The Future of Fintech

Banks large and small are rethinking their businesses by integrating more digital products into their central operations and services. Over the next decade, private venture capital and other major investors will continue pouring funding into financial technology or fintech. It’s easy to see why. Major investors and banks are pouring capital into fintech for the same reason Willie Sutton, the infamous 1930s bank robber, targeted banks: “because that’s where the money is.”

Fintech is indeed “where the money is” as companies across all industries are eager to embed financial services into their products and apps to keep customers engaged and earn fees from their transactions. By integrating features like mobile payments, lending, or investment tools directly into their platforms, businesses can tap into new revenue streams, boost customer loyalty, and gain a competitive edge.

As we reviewed academic studies and consultancy reports and dug deeper into the data on changes in this area to determine the future of fintech, we reached out to Joris Hensen, founder and co-lead, and Brigitte Kötting, communications manager, of Deutsche Bank’s (DB) API program. They suggested their bank—one formed in 1870—is remaking itself through embedded finance (applications placed seamlessly into platforms often used by clients) and fintech more broadly. These changes, they said, should be “understood as a transformation of the bank as such.” DB, like other large banks, has been working on the “technical building blocks,” but it’s concentrating “more strongly than before on reusable services.” Hensen and Kötting noted that “ultimately, where the biggest transformation” will take place is “the customization of banking services” while providing greater flexibility to meet the EU’s calls for a more open banking system.

The efforts of DB and other major banking institutions are among the reasons fintech is now simply a part of people’s lives. Chatbots, artificial intelligence (AI), blockchain, crypto assets, robo-advisors, and all forms of digital banking are no longer the future but the present. A Harris Poll/Plaid survey found that three-quarters of consumers use digital payment services, up about a third since 2020, with the average consumer using three to four financial apps. If this is the present, what does the future of fintech look like? Below, we explore open banking frameworks, the rise of AI, mobile-first banking, and other trends likely to gain steam in the coming years.

Key Takeaways

  • As fintech continues to blend with traditional banking, expect more attention from regulators to ensure consumer protection and financial stability.
  • Blockchain technology and cryptocurrencies are gaining more mainstream acceptance.
  • AI will increasingly drive personalized financial services, automate trading, enhance risk management, and improve fraud detection.
  • Look for more attempts at developing super-apps to emerge, especially for European and American markets after their success in Asia.
  • Regulators are forcing greater compliance with standards needed for real-time payments.

What Is Fintech?

Fintech has been transforming how we manage, invest, and spend our money (and even what we consider money with the rise of cryptocurrencies). This blend of finance and technology is redefining the financial industry, offering consumers and businesses more accessible and cost-effective services. When fintech, the term, emerged a few decades ago, it typically referred to technologies enabling ATMs and the like, as well as other backend financial operations. But in the last decade, developments have been far more directed toward consumer-facing technologies and have found uses in retail shopping, education, fundraising, and community nonprofits.

From mobile banking apps that allow you to deposit checks with a simple smartphone snapshot to investment platforms that use AI to optimize your portfolio, fintech is changing every aspect of the financial sector. You no longer need to visit a bank branch to apply for credit or wait in line to transfer money—people mostly do this from home now. As the World Bank puts it, “Fintech is transforming the financial sector landscape rapidly and is blurring the boundaries of both financial firms and the financial sector.”

That said, in the mid-2020s, fintech could seem to refer to everything—or worse, anything. But genuine uses include trends in AI, automated financial planning (robo-advising), banking, cryptocurrencies, digital lending, lending marketplaces and crowdfunding platforms, financial e-learning, insurance, money transfers, mortgages, payments, and savings and investments.

About a third of all investments in equity fintech funding each year come from venture capitalists—they provide capital to startup companies and small businesses with long-term growth potential in exchange for equity stakes. Globally, Chinese and Southeast Asian tech firms have had the most success with highly popular super-apps with hundreds of millions of users. Indeed, emerging markets across the world are likely to power much of the growth in fintech, with McKinsey, the consulting and research firm, expecting Africa, Asia-Pacific (excluding China), Latin America, and the Middle East to double their aggregate share of the world’s fintech revenue (about a third) by 2028. Because of that growth, North America, which in 2023 accounted for about half of worldwide fintech revenues, is expected to fall to about 40% in that category. That’s not because North America will be standing still—indeed, investments in other areas will often come from firms based there—but because the growth is expected to be more rapid in these areas. For example, almost half of adults in Brazil bank with Nubank (a fintech), double the amount in 2020.

Significant shifts are thus in regions where large segments of the population have historically been excluded from the traditional banking system. Mobile banking apps and financial technologies have emerged in these areas as everyday payment methods. Various applications provide essential services such as money transfers, microloans, and access to nontraditional credit sources. Thus, fintech isn’t just for tech-savvy millennials and Silicon Valley startups. Traditional banks and financial institutions are also embracing these changes, integrating fintech products into their operations to keep clients who could be lured by the ease of various payment apps. But more than the efforts of traditional banks, it’s remarkable how much of the changes in fintech are being led by movements far from the financial capitals.

The Chinese company Tencent Holding’s WeChat (with over a billion users) is just one of many messaging apps worldwide that have evolved into offering services like social media, mobile payments, and digital banking. Nevertheless, this shouldn’t lead us too quickly to celebrate the “democratization” of finance. Much of the investment capital (and therefore the rewards likely to be gained) in the sector originates in the developed world.

The Future of Banking and Digital Payments

The future of finance is likely to occur with mobile banking and digital payments leading the charge. The pandemic caused a massive shift as consumers and businesses sought contactless payment options and remote banking services, which have remained in place since.

Over the past decade, while there have been advances in how consumers pay each other for goods and services, it’s a different story for businesses paying each other (B2B). S&P Global calls this the “final frontier” in payment advances, as many companies still rely on paper checks, and their payment processes can often be slow and complicated. Research shows that almost half of small and medium-sized businesses think they rely too much on manual processes, and managing cash flow automatically is still a significant challenge. Fintech firms are increasingly focused on this area—in recent years, about two-thirds of global fintech companies have concentrated on this market—and we should expect new B2B platforms and tools to have far wider use.

Changes are also being pushed top-down. Regulators have been stepping in to get more uptake of real-time instant payments (along with optional antifraud tools) in the banking industry. The Federal Reserve launched FedNow in 2023, enabling banks and credit unions to send and receive payments for their customers in real-time every day. In Europe, the EU’s plan to mandate Single Euro Payments Area (SEPA) instant payments, which have been available for about a decade, could bring down the costs of these transfers while also leveling the playing field further between banks and nonbanks.

Below are other specific technological changes underway in banking and payments.

The Growth of Fintech

Research by McKinsey contends that fintech revenues will grow almost three times faster than those in the traditional banking sector from 2024 to 2028.

AI-Native Banking

AI is arguably the most transformative technology shaping the future of fintech. McKinsey estimates that AI could generate up to $1 trillion in additional value annually for the global banking industry. Here are some ways AI is seen as key in fintech:

Algorithmic fairness: As AI is increasingly used for consequential financial decisions like credit approval, algorithmic fairness and eliminating AI bias should be a priority. Techniques like federated learning, Kinsey suggests, could enable AI model training without centralizing sensitive personal data. That said, the industry has much work to do since researchers have found evidence of “digital redlining,” a replication through fintech of offline racial boundaries.

Automation: AI is being considered to automate many manual processes in financial services, from customer onboarding, know-your-customer (KYC), and anti-money laundering (AML) checks to processing claims and performing risk underwriting.

Conversational banking: AI chatbots and virtual assistants are enabling 24/7 customer support and natural language interactions for routine banking tasks and inquiries.

Fraud detection: AI is a major topic of discussion in the field of crime detection. Proponents argue that AI algorithms can analyze transaction data in real time, identifying anomalies and potential fraud more efficiently than traditional methods. Of course, fintechs fear that AI could be used by hackers against these same systems.

Personalized financial services: AI could enable hyper-personalization by taking vast amounts of consumer data to tailor financial products and services to individual preferences. This includes customized investment advice, personalized insurance policies, and proactive money management tips.

Risk management: Machine learning could be used to improve credit risk models, fraud detection systems, and algorithmic trading strategies. AI can process massive volumes of structured and unstructured data in real-time to identify patterns and anomalies indicative of risk.

Predictive analytics: AI processes could be used to help deal with customer churn and forecast market movements. Predictive analytics could also help increase employee retention, upselling and cross-selling opportunities, and investment performance.

As it stands, banking and other financial institutions are rethinking their processes to see which can be offloaded to AI-native platforms. The integration of AI in fintech is not without challenges. Concerns about data privacy, algorithmic bias, and job losses to AI are likely to remain live issues for the foreseeable future.

Biometric Authentication

Biometric authentication, such as fingerprint and facial recognition, adds more security to digital payments. This technology is becoming more sophisticated and user-friendly, which could lead to broader adoption in mobile banking and payment apps. By eliminating the need for passwords and PINs, biometrics could solve identification issues with fintech apps but could also bring on others involving privacy.

Buy Now, Pay Later Lending

Buy now, pay later (BNPL) has proliferated since the pandemic. It’s an alternative form of short-term credit, primarily for buying online. Apple Inc. (AAPL) and Amazon.com Inc. (AMZN) are just two of the major firms that entered this market in the 2020s. While BNPL has existed in the U.S. for some time, about 50 million clients used such services in 2021, and the Consumer Financial Protection Bureau (CFPB) thinks that number could triple by 2027.

BNPL’s business model relies on charging merchants fees, though late fees for consumers can pile up quickly. Lenders market BNPL to merchants as a way to drive sales, which could create incentives for BNPL lenders and their partners to encourage customers to spend far more. The CFPB has raised concerns about overspending and financial harm, especially as BNPL is often marketed more as a budgeting tool than a form of credit.

Regulators globally are grappling with how to manage these consumer risks. In late 2023, the Office of the Comptroller of the Currency issued guidance on BNPL lending to community banks, which included steps to protect borrowers from manipulation and outright fraud. Since 2022, the Consumer Financial Protection Bureau (CFPB) has been reviewing extending credit card regulations to BNPL lenders. A CFPB report that year pushed back on the stereotype that BNPL loans are used by those who can’t get credit. Instead, most have some form of credit and could see BNPL as a low or no-interest alternative.

“A common misconception of buy now, pay later borrowers is that they lack access to other forms of credit. Our analysis shows that these borrowers are more likely to use other credit products,” said CFPB Director Rohit Chopra. “Since buy now, pay later is like other forms of credit, we are working to ensure that borrowers have similar protections and that companies play by similar rules.”

Mobile Wallets

The convenience of mobile payments and banking continues to redefine financial transactions, making them more accessible and secure. With the adoption of near-field communication technology and QR codes, services like Apple Pay and Google Wallet are at the forefront. Mobile wallets, such as those from Apple, Alphabet Inc. (GOOG), and the various payment apps, have transformed how we pay for goods and services. These tools allow users to store their payment information on their smartphones, enabling contactless payments with a simple tap. Mobile wallets are fast becoming the primary payment method for many consumers.

Mobile wallets also include those for trading and holding cryptocurrencies. Popular mobile wallets like the Crypto.com DeFi Wallet and Trust Wallet support multiple cryptocurrencies, allowing users to trade digital assets or make payments from their smartphones. In addition, many wallets integrate with decentralized finance platforms, enabling users to participate in lending, staking, and other yield-generating activities.

Below are the results of data from Worldpay LLC for 2023 and its forecast for how payments will look in 2027. Notable is what’s missing: Worldpay doesn’t expect crypto-based payments to break 1% of global payments by then.

Open Banking and Banking as a Service (BaaS)

Open banking is an emerging trend that enables secure sharing of customer data and initiating payments through application programming interfaces (APIs). By opening up banks’ proprietary systems and data to third parties like fintechs and developers, there should be more convenience for consumers. There’s also likely to be an increase in security risks for this data.

Open banking allows third-party developers to build applications and services around financial institutions. This benefits fintech startups like Plaid and Tink, which can offer financial services and data research by accessing consumer banking information.

Regulators have been looking to manage the rollout of open banking with the Revised Payment Services Directive (PSD2) in Europe, the Open Banking regulation in the U.K., and the Consumer Data Right in Australia. These mandates require banks to share customer data with licensed third parties with customer consent. Similar frameworks are emerging in various countries.

However, in the U.S., there’s no direct equivalent to Europe’s PSD2. Nevertheless, several initiatives and regulations dovetail with global moves toward open banking. In the U.S., Section 1033 of the Dodd-Frank Wall Street Reform and Consumer Protection Act mandates that financial institutions provide consumers with access to their financial data. There’s also been an industry-led initiative, Financial Data Exchange, to work out common standards for securely sharing data across the industry.

This leads us to banking as a service (BaaS, not to be confused with blockchain as a service), which enables nonbanks to offer banking services to their customers. This is done through partnerships with licensed banks, where the bank’s regulated infrastructure is used via APIs. This allows companies, from fintech startups to established giants, to embed financial services like checking accounts, payment processing, and lending into their products and services. For consumers, it can mean a more seamless and easy way to tap into banking services through platforms they already use daily.

Hensen and Kötting said the EU’s open banking initiatives are part of the background as DB’s fintech products have evolved. They think it can handle problems traditional banking couldn’t. “Embedded finance has great potential to empower ‘unbanked’ target groups… But whether it’s offering banking services through mobile wallets or providing microfinance options, e.g. within agricultural supply chains, embedded finance can help bridge the gap between banks and underserved individuals and communities, thus fostering economic growth and prosperity.” This requires reaching out to nonbank experts in various sectors. “Partnerships play a crucial role, as expert knowledge is essential to develop products for those often very specialized circumstances, markets, and customers.”

Peer-to-Peer (P2P) Lending

P2P lending platforms connect borrowers with lenders who are willing to provide loans at agreed-upon interest rates. This option is attractive for borrowers who may not qualify for traditional loans because of strict banking regulations or lower credit scores. Investors, meanwhile, could earn higher returns compared with traditional savings and investments, although this comes with great risk.

The Future of Finance and Investing

The digital transformation in financial services is accelerating. Access to investment and financial advice has widened and low-cost access for retail investors into more complex investments is accelerating. The surge in fintech has led to the development of personalized investment platforms that cater to diverse investor needs, from novices to seasoned traders. This shift combines two ideas usually opposed, automation and personalization, as platforms like Betterment and Wealthfront employ algorithms to tailor investment portfolios to individual risk tolerances and financial goals.

Online trading platforms have increased access to financial markets, allowing individuals to trade stocks, bonds, and cryptocurrencies. Platforms like Robinhood and eToro have benefited from these trends.

As financial services become more digital, security is a major concern. The sector is countering threats with sophisticated cybersecurity measures, it also faces AI-driven attacks and more; the same tech enabling improvements in fintech is also being used to hack into these services.

The Future of Money

As we look ahead, several key trends are shaping not just how money is used but also what it is. Unlike decades ago, when moving capital from one country to another would require countless intermediaries, capital can now move in and out of areas very quickly. Digital banking and payment platforms like PayPal, Stripe, and cryptocurrencies allow for instant, low-cost international money transfers, dramatically increasing the speed and ease of moving money globally and, often, anonymously.

The digitalization of money is being pulled in two directions—toward and away from centralized authorities.

Cryptocurrencies

One of the most significant developments in recent years has been the rise of cryptocurrency and blockchain technology. Cryptocurrencies such as Bitcoin and Ethereum have gained mainstream attention and adoption, offering a decentralized and peer-to-peer alternative to traditional fiat currencies, if not as money to be exchanged, at least as a speculative investment.

Crypto has rapidly evolved from niche digital tokens to major financial assets, challenging, for some, the traditional notions of money. At the heart of their appeal and functionality is blockchain technology, a digital ledger consisting of connected blocks that record transactions across many computers.

Regulators worldwide are grappling with whether and how to integrate cryptocurrencies within their systems while protecting consumers. In addition, the market’s volatility and major cases of fraud within the crypto world remain significant hurdles for mainstream acceptance of directly holding cryptocurrencies. Nevertheless, crypto has unquestionably moved into mainstream investing with the advent of crypto futures exchange-traded funds (ETFs) in 2021 and spot bitcoin ETFs in 2024.

Central Bank Digital Currencies (CBDCs)

Much of the world has liberalized its financial markets in recent decades, reducing controls on capital flows to encourage foreign investment and further global economic integration. Interbank networks like SWIFT enable secure and fast financial communication and transactions between banks worldwide, and CBDCs have moved quickly from the descriptions in academic papers to use in the real world.

Fiat money is a currency issued by governments that isn’t backed by a physical commodity like gold or silver but by the trust individuals and institutions place in the issuing government. It is legally recognized as valid for settling debts and buying goods and services. Historically, fiat currencies have been represented by physical bank notes and coins.

The emergence of CBDCs is clearly in response to crypto’s success among many. They are meant to provide the benefits of crypto while “maintain[ing] the centrality of safe and trusted central bank money in a rapidly digitizing economy,” as the U.S. Federal Reserve put it in a 2022 report. It’s not just the U.S. Federal Reserve looking at CBDCs, but also the European Central Bank and People’s Bank of China, among others, reviewing the potential for CBDCs. They are now in use in the Bahamas, Jamaica, and Nigeria.

The U.S. Federal Reserve report noted that the adoption of CBDCs could bring several advantages, such as greater inclusion of the unbanked and underbanked, reduced transaction costs, and improved monetary policy transmission. CBDCs could also improve the speed of payments, particularly in cross-border transactions. However, regulators are apprehensive about CBDCs, given concerns over privacy, cybersecurity, and how it would affect the banking system.

The Future of Regulatory Compliance

Regulatory challenges like AML and combating the financing of terrorism CFT remain significant matters wherever the movement of funds is discussed. Economic stability, currency exchange rates, and cross-border taxation remain crucial issues. Regulators often discuss other concerns with the changes in fintech:

  • Data security and privacy, as fintech firms often handle sensitive personal and financial information
  • Potential systemic risks from large-scale operational failures or cyberattacks
  • Challenges in overseeing rapidly developing technologies like AI and blockchain to ensure regulatory compliance
  • Protecting consumers, as fintech products can outpace regulatory frameworks, including in such areas as BNPL services

Regtech, short for regulatory technology, is the part of fintech dedicated to regulatory compliance. In essence, it uses newer technologies to navigate the complex rules and regulations that financial institutions must adhere to. Here are some principal aspects of it:

  • Regulatory monitoring: Regtech tools can automate the process of tracking and analyzing regulatory changes, ensuring that businesses stay up-to-date with the latest requirements.
  • Reporting: Regtech could simplify the generation and submission of regulatory reports, reducing the risk of errors and saving time.
  • Compliance management: Regtech could help businesses monitor their compliance obligations, ensuring they meet all necessary standards.
  • Risk management: Regtech tools can identify and assess potential risks related to regulatory compliance.
  • Identity verification: Regtech products can aid customer onboarding by automating identity verification.

Regtech companies include ComplyAdvantage, which offers a risk management platform for AML and KYC compliance; Suade Labs, which provides a regulatory reporting platform that helps financial institutions meet their regulatory obligations; and Onfido, which focuses on verifying identities using AI and biometrics.

What Is Insurtech?

Short for “insurance technology,” this is technology designed to squeeze efficiency from the traditional insurance industry model. It includes using big data analytics to personalize insurance policies, AI to automate claims processing, and Internet of Things devices to monitor and manage risk in real time. According to Hourly, there are over 3,400 insurtech companies, up from 1,500 companies in 2018.

What Is Neobanking?

Neobanking, also known as challenger banking, is a type of digital bank that operates only online or through mobile apps. In the U.S., neobanks include Chime, which offers fee-free banking, early direct deposit, and automatic savings; Varo, which provides checking and savings accounts and high-yield savings options; and SoFi, which offers financial products, including student loan refinancing, personal loans, investments, in addition to banking services.

Will Ether Get a Spot ETF?

Those interested in the future of fintech are closely watching developments in crypto. After the U.S. Securities and Exchange Commission approved spot bitcoin ETFs in early 2024, there were expectations the same may soon occur with ether, the Ethereum platform’s in-house cryptocurrency. A spot ether ETF could hold the digital tokens directly, not just futures contracts tied to their value, as is presently the case with ether futures ETFs, which began trading in 2023. As of mid-2024, a spot ether ETF appears unlikely in the near term.

The Bottom Line

The future of fintech likely includes a significant expansion in the next few years. As consumer demand for convenient digital financial apps rises and traditional financial institutions increasingly partner with or adopt fintech offerings, the line between fintech startups and established players will blur quickly.

Emerging technologies like blockchain, AI, and machine learning are poised to drive further changes in how payments are made, how money is lent, how funds are invested, and how customer service for each is provided. Open banking initiatives and embedded finance products will increasingly integrate financial services seamlessly into nonfinancial platforms. Meanwhile, regulators are not stepping back, at least for now. Indeed, contrary to the typical story that regulators are holding back innovation, it’s U.S. and EU regulators who have been pushing changes in getting consumers more real-time payment options.

As AI is further integrated into financial systems, there’s the promise of further industry automation but also advanced AI-backed attacks on banking security. That’s why risk management, including regtech and insurtech, is also a major part of the fintech future.