Despite the adverse market environment, fintech companies continue to gain strength and importance for customers and the economy. What trends will shape the industry in the coming year?
The past year was an extremely turbulent one in several respects. Fintech companies in particular suffered greatly from the difficult market environment and resulting turmoil, with several high-flyers brought down to earth.
Although 2023 will continue to be challenging, the fintech industry continues to evolve with market trends, and innovation in the fintech sector will continue to drive change in traditional financial services.
What trends and developments is the fintech industry talking about for the new year?
RegTech a Profit Driver
Few sectors are as heavily regulated as the financial industry. FTX’s spectacular collapse and alleged fraud will lead to more regulation in the crypto space globally. At the same time, as the crypto universe becomes ever more entwined with traditional finance, the latter will also face tighter regulations in the future when it comes to digital asset services.
RegTech helps banks and financial services firms streamline nearly every aspect of the compliance process with solutions that help to efficiently identify and mitigate risks. Since many financial institutions do not have the staff or the technical expertise to handle regulatory hurdles in the crypto space without outside help, they will seek partnerships with third parties to create an efficient compliance process when it comes to digital assets.
Artificial Intelligence is Critical for Success
The topic keeps showing up on lists of top tech trends, and the use of artificial intelligence (AI) will become more commonplace in the future. The use of AI in lending, or in combating cybercrime and fraud will continue to grow. AI enables the automation of complex and high-value processes in finance, while AI-assisted chatbots will become increasingly common in online contact with bank customers.
According to one study, AI will reduce the cost of banking transactions by 22 percent by the end of 2030, translating into potential savings of up to $1 trillion. In a Deloitte survey of IT and business leaders, 86 percent of AI users in the financial services sector also said adopting the technology in the next two years will be critical to their company’s success.
The term «embedded finance» isn’t new, but consumers and investors alike are increasingly interested in it. Simply put, it refers to the integration of financial instruments or services into the offerings of non-financial institutions. Of all the forms of embedded finance, buy-now-pay-later (BNPL) is probably the most commonly known.
But the embedded finance ecosystem encompasses much more, from financial services such as banking, lending, and investing to payment processing and insurance. As consumers spend more of their daily lives online, they are looking for solutions that facilitate their customer experience. Embedded finance enables this, making it one of the most important customer service enhancements.
Open Banking Trends
Open banking has been on the agenda for some time, and the trend taking a more concrete shape. The practice grants third-party providers access to financial data through application programming interfaces (APIs) which has several benefits, including improved efficiency.
As banks undergo digital transformation, such interfaces are becoming increasingly important, because banks that may have been buttoned up until now, will share increasingly more financial data with other platforms in the future, in turn making banking more user-friendly. Through open banking, the banking world is increasingly becoming an open, customer-centric ecosystem.
Venture Capitalists Return
The volatile market environment hit fintech companies hard. Drastic austerity programs, mass layoffs, and severe valuation revisions dominated the headlines this year. Financing rounds are much more difficult now because many venture capitalists have come away with burned fingers and are now holding back. Even fintechs that have been spoiled for success in the past now have to watch their finances and minimize risks. After the record year of 2021, activity in mergers and acquisitions has cooled off accordingly.
Next year, activity levels could return to normal. Venture capitalists in particular are likely to return to the negotiating table in greater numbers starting in the second half of 2023. The chances of success are reasonably good. There is still plenty of venture capital chasing high-yield opportunities in the pre-IPO market, while promising fintech companies are now much more reasonably valued than a year ago.