The end of the year is a great time for reflection.

2023 was a year of industry ‘firsts’ and full shifts in sectors that had been trending up. There was so much to process from the last 12 months that we forget key developments that took place.

This post archives the year’s dynamics and puts into perspective what happened now that the industry has had time to digest it all.

Crypto Winter

The winter firmly set in by the end of 2022.

From the end of 2021 to early 2023, many established companies (such as lenders and exchanges) shut down — due to regulatory pressure or lack of operational stability. There was a domino effect on other major players across the globe.

Criminal charges against founders & executives became the norm as investigations uncovered wrongdoing and misrepresentations — impacting investors and creditors claiming what’s owed. Regulators dialed up their enforcement actions and agencies collaborated on industry-wide guidance.

The overall effect had banks and financial institutions eliminate involvement with crypto firms, especially in use cases that involved custody and/or exchange of coins. Startups in this sector started layoffs as well — a pattern that spread throughout all fintech verticals by early 2023.

• POTENTIAL TURNING POINT? Despite the depressed state of the sector, Bitcoin has rallied over the last month above $40K. There’s still buzz about stablecoins in regions throughout the world being utilized to combat local currency fluctuation and improve money movement. US would need to step up as an active leader that enables fiat & crypto conversion, before we start to see real progress.

LATin AMerica as fintech’s new leading hub

This was the pivotal year that LATAM emerged as a dominant industry player.

While the US and Europe slowed down in terms of industry growth, this region continued to trend up with activity and innovation. NuBank became the top neobank across the globe and continued to expand its reach beyond Brazil into Mexico. Lending platforms shined in LATAM as they addressed a long-outstanding need with personal credit.

The demand for quality, accessible financial services will only continue to grow throughout the 15+ country region, based on mobile access & high digital adoption rates.

• WHAT’S NEXT? Global financial solutions that LATAM users can travel and invest with. The demand for US investment opportunities (such as US real estate & stocks), holding USD and other fiat currencies, and spend cards for travelers is increasing at a rapid rate. US partner banks and Banking-as-a-Service (BaaS) infrastructure providers have started to accommodate some of these needs (through fintechs like Nomad, Avenue), but turbulence with partnerships puts the future of these programs at-risk for 2024.

major Turbulence with Banks & Financial Institutions

By the end of Q1 2023, there were 3 banks with disruptions to their operations and regulators taking decisive action to bail them out.

Bank customers concerned about large balances and their bank’s viability made waves (of withdrawals) in March. Silvergate, Silicon Valley Bank, and Signature Bank all fell victim to a ‘perfect storm’ of poor market environment and negative consumer sentiment of the time. Concentration risk (with the crypto sector or startups) became a key learning for financial institutions.

Banks took a look at themselves to evaluate stability. If there was a similar risk from large deposit holders or revenue coming from a single source, financial institutions searched for strategies to de-risk exposure.

• WHAT’S THE MOOD NOW? Banks are still in a cautious, wait-and-see pattern in terms of operations and new initiatives. The rate environment and regulatory pressure continues to deter innovation (with products & partnerships) in the US.

Challenging Rate Environment

In 2023, the central bank increased the Fed Funds rate by 5% over its early 2022 range to counter the risk of inflation (which unchecked can lead to a recession).

Bank rates (linked to the Fed Funds rate) help drive ‘stickiness’' of deposits through deposit interest and growth of lending programs through borrowing rates on loans. The current dynamic impacted the business models of banks as they pay consumers more on deposit interest (previously 0.25%, now up to 4%+), yet are struggling to increase home loans booked (due to mortgage rates as high as 7%, increasing from 3%).

Despite mixed signals that the economy is stabilizing, these rates are expected to remain unchanged into early 2024.

• WHAT NEEDS TO GIVE WAY? An economic breakthrough in which the Fed feels comfortable bringing rates back down. If there’s no clear momentum for the economy, the need to keep inflation at bay is still there and rates will remain high for another year.

the New Dynamic for Bank/FinTech Partnerships

The greenfield of bank & fintech partnerships launching new products & programs in the US is gone.

Regulatory pressure on financial institutions resulted in a minimal number of platforms launching in 2023. Demand for increased oversight of 3rd parties has partner banks (such as Blue Ridge Bank) stepping away from Banking-as-a-Service (BaaS) and shutting down programs with fintech partners.

The licensed entity (bank) has the ultimate responsibility for risk management from the regulator’s perspective — yet most bank partners are smaller institutions with limited resources (such as staffing & technology) for required oversight.

The pressure from regulators is trickling down to fintechs. The industry mindset is firmly set on shared responsibility for risk & compliance management (instead of it all falling on financial institutions).

• ENTER REGTECH SUPPORT VENDORS. We already have an influx of KYC and fraud management vendors, but widespread support for banks & fintechs satisfying regulatory examinations is not there. There’s movement in this space with compliance startups (such as Cable) providing solutions that satisfy key requirements — more players should come through in 2024.

Embedded Finance on the Rise

For today’s consumer, there’s an expectation that digital experiences can constantly improve to become more seamless and compelling. Large, established brands with a massive user base lead the way here.

Adding financial services in existing customer journeys is the next level for enterprise firms across multiple business sectors. Better payments, payout options, financing opportunities, and additional offerings (such as insurance) are possible with embedded finance. Amazon is the ultimate example of integrated financial products benefiting buyers & sellers.

More non-banking enterprises will take the leap forward — social proof needs to come through in specific industry verticals first (such as trucking, healthcare, retail).

• BEST POINT OF ENTRY? Insurance. InsurTech companies have built compelling, embeddable offerings already and the verticals are already there — homeowner, auto, warranty, travel, medical, business, worker’s compensation. Companies with affiliated products & users can immediately benefit and implementation/maintenance costs are minimal.

Expedited Payments in the US

With the debut of FedNow in July, the US can catch up to other countries who have some form of instant, real-time payments.

The demand for expedited money movement is coming from merchants looking for cheaper & rapid alternatives to card processing. Both cash & paper checks lack security and require manual processing. ACH as an electronic transfer method is low cost, but slow to settle (2-4 business days).

Merchants and their customers do have much to gain with instant payments in the US, but so do financial institutions. This is a new opportunity for banks to reinsert themselves as an integral part of critical transactions — examples include insurance payouts, loan & bill repayments, payroll, and benefits disbursements.

• CATALYST FOR THE US? Mainstream adoption will come through with ‘low-hanging-fruit’ use cases. Business-to-business (B2B) payments, settlement, and reporting is still an underserved space in the market. From freelancers sending out invoices to bill their clients to large corporations consolidating vendor payouts, a well-designed B2B instant payment platform can quickly emerge as a market leader.

EXCITEMENT STILL in FINTECH

Despite the minimal growth and atmosphere of consolidation, there’s still a buzz throughout the financial services industry.

The amount of change and forces impacting fintech at this time is unprecedented. However, the ability to withstand the turbulence and turn it into something valuable and innovative is the fintech sector’s ‘superpower.’

The need for better financial technology that operates seamlessly, securely, and less costly remains stronger than ever. The future generation of founders & startups has a great backdrop of successful fintechs from the last decade to learn from.

The stage is set for more financial innovation to come in the next 3-5 years.

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