The Future of Fintech

Fintech is short for financial technology. It refers to companies that mainly use technology to provide financial services to customers.

Today, 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.

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."

As we reviewed academic studies and consulting firm reports and dug deeper into the data on changes in this area to predict the future of fintech, we reached out to Joris Hensen, founder and co-lead, and Brigitte Kötting, communications manager, of Deutsche Bank's (DB) division overseeing its application programming interfaces (APIs). They've been working at helping their bank—formed in 1870—remake itself through embedded finance (applications placed seamlessly into platforms often used by clients) and fintech more broadly.

Hensen and Kötting said these changes should be "understood as a transformation" of DB. DB, like other large banks, has been working for some time on the "technical building blocks" unseen by consumers, but they said it's concentrating "more strongly than before on reusable services... ultimately, the biggest transformations" will be from how banking services are customized to the individual.

The efforts of DB and others 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. 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.

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.

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 a World Bank report puts it, "Fintech is transforming the financial sector landscape rapidly and is blurring the boundaries of both financial firms and the financial sector."

By the mid-2020s, however, fintech has come to mean everything—or worse, anything. But once we get specific (not just marketing), we notice genuine 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.

Funding Sources

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 and hundreds of millions of users.

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 parts of the world will often come from firms based there—but because the growth is expected to be more rapid in these areas. For example, today, almost half of adults in Brazil bank with Nubank (a fintech), double the amount in 2020.

Significant shifts are thus in regions where large population segments have historically been excluded from the traditional banking system. Mobile banking apps and financial technologies have emerged in these areas as everyday payment methods. 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. Various applications provide essential services such as money transfers, microloans, and access to nontraditional credit sources.

More than the efforts of the major European and American banks, it's remarkable how many of the changes in fintech are being led from below. Nevertheless, this shouldn't lead us to celebrate the "democratization" of finance too quickly. Much of the investment capital (and, therefore, the rewards likely to be gained) 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 that have remained in place since.

While there have been vast changes in how consumers pay each other for goods and services, it's been a different story for businesses paying each other (B2B). S&P Global calls this the "final frontier" for this part of fintech, as many companies still rely on paper checks, and their payment processes can often be slow and complicated. Their 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 been in the B2B 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 (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 specific technological changes underway in banking and payments:

1. 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 revenues 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. 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 for detecting crime. 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 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 suggesting greater 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.

The integration of AI in fintech is not without many challenges. Concerns about data privacy, algorithmic bias, and job losses to AI are likely to remain live issues for the foreseeable future.

2. 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.

3. Buy Now, Pay Later Lending

Buy now, pay later (BNPL) has proliferated since the pandemic as 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, the Consumer Financial Protection Bureau (CFPB) thinks that the number of BNPL customers could triple by 2027 from its 50 million figure in 2021.

BNPL's business model relies on charging merchants fees, though late consumer fees 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 marketed more as a budgeting tool than a form of credit, which the CFPB thinks is behind the widespread use of it by people who already have credit through other means. Since 2022, the CFPB has been reviewing extending credit card regulations to BNPL lenders.

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. "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 have other forms of credit, 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.”

4. Mobile Wallets

The convenience of mobile payments and banking continues to redefine financial transactions, making them more accessible and secure. Mobile wallets, such as those from Apple, Alphabet Inc. (GOOG), and various payment apps, 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. Despite the hoopla surrounding crypto in recent years, what's also notable is that crypto-based payments are missing from this list as Worldpay doesn't expect them to break 1% of global payments by then.

5. Open Banking and Banking as a Service (BaaS)

Open banking enables the secure sharing of customer data and initiating payments through Application Programming Interface APIs. This benefits fintech startups like Plaid and Tink, which can offer financial services and data research by accessing consumers' banking information. While this could provide consumers with greater convenience, it could also increase security risks for the data that's shared.

Regulators have been attempting to speed up the rollout of open banking with the Revised Payment Services Directive (PSD2) in Europe, the Open Banking regulation in the U.K., the Consumer Data Right in Australia, and similar frameworks elsewhere. These mandates require banks to share customer data with licensed third parties with customer consent.

In the U.S., there's no equivalent to these open banking regulations. Nevertheless, several initiatives dovetail with them. 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 is when nonbanks offer banking services to their customers through APIs with licensed partner banks. Fintech startups and established giants can use these APIs to embed financial services like checking accounts, payment processing, and lending into their products and services. For consumers, it can mean a more seamless 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." Banks will need to reach out to major players in other sectors, they suggested, since they will have better expertise for enabling banking services in those areas.

6. 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 fintech has led to the development of personalized investment platforms that cater to novices and seasoned investors alike. 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 even more digital, security remains 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 how money is used and what it is. Unlike decades ago, when moving capital from one country to another would require countless intermediaries, capital now moves instantaneously across many parts of the world. Digital banking and payment platforms like PayPal, Stripe, and cryptocurrencies allow instant, low-cost international money transfers, dramatically increasing the speed and ease of moving money globally—often, regulators worry, anonymously.

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 speculative investments.

At the heart of crypto's appeal 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 propensity for fraud 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, spot bitcoin ETFs in 2024 and the SEC's nod towards potentially approving spot ether ETFs in May 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. Interbank networks like SWIFT enable secure and fast financial communication and transactions between banks worldwide. It's this context, along with the rise of crypto, that has caused CBDCs to leap quickly from the pages of academic papers describing them theoretically to use in the real world.

The emergence of CBDCs—essentially digital forms of national fiat currencies—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:

• Greater inclusion of the unbanked and underbanked
• Reduced transaction costs
• Quicker response time between when monetary policy is initiated and effects are seen
• Faster payments, especially for cross-border transactions

However, regulators still have concerns about CBDCs related to privacy, cybersecurity, and how vast amounts of digital money moving around could affect the banking system.

The Future of Regulatory Compliance

Regtech, short for regulatory technology, is the part of fintech that 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 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.

The Bottom Line

The future of fintech will likely include 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 is done. 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, U.S. and EU regulators have been pushing for banks to provide consumers with more real-time payment options.

As AI is further integrated into financial systems, further industry automation is likely—as are AI-backed attacks on banking data. That's why risk management is also a significant aspect of fintech's future.