7 Fintech Trends Banks Should Be Watching Now + 8 More to Anticipate
Opportunities abound for banks and credit unions that delve not only into today's technology trends but what's just over the horizon. A veteran industry analyst assesses where institutions can find fresh fields.
By Alex Jimenez Backbase
Many banking and fintech researchers excel at tracking industry trends. From year to year the trends change, although sometimes it feels that they remain static. When looking back just a few years, you realize that what was once imminent has sometimes petered out. (I’m looking at you, blockchain.) In other cases, a trend seems to come out of nowhere — case in point, generative artificial intelligence.
As we pass through the second half of 2024, I suspect that many fintech authors are starting to draft summations of 2024 trends as well as predictions for 2025. I’ll preview what is likely to be included in these articles from my own tracking. More importantly, I’ll cover the trends where I see banking institutions coming up short.
Six Trends Your Bank Should Be Monitoring Right Now
Here are the trends being discussed in bank and credit union boardrooms, covered by consultants, and getting the most digital ink in the banking and fintech press:
1. Artificial Intelligence: AI is said to be revolutionizing everything in banking. The reality is that AI has been in use for quite a while, but its use is growing. Generative AI is still in its infancy in banking — and no, it hasn’t "changed everything."
2. Embedded Finance: This, along with the next item, is a perennial trend and should continue for the foreseeable future. Embedded financial experiences pose both a major threat and an opportunity for financial institutions.
3. Open Banking: Due to consumer demand, the use of application programming interfaces (APIs) to share financial data between institutions is growing, whether there are open banking regulations in a market or not.
4. Biometric Authentication: With the rise in cyber threats, financial institutions are increasingly adopting biometric methods like fingerprint and facial recognition to enhance security and user authentication. Customers also demand and expect biometrics, which wasn’t always the case.
5. Alternative Credit Scoring: A few years ago, the use of alternative data for credit scoring was imminent. While early tries died out with some dubious schemes (scoring based on social media connections, for example), stronger alternatives are gaining use. Banks and credit unions are using alternative data, such as cash flow and utility payments, to provide more accurate credit assessments, thereby expanding financial access to underbanked populations.
6. Green Fintech: There is a growing focus on sustainable investments and eco-friendly financial solutions that incorporate environmental, social and governance (ESG) factors into their offerings.
Read more: The New Fintech Playbook for a $1.5 Trillion Market in 2024 and Beyond
Add One More Point, Financial Tech Waiting in the Wings
With the six points above, I recommend including one more, a group entry:
7. Just About to Break Fintech: Not a single trend but there are always technologies on these lists that are about to break but haven’t yet. Among them:
a. Decentralized Finance (DeFi): Financial services provided without intermediaries, leveraging blockchain technology to offer solutions like decentralized exchanges, lending and insurance.
b. Central Bank Digital Currencies: Many countries are exploring or implementing CBDCs to streamline transactions, reduce costs and improve financial inclusion.
c. Stablecoins: These digital currencies, which are pegged to stable assets like fiat currencies, are becoming more prevalent for their efficiency and transparency in transactions.
d. Quantum Computing: This emerging technology is set to revolutionize financial modeling, risk assessment and fraud detection by solving complex problems much faster than traditional computing.
Read more: What Does the BaaS Crackdown Mean for the Tradeoff Between Innovation and Compliance?
Eight More Trends that Should Be on Your Radar
While these trends are getting the most buzz there are several fintech themes that deserve much more focus. These areas represent significant opportunities for innovation and impact, deserving more attention and investment to drive inclusive and sustainable growth:
1. Small Business Financial Inclusion: While consumer-focused financial inclusion gets significant attention, small businesses often struggle to access credit and financial services. Innovative fintech solutions tailored for small enterprises, particularly in underserved regions, are crucial but underrepresented in mainstream discussions. They also offer an untapped market for legacy financial institutions.
2. Regulatory Technology (RegTech): With increasing regulatory scrutiny, RegTech solutions can help financial institutions manage compliance efficiently. Despite its potential to streamline processes and reduce costs, RegTech doesn’t receive as much focus as other fintech areas like AI. I still find financial institutions that are using old technology for basic compliance including know your customer, anti-money-laundering compliance, and reporting.
3. Ethical AI: As we continue to deploy AI in the banking industry, the explainability of AI and machine learning models must be considered. It’s very likely that ethical concerns —ensuring fairness, transparency and accountability in financial services — will be central to coming regulation. Nightmare scenarios are already playing out in various industries that should drive this point for all banks and credit unions and their compliance teams.
Read more: Deploy AI Without Triggering Employee Alienation and Burnout
4. Climate Fintech: Beyond green fintech solutions, there is a broader need for climate fintech that focuses on financing sustainable projects, carbon credit trading platforms, and tools to help businesses manage their environmental impact. This niche is emerging but still lacks the spotlight it deserves.
5. Cybersecurity: While I covered biometrics above, the unique risks in digital financial services are not as prominently discussed. This includes advanced fraud detection, secure data sharing, and protecting against sophisticated cyber threats. The rise of AI and the impending application of quantum computing are both threats and opportunities for cybersecurity.
6. Financial Literacy Tools: There is a significant need for fintech solutions that focus on enhancing financial literacy, particularly for younger generations and underserved populations. Many organizations think that having a set of articles on the website is enough. It is not. There are opportunities coming from the use of AI to provide contextual, personalized advice, as well as application of gamification. These tools can empower users to make informed financial decisions and improve overall financial well-being.
7. Digital Identity Verification: Ensuring secure and efficient digital identity verification is critical, especially with increasing online transactions and resulting growth of fraud. Innovative solutions in this area, such as decentralized digital identities, are essential but often overlooked.
8. Mental Health and Financial Stress Tools: While this is related to financial literacy, fintech solutions that address the intersection of mental health and financial stress are crucial. Tools that help users manage financial anxiety, provide financial counseling, and promote overall well-being are necessary but not widely highlighted.
I challenge banks and credit unions to examine the trends that get less focus, perhaps leveraging associated trends, to make a difference in the industry. Many of these "lesser trends" represent opportunities for financial institutions to stand apart from the pack, and ultimately drive better customer outcomes and business results.
About the Author:
Alex Jimenez, a veteran banker and consultant, is lead principal consultant at Backbase.
