be, it bears repeating for the world of payments. Advancing technology, geopolitical upheaval and changing global regulations are all leaving their mark.

But where do they leave the future of payments? Let’s take a look at what two of our experts are expecting for the upcoming year.

Kjeld Herreman, Head of Strategy Advisory at RedCompass Labs

Instant payments are taking off (even more)

The move to instant payments in Europe took a huge step forward in 2023 with the European Parliament and the European Council reaching a political agreement regarding the instant payment legislative proposal. This effectively mandates payment service providers (PSPs) to offer the sending and receiving of instant payments in euros at no extra charge. This is great news for European consumers and businesses, but it involves a hugely technical implementation within a very ambitious timeline. This will prove an enormous challenge for banks.

We have also seen huge progress in emerging markets, with the likes of India and Brazil embracing digital payments as part of their financial inclusion efforts. However, much of the rest of the world, and in particular the US, has much to do on the instant payments front. There are a lot of issues to be tackled, such as changing legacy, batch-based systems to support a 24/7 market, which requires a high number of transactions at low latency. That said, in 2024, we can expect the drive towards instant payments to pick up pace. As there is no cookie-cutter solution that will work for all banks, we can expect to see them explore alternative approaches that don’t require them to change their core banking systems.

Digital payments: experimentation and evolution

2024 will see evolution, not revolution, on the digital payments front. We will continue to see a shift towards the cloud, as scaling and keeping the total cost of ownership under control become increasingly important. The most innovative changes that we see are related to the use of artificial intelligence (AI) and machine learning, which can help banks increase their straight-through processing rates, increase their insights into their clients’ transactions, and deliver on changes more cost-efficiently.

As fraudsters start to use AI for nefarious purposes such as deep fakes, banks will quickly need to address these threats. One countering measure could involve developing their own AI systems to spot them. Indeed, 2024 will be a year of experimentation, with the most promising AI initiatives coming to fruition in 2025.

In the near future, payments will be instantaneous, cheap, frictionless and interoperable, able to move along and across different payment rails without human intervention. However, as was the case in the telecommunications industry, innovation doesn’t come to an end because a product becomes commoditised. Payment service providers will need to find ways of monetising the data generated by payments and creating value-added services that elevate payments beyond a simple transfer of funds.

The biggest trend will be payment service providers reducing the costs associated with their payment operations while upgrading their real-time capabilities and looking for ways to connect the various payments rails and closed loop wallets. As the industry continues towards commoditisation, it will become essential for payment service providers to leverage AI to service their clients efficiently. Experimentation with machine learning, and more particularly with generative AI, along with interoperability, will be all the buzz in 2024.

Silvija Krupena, Head of Financial Crime at RedCompass Labs

Fighting human trafficking and exploitation

Criminal techniques are becoming increasingly sophisticated, which makes it challenging for banks to spot and stop the transfer of illegal profits or ‘bad payments’. In fact, 75% of employees within financial institutions are not confident in their ability to identify human trafficking signs in transactions. The current approach to tackling human trafficking is not working. The regulatory pressure on banks and financial institutions is building. Human trafficking is one of FinCEN’s national anti-money laundering priorities, while credit and financial institutions were fined almost US$5 billion in 2022 due to AML, KYC and sanctions breaches.

Reflecting on the progress made in 2023, it’s evident that the fight against human trafficking in the financial industry is gaining traction. By adopting innovative methodology and building strong partnerships, we can make significant strides in identifying and disrupting these heinous crimes. Looking ahead, we need to keep improving these strategies and fully utilise the latest advancements in technology, such as AI, to effectively combat traffickers. We must work together to make sure our financial systems stand strong against exploitation and abuse.

If banks embrace a data-driven, persona-based approach they can reduce costs, increase investigation productivity and be more effective in their efforts to unmask perpetrators. At the same time, if they strengthen their prevention measures, they can truly lead the charge in the fight against human trafficking.

Pinched budgets leaving an opening for financial crime

The financial industry is facing increasingly challenging times, with budget and resource constraints impacting everything from training to staffing. Many banks are already feeling the pinch, and there’s a growing concern that these cuts, especially in compliance, might be too deep. Such reductions could potentially lead to enforcement actions in the future, highlighting the need for a balanced approach in resource allocation.

The Basel AML Index for 2023 revealed a regressive trend in the fight against financial crime. Risks have increased, the quality of AML and CTF frameworks are getting worse, transparency, legal and political risks are increasing and compliance with new tech such as AI and virtual assets, including crypto, is plummeting. The industry is losing the fight against financial crime and needs to take a new approach.

There’s a strong hope within the industry that technology, particularly AI, will help address the current budget and resource challenges. However, despite the growing sophistication of technology, a major hurdle remains: many institutions are finding that their data infrastructure isn’t yet capable of fully harnessing these technological advancements. Addressing this may require multi-year projects, but it’s a necessary step to fully realise the potential of these technologies in tackling financial crime.

The recent FATF, INTERPOL, and Egmont Group report highlights the growing challenge faced by the financial sector, where rapid digitalisation is inadvertently aiding criminals, enabling them to boost their illicit activities, especially in money laundering. This digital shift, coupled with the acceleration of financial transaction speed and sophisticated anonymising techniques, poses significant hurdles in tracing financial crimes.

These challenges underscore the urgency of implementing enhanced AML measures to address emerging risks, such as the misuse of deep fake technology and criminal exploitation of digital tools and social media.

If you’d like to learn more about any of these topics and discover how we can help you, click here to get in touch with a member of our team.