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Fintech Industry 2023 Trends and Challenges

With an economic recession looking ever more likely, VC investment and start up growth has of course declined. However, when it comes to the Fintech sector, the reduced VC investment is a strategic decision rather than a loss of confidence. VC investment is focusing more on early stage companies, rather than the big budget late stage deals that have attracted so much attention in recent years. Furthermore, the Fintech sector is strong: despite the venture capital slowdown, Fintech companies are still hiring and the deal activity in the sector defies the broader slowdown in M&A activity. Furthermore, an article by a16z showed that the “slowdown” is actually just the Fintech sector’s growth returning to the pre-Covid trendline, i.e. a much healthier and more sustainable CAGR. In fact, the Fintech market is predicted to exceed $161 billion by 2026. All in all, the Fintech sector is a promising one to watch. 

So what are the current trends and challenges in Fintech, and where will the sector head in 2023? 

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5 Key Trends and Challenges 

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1. Embedded Services 

One of the main tenets of the Fintech industry is to provide customers with convenience and flexibility. One way to achieve this is by embedding financial services (like payments, lending, and insurance), and thus removing the need for the customer to reach out to traditional financial institutions for these products. Rather, the financial service is offered to the customer where and when they need it. Essentially, what this means is that while the base platform is not a Fintech company, the financial service is embedded in the platform, often via an API. For instance, Shopify has added a credit financing option for merchants, which is based on their sales and revenue data, and is offered to merchants within their e-commerce storefront. One of the advantages of embedded services is that they can leverage the data that the host platform has access to about the end customer. Embedded services reflect a fundamental shift in thinking where companies are now offering financial services as an ancillary product, rather than the customer reaching out to a traditional institution of their own accord. 

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2. Blockchain Technologies 

Fintech and blockchain sometimes seem like they go hand in hand, and this is not without good reason: the banking industry has the highest market value in blockchain technology, with a 29.7% share. The transparency and security offered by blockchain technology helps customers feel more safer when it comes to their finances, while also circumventing the often slow and outdated processes in traditional institutions. It’s not just everyday consumers who are convinced of the blockchain’s value - Dubai’s government has mandated the use of blockchain technology for certain government processes, indicating a further growth in demand for blockchain. Furthermore, Fintechs are often quicker to adopt new technologies and ideas, such as offering easy ways for their customers to invest in cryptocurrencies, and even DeFi. In contrast, many banks are slow to adopt these technologies, causing their customers to miss out on great opportunities. 

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3. AI 

Another trend to watch is the use of AI for Fintechs: according to Mordor Intelligence, the CAGR for AI in Fintechs for 2022-2027 is expected to be 25.3%. As Fintech companies have grown and handle more and more customers and data, the use of AI is ever more important. Companies need to have the capacity to handle, analyze, and put to use the data that they are generating. Furthermore, certain Fintech applications are prime use cases for AI, such as behavioral prediction for markets, cybersecurity, fraud detection, and insider trading prevention, and even AI-powered financial advice. 

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4. Digital First Banking

You’ve definitely heard of the many different digital first banks, including Revolut, Monzo, FirstDirect, to name just a few examples. A digital first platform allows for greater personalization within the app and website experience. This also allows for the incorporation of AI predictive analytics, for instance with Fintechs that offer AI powered financial advice. Furthermore, ever more customers are prioritizing digital contact channels, due to the ease and convenience associated with them. 

Beyond simply offering customers a more convenient solution than traditional banks, digital first banks also address a significant unmet demand in emerging markets. Indeed, in emerging markets, 1.6 billion people and 200 million small businesses are unable to access traditional banking services. For many people in emerging markets and remote areas, traditional banking in brick-and-mortar stores is either prohibitively expensive, far away, or simply does not meet their needs. For seasonal workers, low-income people, or self-employed individuals, traditional banking is simply not a viable option. Many digital first banks are able to circumvent the traditional barriers, and are able to meet this demand. 

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5. Cross border and international banking 

The fifth and final trend to watch is the rise in cross-border and international banking. The Financial Stability Board (FSB) recently updated its roadmap for this project, which had been endorsed by the G20 leaders. Under this roadmap for cross border banking, there is a significant emphasis on governments and the private sector working together, something that is vital for the success of any international banking process. Fintechs and startups, being more agile and less beholden to traditional practices are well positioned to solve this problem. Deloitte’s report on the 2023 banking sector argues that “legacy platforms and infrastructure make these payments slow, expensive, and opaque”. At the same time, Deloitte argues, crises like the war in Ukraine have emphasized the need for new and resilient solutions to cross border payments, as the risk of the world “fragmenting into multiple economic blocs” increases. 

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Challenge 1: Internationalizing Operations 

As discussed above, the FSB’s roadmap outlined the necessary steps for cross border banking to continue to grow. One of the main challenges the FSB identified is the “promotion of an efficient legal, regulatory, and supervisory environment for cross-border payments”. This is not only a challenge for cross border banking, but for any Fintech with a global or international customer base. Financial services are heavily regulated, and can vary significantly across countries. Any Fintech that hopes to serve more than just their domestic market will need to internationalize its operations, and be able to function competitively in a variety of regulatory environments. 

For instance, US Fintechs that want to expand into the European market must contend with GDPR. We’ve also seen sanctions against Russian customers come into play for Fintechs like Revolut, as well as in the wider financial services market. As the risks in the global market increase, and we see ever more fragmentation, we will rely on Fintechs for innovative solutions in this challenging environment. 

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Challenge 2: Offering Personalized Customer Service 

Another major challenge with digital banking is that customers expect to have the same convenience and ease of use when solving issues as they do in the day to day function of the app. They expect instant responses from agents, and to have their issues resolved quickly. This presents a huge obstacle for companies who are serving a global, fast growing market with many customers. 

Emerging markets in particular present a different challenge altogether, as customers may not speak English, and may be distrustful of companies that cannot serve them in their native language. Earning and keeping their trust is a key element to capturing these markets. 

Offering native language customer service with conversational AI is key - something Algomo specializes in. As mentioned above, more and more customers are turning to digital channels first, and they expect a rapid response time. Using an AI with a seamless handoff to live agents can help split the workload between the bots and the human agents, making sure that human agents are only involved when necessary. Customers will enjoy a faster response time, and the AI will learn with each interaction what customers are really asking. Furthermore, interacting with customers in their native language increases their trust and loyalty to a company. Intercom has shown that 29% of businesses lose clients when they are unable to support customers in their native language. 

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Takeaways

Fintech is a key area to watch in 2023, and if your business is involved, you need to be ready to support your customers in the channels and languages they prefer. For Fintechs, the industry is moving more and more towards digital first communication, and a more global audience. Make sure your company is ready to step on to the global stage.