Future fintech industry trends

Consolidation as bigger brands incorporate fintech startups and opportunities in America as the US finally embraces open banking are just two trends fintech founders need to watch out for this year

Fintech cannot stay out of the headlines, mostly for the wrong reasons reasons. This past year has seen the spectacular collapse of cryptocurrency exchange FTX, while the ex-chief executive of Binance, the world’s largest crypto exchange, has pleaded guilty to money-laundering as part of a $4 billion settlement between the platform and the US Department of Justice.

No wonder investors are feeling cagey about putting their money into disruptive fintech startups.

Combined with rising interest rates and inflation, investors have held onto their cash – ending the pre-pandemic era of easy money – making it more difficult for fintech startups to raise capital.

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According to KPMG, total UK fintech investment dropped to $5.9bn (£4.6bn) in the first half of 2023, down 57 per cent from $13.8 billion in the same period in 2022.

So, will it be the same this year?

Nick Sando, a fintech principal at Octopus Ventures, believes fintech is now entering a period of stability compared with last year.

Sando says: “The last three months have been particularly active … it’s really picked up over the last few months, as people feel that we’re through the worst of it.”

‘The biggest companies are built on the back of market downturns’

Nicholas Sando, principal Octopus Ventures

In fact, says Sando, being in the trough of a downturn can be propitious for fintech founders, as there’s less competition for investor cash and an IT labour market which has seen mass redundancies post-pandemic means you have the pick of better people.

“While it can be daunting, it’s also incredibly exciting. The biggest companies are built on the back of market downturns. Times like these are when opportunities arise,” says Sando.

If there is one overarching theme among the fintech trends in 2024, it will be consolidation in the sector, whether it’s high-street banks buying into disruptive fintech startups or bigger brands including them as part of a bundled finance offer.

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Given the fall in fintech investment, fintech founders might be grateful when a high-street bank comes a-knocking – banks have, after all, been taking stakes in fintechs for years.

The attraction of having your disruptive fintech app bundled with a larger player is that it solves the biggest problem that has faced fintechs – getting in front of customers. For example, one of the ubiquitous accounting software providers, such as a Xero or a Sage, could offer loans when they notice you’ve got a cashflow problem. This bouquet of financial products, known as “embedded finance”, is going to be one of the most exciting developments in fintech, says Sando.

Another fintech trends theme that is not going away is the importance of cyber-security and anything which protects fintechs from cyber-attack.

“There really is an increased focus on cyber-risk and operational resilience is a real problem there across the thousands of critical infrastructure and private businesses that are really impacted,” says Simon Crown, co-head of fintech practice at Clifford Chance.

Future fintech industry trends

Growth Business has identified nine future fintech trends for 2024 and beyond.

Climate fintech

One area that especially excites Sando is climate fintech, which covers carbon emission accounting, carbon offsetting and ESG compliance. “All of these solutions are being built right now while the train is going a hundred miles an hour,” enthuses Sando, whose Octopus Ventures recently invested in carbon accounting software startup Minimum.

Decentralized Finance (DeFi)

Decentralized finance (DeFi) platforms will go mainstream. These use blockchain technology to help cut out the middleman taking commissions, reducing the cost of money. Think how Wise has disrupted the foreign exchange market by undercutting banks. DeFi startups will move on to disrupting borrowing, lending and insurance markets, as well.

AI offering financial advice

Imagine an Alexa as your personal financial advisor – there is going to be opportunity for AI-driven personalised investment and spending advice.

The big question when it comes to AI-driven chatbots, say, offering financial advice, is going to be governance and oversight. Who in the end will be responsible if the AI advice is duff or results in losses. “The thing senior managers will be thinking about is the Frankenstein effect – what have we created?” says Crown.

Tokenisation of assets

Blockchain technology will enable small investors to own shares of hugely expensive things, whether it’s property or fine art or classic cars. Combining tokenisation with distributed ledger technology (blockchain) gives a great deal of scope to create a whole new wave of innovative products and services, one of which could be programmable money.

America embraces open banking

Open banking began as a UK government initiative to break the stranglehold of legacy providers on personal finance. High-street British banks were forced to share their customers’ data with third parties such as fintechs for the first time, enabling the launch of disruptors.

US regulators announced measures in October to allow consumers’ data to be shared as in the UK, Australia and Europe, which make it easier to switch bank accounts. The Personal Financial Data Rights rule will, for the first time, guarantee Americans access to their bank data at no charge, enabling them to share that data with third parties.

This new open banking rule will require that, as in the UK, banks provide application programming interfaces (APIs), which allow data to be easily shared.

On the face of it, the US offers a huge opportunity for UK fintech start-ups, given that Britain was for a long time the most innovative fintech market in the world (before the EU caught up).

However, Simon Crown warns that the US would be a difficult market for a UK startup to crack, given the different regulation, which would mean partnering with a US firm.

However, one key difference is that open banking had political support here in Britain, which may not be the case for either the Democrats or Republicans following next year’s election. Opening up America’s banks to foreigners would not sit well with protectionist Donald Trump.

“Everything in America is at risk of politicisation,” says Crown.

Another issue is that the huge cost of implementing open banking fell on UK banks and not on the fintechs which stood to benefit from access to their data. Given that there are more than 9,000 banks and credit unions across America, most of which would have to implement open banking, many of these mom ‘n’ pop banks could not bear the cost of opening up as did British high-street legacy banks.

Fintech consolidation

In a saturated market in terms of the number of fintech startups, it’s now cheaper to buy an existing fintech than to build one from scratch. M&A activity has risen and is expected to grow this year as fintech valuations go down. This consolidation phase, reducing the number of fresh startups, signals a more stable fintech ecosystem.

Buy Now, Pay Later for businesses

While BNPL was initially used for lower-cost fashion purchases, its application has expanded. BNPL is now being offered in corporate purchasing and non-discretionary purchases, such as healthcare, legal services, and auto repairs.

Embedded finance

Embedded finance requires technology to build into products and services the capability to move money in certain circumstances, such as paying for an Uber car directly out of your bank account after the journey. Consumers pay without consciously having to dig out their debit card. The payment is in the background and invisible to the consumer.

For example, one online travel agent has experimented with offering loans to pay for package holidays when you book a holiday. Booking your holiday and paying for it, rather than going outside to use your credit card, is one transaction.

As such, embedded payments are becoming very common for all B2B2C and B2B2B business models like platforms and marketplaces. Embedded payments are expected to scale using emerging technologies such as AI, distributed ledgers, augmented and virtual realities, 5G and IoT.

Sando predicts that bigger brands will buy disruptive fintechs, especially when it comes to offering embedded finance. A case in point might be one of the accounting software platforms, which every business now has to use, seeing that you’ve got a short-term cash flow problem and offering a loan.

The question a fintech founder has to ask, says Sando, is whether they think they would be more powerful on their own or embedded in a larger platform.

Fintechs adopt SaaS model

We’ve become used to renting monthly software subscriptions, which give us peace of mind that we’re always up to date. SaaS revenues globally were being hit $623 billion in 2023 at a compound annual growth rate of 18 per cent. Fintechs are adopting the software-as-a-service model too.

One of the attractions of cloud-based SaaS is that it offers enhanced security when it comes to data storge and management, which fintech startups could not replicate onsite.

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Where to find fintech investmentDespite investment in the first half of 2023 dropping to £4.6bn UK fintechs are still attracting more VC investment than all other EMEA fintechs combined

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