The financial services industry is highly profitable, generating around $12.5T in annual revenue and approximately $2.3T in annual net profits, with an average profit margin of 18%. Despite its profitability, customer satisfaction in financial services, including insurance, has traditionally ranked low compared to other industries, according to Deloitte. Fintech companies have consistently outperformed traditional organizations in this regard, with significantly higher customer loyalty scores.
Moreover, there is substantial potential for growth in the fintech sector, especially in emerging markets. Globally, 1.5 billion adults remain unbanked, while an additional 2.8 billion adults are underbanked, meaning they lack access to credit cards, reports the BCG. This accounts for over half of the world's population. Additionally, many adults rely heavily on cash for major transactions, even though 89% use mobile phones or smartphones. This immense untapped market presents a significant opportunity for fintech software development, as innovative solutions can bridge the gap and provide accessible, mobile-friendly financial services to these underserved populations.
6 technology trends propelling financial services industry
2024 promises to be a year when fintech companies forge strategic partnerships with traditional banks to revolutionize the industry. Propelled by fintech's innovative spirit and disruptive potential, banks recognize the transformative power of these collaborations, encompassing a range of initiatives from prefabricated fintech solutions to jointly developing cutting-edge technologies. Fintechs bring agility, creativity, and a deep understanding of customer needs, while banks provide access to their established infrastructure, regulatory expertise, and vast customer base. This synergy presents a win-win situation, enabling both parties to reshape the future of finance by offering enhanced customer experiences, streamlined processes, and groundbreaking products. Let’s take a look at the fintech trends that will spur innovation in the financial sector in 2024.
1. Central bank digital currencies are about to take off
While the value of bitcoins and NFTs may be declining, there is a growing interest in a different type of cryptocurrency worldwide. Central bank digital currencies (CBDCs) are gaining popularity and represent a stark contrast to decentralized and untraceable cryptocurrencies like Bitcoin. CBDCs are government-controlled, similar to traditional currencies. Several smaller countries, including Nigeria, since October 2021, have already introduced CBDCs, and larger nations like the European Union, Canada, Brazil, and the United States are actively considering launching their CBDCs. The European Union is currently proposing a legal framework for the digital euro, and the Atlantic Council's Central Bank Digital Currency Tracker indicates that plans for CBDCs are in progress in Canada, Brazil, the United States, and other countries.
The emergence of digital assets, encompassing central bank digital currencies (CBDCs) and blockchain-based stablecoins, presents a compelling opportunity for fintech companies to establish themselves as indispensable partners for treasurers navigating this evolving field. While the adoption of digital assets necessitates treasurers' adaptation to new technologies and services, it simultaneously opens doors for fintechs to showcase their expertise and innovative solutions. Fintechs will help shape the future of the CBDC through innovation in the following areas:
Infrastructure and security
- Provide secure digital wallets for CBDC storage
- Implement advanced security measures like multi-factor authentication
- Develop validator node solutions for CBDC blockchains
Custody and data management
- Offer specialized custody solutions for CBDC assets
- Leverage cybersecurity expertise to protect CBDC data integrity and confidentiality
- Implement data management tools for efficient CBDC tracking
Market data and analytics
- Provide access to real-time CBDC market data sources
- Develop data analytics tools tailored to CBDC risk assessment
- Empower treasurers with timely and strategic decision-making capabilities
Oracle solutions for private blockchains
- Innovate and develop specialized oracles for private CBDC blockchains
- Enable treasurers to maintain visibility into their CBDC holdings
- Bridge the gap between private blockchains and external data sources
Regulatory compliance and transaction monitoring
- Offer tools and solutions to monitor CBDC transactions
- Ensure adherence to KYC, AML, and sanctions regulations
- Facilitate regulatory compliance for treasurers
As the appetite for digital financial services continues to surge, 2024 is expected to witness even stronger alliances between banks and fintechs, empowering traditional institutions to embrace digital transformation and remain relevant in the rapidly evolving financial sector.
2. Decentralized finance goes mainstream
The expansion of decentralized finance (DeFi) platforms, which empower individuals to access financial services directly, eliminating traditional intermediaries, is another prominent fintech trend. The DeFi initiatives will continue improving and diversifying their offerings, including lending, borrowing, and insurance services. As they evolve, they will attract a broader audience and disrupt the conventional financial system. Fintechs have the potential to play a prominent role in the development and adoption of DeFi. Here are some key ways they can participate:
Building DeFi infrastructure:
- Developing user-friendly wallets and platforms: User-friendly interfaces for interacting with DeFi protocols will make them accessible to a broader audience.
- Providing custodial and non-custodial solutions: Fintechs can offer custodial solutions for investors seeking safekeeping of their DeFi assets, alongside non-custodial solutions for those who prefer greater control.
- Building bridges between DeFi and traditional finance: Bridging the gap between DeFi and traditional finance by enabling seamless transfers of assets and facilitating access to DeFi services for legacy financial institutions.
Offering DeFi-based services:
- Lending and borrowing: DeFi-based lending and borrowing platforms, providing access to alternative sources of capital for individuals and businesses.
- Payments and remittances: Fintechs can leverage DeFi to develop innovative payment and remittance solutions that are faster, cheaper, and more inclusive than traditional options.
- Wealth management: DeFi-based wealth management services, allowing users to invest in decentralized assets and protocols.
Partnering with DeFi projects:
- Collaborating on co-branded products and services: Partnering with DeFi projects to develop co-branded products and services that combine their strengths and reach broader markets.
- Providing consulting and development services: Helping DeFi projects scale and improve their offerings.
- Investing in promising DeFi startups: Providing funding and support to further innovation in the space.
Overall, the participation of fintechs in DeFi is expected to accelerate the growth and adoption of this innovative financial ecosystem. By sharing their expertise and resources, fintechs can help make DeFi more accessible, secure, and user-friendly for a wider audience. This collaboration between fintechs and DeFi projects has the potential to reshape the future of finance, creating a more open, inclusive, and efficient financial system.
3. AI-driven personalized financial services
Financial services are becoming highly personalized with artificial intelligence and data analytics advancements. Fintech firms employ intelligent algorithms to analyze individual spending patterns, risk profiles, and investment preferences. This capability enables them to provide tailored budgeting, saving, and investing recommendations that align with each individual's unique preferences. Some of the use cases for AI in finance include:
- Personalized financial advice: AI-powered assistants analyze individual data and financial goals to deliver customized recommendations for investing, saving, and managing finances.
- Data-driven insights: AI analyzes financial patterns, even with imperfect data, to provide valuable forecasts and optimize decision-making. This can be used to predict product preferences and tailor marketing strategies accordingly.
- Digital assistants: AI-powered chatbots and assistants provide 24/7 personalized financial advice, easing the burden on support teams and helping users track expenses, achieve goals, and monitor spending.
- Compliance and customer interaction: Natural Language Processing (NLP) helps with contract compliance by analyzing documents and identifying potential issues. NLP also empowers chatbots to understand customer inquiries and provide accurate responses, streamlining client interaction and onboarding.
- Fraud prevention: AI monitors client behavior, spending habits, and location to detect suspicious activity and prevent fraud. This fintech trend is especially important in today's increasingly sophisticated cyber threat landscape.
4. Quantum computing revolutionizes financial modeling
Forecasts suggest a fully functional fault-tolerant quantum computer could become a reality by 2035. However, significant technical advancements are already underway. This paves the way for the fintechs to capitalize on the immense potential of quantum computing even before fault-tolerant machines are fully realized. As early as 2024, major financial institutions will use quantum computing to understand risks, optimize investment portfolios, and detect fraud. By the time fault-tolerant quantum computers are widely accessible, the value generated from this fintech trend in the financial services industry is forecast to reach a staggering $622B, according to McKinsey. Quantum computing's impact on the fintech sector transcends applications like portfolio optimization, paving the way for transformative innovations that will redefine the industry in areas such as:
Risk and cybersecurity
Two main strategies for keeping data safe in a quantum world are Post-Quantum Cryptography (PQC) and Quantum Key Distribution (QKD). PQC uses complex classical encryption methods to resist quantum attacks. On the other hand, QKD uses quantum properties to set up a secure communication channel between two parties. If anyone tries to spy on this channel, it's instantly noticed, and the compromised keys are rejected.
There are two significant applications to explore: credit-decision algorithms and collateral optimization, which stand to gain from increased precision. In addition, quantum computing could also enhance portfolio optimization in some instances.
Quantum states could make payments much more secure and faster than blockchain technology. They might also solve the problem of money laundering on the blockchain.
Quantum states represent money that can't be faked because it can't be copied. We'll need the right hardware called Quantum Key Distribution (QKD) to make quantum payments possible.
In the future, quantum money, based on QKD, could significantly improve the security of bank transactions within and between banks. This could lead to significant changes in how banking works.
Quantum computing is useful in investment banking, especially portfolio optimization and derivatives pricing. With quantum computing, fintechs can create digital copies of their assets to simulate different economic conditions. This helps them allocate capital better. In derivatives pricing and high-frequency trading, quantum computers can handle more data, making pricing more accurate. They can also speed up calculations. In the future, quantum computing can make transactions like smart contracts faster, more secure, and energy-efficient, similar to what's happening in wealth management.
Operations and finance
Quantum computing is well-suited to tackle problems related to natural language processing because of the vast amount of data and different aspects involved in language. Machine learning helps match tasks to available workers and optimize schedules using data in call centers. Quantum computing could improve this by categorizing tasks more precisely and assigning them to the right workers based on complexity, making better use of the workforce. Quantum computing could eventually support even the most complex tasks in large call centers with better data and improved data privacy. In banking, quantum computing can enhance financial and accounting tasks and provide additional insights from experts. This can lead to more accurate decisions. However, it cannot replace the expertise of legal professionals in complex tax cases. Nevertheless, quantum computing can better support experts as data quality improves.
5. Enhanced security & authentication measures
With the rise of online financial transactions, robust security measures become paramount. Biometric methods are set for widespread adoption, offering a secure and convenient way to access accounts and perform transactions. This technology, which uses unique physical and behavioral traits for individual verification, is set to transform how we secure financial transactions and improve user experiences.
In addition to familiar methods like fingerprint and facial recognition, the future of biometric authentication will encompass a broader range of identifiers. Voice recognition, iris scans, and behavioral biometrics like keystroke dynamics and gait analysis will become part of the arsenal, enhancing security while simplifying user interactions.
In 2024, we anticipate widespread adoption of this multifaceted approach in mobile banking apps and in-person transactions. Users can look forward to accessing their accounts, making payments, and authorizing transactions with a simple look, touch, or voice command. This boosts security and streamlines processes, eliminating the need for traditional PINs and passwords. Besides biometric authentication, identity management in fintech will see several important fintech trends in 2024:
- Single Sign-On (SSO) improvements: SSO, which allows one set of login credentials for multiple applications, will improve with features like multi-factor authentication and context-aware access controls, making it more secure and user-friendly.
- Decentralized identity systems: Instead of relying on a central authority, decentralized identity systems use blockchain for self-sovereign identities, giving users more control over their data. These systems will gain popularity, but challenges like scalability and regulation must be addressed.
- Identity-as-a-Service (IDaaS): Cloud-based identity management services will grow significantly as more businesses move to the cloud. IDaaS offers scalability, flexibility, and cost-efficiency for organizations of all sizes.
Regulatory bodies will be crucial in guiding the evolution of biometric authentication. Maintaining a balance between convenience and privacy will be paramount. Robust data protection measures will be in place to ensure the utmost care in handling users' biometric data. In summary, 2024 marks a pivotal moment for biometric authentication in fintech. This dynamic fusion of security and user convenience opens the door to a future where financial transactions are safer, more seamless, and more accessible than ever.
6. Rise of embedded finance
As we enter 2024, embedded finance, also known as embedded banking, is expected to see explosive growth. This fintech trend sees non-financial companies, like online shopping platforms, ride-sharing services, and even social media giants, incorporate financial services directly into their existing platforms. The seamless integration enables users to manage their finances conveniently without leaving their favorite apps' familiar environment. This eliminates the need to switch between multiple apps, offering a streamlined and user-friendly experience.
Sectors like retail & ecommerce, healthcare, and education are expected to witness significant growth in embedded finance solutions, driven by the need for convenient and accessible financial services. Additionally, the diversification of embedded finance into sectors like real estate, mobility, travel, and energy highlights embedded finance's expanding scope and versatility in addressing various financial needs across industries. BNPL and other consumer financing options are expected to be significant growth drivers across various sectors.
According to an analysis by Dealroom, the market for embedded finance solutions is projected to achieve a value of $7.2T by 2030. This surpasses the combined value of fintech startups and the top 30 global banks and insurance companies. This explosive growth is driven by a confluence of trends in fintech, including the rise of open banking, the increasing adoption of mobile wallets, and the growing demand for personalized financial services. The report also anticipates that this substantial growth will be primarily fueled by services related to insurance, lending, and payments, including branded credit cards. Fueling this growth is an arsenal of innovative technologies:
- Tokenization: Replacing sensitive card data with tokens for secure and convenient transactions within non-financial platforms.
- One-click payments: Enabling seamless payments with stored credentials and pre-authorized transactions, reducing checkout friction and enhancing user experience.
- Real-time payment processing: Ensuring instant transaction settlements and immediate fund availability within the embedded payments ecosystem.
- Mobile wallets: Mobile payments are gearing up for a massive leap forward in 2024. New research from Juniper Research predicts that the total value of transactions processed through digital wallets will skyrocket by a staggering 77%. This translates to a rise from $9T in 2023 to $16T by 2028.
- Embedded payment APIs: Facilitate integrating various payment methods and processing services within non-financial platforms through secure and standardized interfaces.
- Fraud detection and prevention: Utilizing AI and machine learning algorithms to identify and prevent fraudulent behavior within the embedded payments ecosystem, protecting users and businesses.
- Open banking APIs: Employing open banking APIs for secure access to customer account information and transaction history, enabling personalized payment solutions and value-added services.
- Machine learning algorithms: Help personalize insurance offerings by analyzing customer data and predicting risk profiles.
- Real-time risk assessment: This technology enables immediate assessment of risk and pricing of insurance products, making the process faster and more efficient.
- Application Programming Interfaces (APIs): APIs allow for seamless integration of insurance products into non-financial platforms, such as travel booking platforms or ecommerce websites.
- Alternative credit scoring models: These models utilize data beyond traditional credit scores, such as cash flow and social media activity, to assess creditworthiness and expand access to financing.
- AI-powered decision engines: These engines analyze data in real-time to approve or decline loan applications quickly, providing a more streamlined experience for borrowers.
- Open banking APIs: Allow for secure access to customer data, enabling lenders to make informed decisions and personalize loan offerings based on individual financial situations.
These tools are not just enabling seamless integration of financial services into non-financial platforms but orchestrate a fundamental shift in how we access and manage our finances.
Despite experiencing short-term fluctuations, annual fintech revenues are predicted to reach $1.5T by 2030. Specifically, within the banking sector, fintech revenues related to lending, deposits, payments, and trading and investments are forecasted to increase their penetration from 4% to 13% (at a CAGR of 22%) of banking revenue pools by 2030, according to the BCG. They are anticipated to constitute one-fourth of the overall global banking valuations.
Collaborative efforts of fintech companies and traditional banks, driven by fintech industry trends, are reshaping the future of finance by offering enhanced customer experiences, streamlined processes, and groundbreaking products. With the demand for digital financial services rising, 2024 promises to be a year of significant advancements and closer alignment between fintech and traditional financial institutions.
While Dealroom’s prediction that every company will be a fintech may not be fully realized in the immediate future, the trend of businesses integrating financial services into their offerings is undeniable. By partnering with an experienced digital provider, companies can position themselves to take advantage of the opportunities this trend presents while mitigating the associated risks.