As we get ready to start the final month of the year, we look ahead at 2024 and what’s in store for the financial services industry.

Reflecting back at 2023, companies of all sizes faced economic challenges from the current market downturn.

Tough decisions needed to be made in response to minimal investor funding, slow revenue growth, and increasing regulatory pressure.

Innovation is still on the horizon as the industry awaits a leap forward with AI (artificial intelligence) and new developments from account-to-account (A2A) payments, digital wallets, and stablecoin adoption.

Here’s our roundup of the trends to watch in 2024 — some continuing from 2023 and a few new ones.

EXPANDING applications of ai

2022 saw the emergence of AI from newly formed startups riding the mainstream momentum of ChatGPT.

Investors were quick to support this influx of companies with investments, but the flow of funding slowed down early 2023. VCs (and the industry) took a step back to see which platforms had a novel solution that improved user experience & business outcomes. Startups in which AI wasn’t a differentiator (in a new product/service) fizzled out.

The newest models bring cost-effective and faster ways to integrate AI with financial products.

Financial institutions are committing more budget in the New Year towards AI capabilities that boost revenue performance.

RegTech (tech focused on adhering to regulation) is also benefiting from AI enhancements.

The continuous change of regulatory requirements, agency demands for annual audits, and complexities in preventing money laundering, all have financial institutions behind on compliance oversight. AI-powered infrastructure and support (through RegTech firms) allows for faster & robust responses times in supervising risk programs.

Generative AI is also expected to expand across banks of all sizes, who track and store massive volumes of transaction and customer information. This data can be processed through models that produce custom recommendations + analytics, down to the individual or business. Personalization from financial institutions is in high demand from today’s financial ecosystem.

Overall, 2024 will be the year that AI becomes an advisory component within FinTech. From evaluating credit risk (for consumers & businesses), compliance risk (of new fintech/bank partnerships), to wealth management & financial planning — AI will become a true gamechanger at the end-user level.

The rise of A2A payments

Account-to-Account (A2A) payments & transfers are gaining momentum globally.

Outside of the US (where debit & credit cards aren’t as widely used), the majority of money movement happens through wallet transfers. This payment rail is cheaper than the card network, comes with lower risk of fraud, and settles instantly.

China, India, and Brazil are leading countries in which non-card payments are mostly via A2A. QR codes at merchant point-of-sale (POS) stations helped spread usage for daily purchases — starting with convenience stores and street vendors.

In the US, an extension of instant payment rails (FedNow launched this year, RTP a couple years ago) can be the use case of A2A for business transfers. Instead of using the ACH network for electronic bank payments and waiting up to 3 business days for settlement, invoices and bills can be paid + settled near real-time. For consumers, A2A can deliver quick top-up deposits and embedded banking functionality (through non-banking brands integrating financial products) .

Digital wallets and digital identity

Similar to neobanks consolidating or shutting down in the last year, individuals and businesses also narrowed down the amount of bank accounts opened.

The majority of these accounts sit with a low (or $0) balance and were utilized for a specific, one-time purpose (such as a promotional bonus, remittance need, or transfer to a friend).

This usage resembles more of a digital wallet, in which users receive a payment and then transfer to a primary banking account.

PayPal, Venmo, and CashApp are top examples of wallets that most individuals have today, but keep no active balance or recurring activity. A2A transfers (mentioned above) would boost wallet adoption even further due to low cost, rapid transfers.

The blocker of user onboarding for account/wallet opening is also expected to be minimized due the creation of digital identities. Instead of consumers or businesses uploading personal information each time, their identity info can be tokenized and user screening performed instantly (or on an ongoing basis). Customers would be able to control personal data access as needed and avoid false positives or delays in working with a new, financial service provider.

from b2c transacting to b2b subscriptions

As neobanks and other consumer-facing fintechs saw a drop in user transactions and overall growth, many decided on a pivot to B2B by outsourcing their platform/infrastructure to banks OR serving business clients.

Instead of relying on continuous activity from thousands of individuals, these fintechs focused on a small subset of customers who would be willing to pay a monthly subscription for platform access. SaaS (software-as-a-service) subscription models tend to have more revenue stability and stronger returns for investors. New capital infusions from VCs help startups stay afloat another 12+ months.

It’s also win for financial institutions in search of the latest innovation without having to build in-house, which can be costlier and time-consuming.

A clear example is with Buy-Now-Pay-Later (BNPL), which gained popularity in facilitating consumer purchases online (into installment payments). Businesses are now in high demand for BNPL options to help manage cash flow, especially for ‘cost smoothing’ during times of financial stress. Consumer BNPL providers can pivot to B2B and serve fewer business clients with larger loans in the next months — a shift away from the crowded field of consumer options.

The (SLOW) RETURN of stablecoins

With the fallout and aftermath of FTX last year, cryptocurrency solutions in the US have had to shut down due to regulatory pressure.

Blockfi’s collapse also made consumers cautious of which platforms they should trust with their crypto balances.

For crypto proponents, stablecoins is still the path toward mainstream adoption.

Its a particular type of cryptocurrency linked to a “stable” currency or a commodity (e.g. US dollar, gold) to help eliminate price fluctuation. A few companies outside of the US are already accepting stablecoins for e-commerce payments.

In the US, regulators were more vocal this year about finding ways to include cryptocurrency in the financial system. Allowing stablecoins and regulating issuers seems to be the best entry point. Large financial institutions (like JPMorgan Chase) are already seeing success with cross-border transfers and rapid settlement between institutional clients via native coins.

Expect 2024 to start rallying momentum (slowly) in the cryptocurrency sector with stablecoins.

FINAL round of Mergers, acquisitions, and shut downs

2023 saw numerous companies get acquired by banks, merge with competitors, and abruptly shut down due to lack of new funding.

For the firms that cut back on staffing or pivoted to a different business model to extend their runway, time will run out in 2024. If there was no substantial gain from their strategic move, then some type of exit (merger, acquisition) or shut down will take place. No more early-stage startups hanging in the balance in 12 months.

Mature fintechs and financial institutions will have their pick of these companies as they search for ways to expand product and/or geographic reach. In this context, it becomes less costly to buy than to build from scratch.

staying ahead in 2024

Regardless of industry vertical or geography, fintech & non-fintech companies need to stay aware and flexible next year with the trends above.

From recent discussions within our network, regulatory guidance & action will be the most critical theme to watch out for. It impacts each item above — from AI applications to stablecoin growth.

In minimizing the impact of regulation to current & future business operations, companies must focus on:

• Contingency planning: If new requirements emerge, determine all available options for business continuity — shifting business model, removing certain product functions, not serving a set of users, or removing a payment flow may need to be considered;

• Risk management: Regulators will continue to pressure financial institutions to integrate better controls & oversight. These requirements trickle down to firms embedding banking. A robust AML policy, fraud prevention and management practices, and ongoing monitoring are examples of additional support that banks need to see from partner platforms;

• Starting with a narrow scope: For new bank partnerships, platform clients need to start with a simple, low-risk use case. No international transfers. No multi-product launches. After the MVP (minimum viable product) is up & running, new functions and use cases can be added;

If the economy does bounce back from its current state, VC investments would also have a resurgence. This can lead to startups and established fintechs deciding to launch new products and forge partnerships that push the industry ahead.

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