Abrigo CEO Jay Blandford believes AI [artificial intelligence], Fed rate cuts, compliance pressures, and the fight for depositors will be some of the themes defining 2025
1. Artificial intelligence to be increasingly integrated
Blandford said AI will accelerate its transition from a buzzword to an integrated tool for financial institutions. Financial institutions will increasingly integrate automation and AI to address a combination of operational efficiency, risk management, and compliance challenges. With rising pressure from regulators, economic uncertainties, and complex fraud threats, banks and credit unions will deploy AI-driven solutions for enhanced monitoring, decision-making, and process optimization.
“AI will be instrumental in fraud detection, with advanced machine learning models helping to identify emerging fraud patterns, including AI-generated fraud schemes,” Blandford said. “Automation will also streamline compliance efforts, such as meeting CFPB 1071 reporting requirements, by simplifying data collection, analysis, and reporting workflows.”
He said risk management will see notable improvements through AI’s ability to predict loan performance and market changes, helping financial institutions better prepare for interest rate shifts and credit risks. AI-enhanced data analytics support deeper insights into loan portfolios, providing tools for precise pricing and portfolio management.
Institutions will increasingly utilize AI and automation to gain performance insights, improve customer experiences, fight fraud, and balance human involvement and the more efficient handling of manual, repetitive tasks.
2. The fight for depositors will continue
With banks and credit unions wanting to grow their balance sheets, they will need deposit strategies that accommodate the dynamic rate environment and an aging deposit base. Blandford said heightened competition for core deposits and the generational transfer of wealth means institutions need to understand the differences in both the financial assets and banking habits of Boomers and later generations.
“Retaining and attracting additional depositors requires understanding core deposits and pricing strategies,” Blandford said.
3. Additional Fed rate cuts will pressure financial institution profitability
“We notice a growing shift in clients’ concern toward interest rate risk,” Blandford observed. “Expect additional pressure on financial institution profitability as the Fed cuts rates. Lower rates will eventually benefit borrowers, resulting in cheaper loans, but funding costs are unlikely to drop as fast as perceived loan rates, pinching net interest margin.”
He explained that banks and credit unions will face challenges in managing repricing risk (both for loans and deposits that need to be repriced at lower rates). They’ll also see changes in prepayments and depositor behavior, all of which can pressure institutional profitability and prompt institutions to seek alternative revenue streams, such as fee-based income or new lending products. At the same time, they’ll continue emphasizing cost containment. Lower rates would also make market valuations more attractive, which could drive higher M&A activity.
“If the narrative changes from a ‘soft landing’ to a potential recession and interest rates remain elevated, the consumer’s declining purchasing power and general financial health would add pressure to credit risk, and we may see institutions increasing their reserves.
4. Institutions will face immense regulatory compliance pressures
Blandford said regulatory compliance pressures are intense heading into 2025, with the future unclear as a result of the presidential election. Until Trump’s appointees and priorities are more clear, expect regulatory scrutiny in 2025 to emphasize compliance related to sanctions, emerging AML regulatory expectations, the fight against fraud, fair lending (in particular in 2025, small business lending), and consumer protection risk management.
“Financial institutions must adapt to an evolving regulatory landscape related to access to financial services, including lending,” Blandford noted. “Preparing for 1071 small business reporting requirements will require changes to data collection and other business processes. New compliance requirements always draw attention, so institutions tell us they will also keep an eye on CRA modernization, other aspects of the Dodd-Frank Act, and the Corporate Transparency Act (CTA Act).”
Blandford added that allowances under CECL are also facing increased scrutiny. Expect the focus to incorporate model validation and sensitivity to changes in economic forecasts (including prepayment and curtailment rates).
“With tight resources, banks and credit unions using manual processes will find it particularly challenging to keep pace compliantly in a cost-effective way, increasing the importance of leveraging third-party partners for project management and new technology, such as AI-assisted check fraud detection, to meet compliance needs efficiently,” he concluded.