Back in December, we put together a list of developments worth reflecting on in 2023. Now, we are taking stock of where we are as we head into 2024. Below is a look at the top 5 things we are watching closely as the year gets underway.
- Fintechs transitioning to vendors
We’ve talked a lot recently, including in our 2023 retrospective, about the shift in focus across the fintech industry from consumer propositions to business-to-business (B2B) ones. And while that is a trend that we will continue to watch in the year ahead, there is a subset of this dynamic that’s particularly interesting: the pivot of fintech companies to more traditional-looking banking vendors. For example, in November, consumer neobank HMBradley announced that it was shuttering its consumer operations and would instead focus on selling its technology to banks.
This makes a whole lot of sense in an environment where consumer fintech companies are struggling to demonstrate viability. It is hard to make money selling banking products to consumers — the market is extremely competitive — but there are also many fintechs out there that have built fantastic experiences on impressive tech. That all shouldn’t go to waste. As such, it wouldn’t surprise us if more companies make this pivot, doubling down on what they are really good at (building) and instead selling to those who know how to do the rest.
This could even extend beyond consumer fintechs to others that may benefit from licensing their technology like Banking-as-a-Service (BaaS) providers, for instance, many of which are looking for new ways to drive revenue as the market evolves.
- Buy Now, Pay Later (BNPL) making a comeback
BNPL companies struggled in the lead up to 2023, and valuations took a hit. But recently, a number are showing new signs of life. Affirm, for example, tested the waters with Affirm Card, a debit card with the option to pay upfront or request from the Affirm app to pay with installments. It differentiates from the installment payment option offered by some credit cards because Affirm finances each purchase without an open credit line, perhaps giving BNPL an edge at the point of sale and expanding its customer base with in-person transactions.
At the same time, big tech is becoming a major factor at play and could use digital wallets to dominate the BNPL market. Google announced in December a pilot program with Affirm and Zip, and Apple Pay Later went into general release in October. By embedding BNPL, Apple and Google probably lower the friction of adopting it. But Apple competes directly with traditional BNPL providers, and in the end, Google could squeeze its suppliers.
B2B “BNPL” is also emerging. It looks kind of like a short-term working capital loan in which buyers are on the hook for payments. Sellers are paid immediately while the BNPL provider underwrites the loan. Affirm does this for small sellers with its Amazon Business partnership. And large enterprises have gotten involved: Allianz Trade and Santander formed a partnership for underwriting and funding B2B BNPL. But it’s early days.
- The infrastructure push to support artificial intelligence (AI)
There is no question that AI stole the spotlight last year. And it will probably continue to do so into 2024. However, this year we are watching for signs of how the industry will adjust to support the adoption of AI — specifically, from an infrastructure standpoint.
In particular, many institutions continue to operate on legacy technology with data housed in silos, making it largely unusable for basic use cases let alone AI-driven ones. Moreover, many banks still don’t have a fully developed data strategy, which is a prerequisite to any meaningful AI initiative. As Santanu Pal, partner at PwC, penned in a recent article, “Given the complexity of data, legacy technical debt, evolving regulations, and advancements in the field of data and AI, it is critical for every bank to clearly define a data strategy that would drive growth and justify the investments needed to enable this critical capability.”
Ultimately, while AI is set to be a transformative technology in financial services — with implications for everything from customer service to underwriting — if you don’t have the foundations in place to support such technology, you’re not going to be able to do much. We believe bank leaders will begin to wake up to this reality in the near future.
- Payments’ new groove
It’s been 6 months since FedNow went live, and at last count in December, 331 financial institutions (FIs) were participating. That’s a large increase from the 108 that were sending and receiving payments on the network in October. We’re now waiting to see which and how many FIs go live this year. The size of the US banking system puts the odds against speedy adoption, but the industry could surprise us if things continue at this pace. And, as more jump on board, we should start to see some of the benefits of instant payments in the wild, including in consumer account-to-account (A2A) payments as well as in areas like early wage access and other business-related disbursements.
Meanwhile, in consumer payments specifically, banks have another “almost” that we are keeping an eye on. Paze, a digital wallet product built for banks, was unveiled in March last year by Early Warning Services. Paze’s killer edge is distribution: Everyone with online banking credentials will allegedly be signed up automatically. It’s reportedly running late, but once it’s live with a critical mass of banks, Paze could contend with popular wallets like PayPal, Apple Pay, and Google Pay for clicks at checkout.
- The Consumer Financial Protection Bureau (CFPB) extending its reach
The biggest splash in 2023 for financial regulation was the CFPB’s release of proposed rules for open banking. The draft sheds some light on how the agency plans to settle disagreements about data access, compliance, and liability, but the final rule due in 2024 should bring some still-much-needed clarity. One thing it may revise is the compliance burden on smaller FIs, a nerve-wracking question mark. Another is what role the CFPB thinks it will play with technical standards within a quasi-open banking system that has worked out standards on its own. But most tantalizing is any further hint of open finance regulation, something the market hasn’t created for itself and something the CFPB addresses only in passing in its draft.
Meanwhile, we’ll also be keen to see how the CFPB’s approach to big tech evolves. In November, it proposed a rule “to define a market for general-use digital consumer payment applications,” covering apps for peer-to-peer (P2P) or retail payments (wallets), and subject larger providers to the CFPB’s supervision. It’s easy to guess that “larger providers” include Apple and Google, which have played in consumer payments since 2014, when Apple Pay was released. Mobile wallet adoption has since become massive, and tech companies can own much of the customer relationship for day-to-day payments. Banks surely want a level playing field, and we should be anxious to hear what both FIs and big tech firms have to say about it. Public comments on the CFPB’s proposed rulemaking are due next Monday.
The Top 5 Things on Our Mind Heading Into 2024
The Top 5 Things on Our Mind Heading Into 2024
January 2, 2024
By: Tyler Brown and Kate Drew
Request for Proposal
By: Tyler Brown and Kate Drew
Back in December, we put together a list of developments worth reflecting on in 2023. Now, we are taking stock of where we are as we head into 2024. Below is a look at the top 5 things we are watching closely as the year gets underway.
We’ve talked a lot recently, including in our 2023 retrospective, about the shift in focus across the fintech industry from consumer propositions to business-to-business (B2B) ones. And while that is a trend that we will continue to watch in the year ahead, there is a subset of this dynamic that’s particularly interesting: the pivot of fintech companies to more traditional-looking banking vendors. For example, in November, consumer neobank HMBradley announced that it was shuttering its consumer operations and would instead focus on selling its technology to banks.
This makes a whole lot of sense in an environment where consumer fintech companies are struggling to demonstrate viability. It is hard to make money selling banking products to consumers — the market is extremely competitive — but there are also many fintechs out there that have built fantastic experiences on impressive tech. That all shouldn’t go to waste. As such, it wouldn’t surprise us if more companies make this pivot, doubling down on what they are really good at (building) and instead selling to those who know how to do the rest.
This could even extend beyond consumer fintechs to others that may benefit from licensing their technology like Banking-as-a-Service (BaaS) providers, for instance, many of which are looking for new ways to drive revenue as the market evolves.
BNPL companies struggled in the lead up to 2023, and valuations took a hit. But recently, a number are showing new signs of life. Affirm, for example, tested the waters with Affirm Card, a debit card with the option to pay upfront or request from the Affirm app to pay with installments. It differentiates from the installment payment option offered by some credit cards because Affirm finances each purchase without an open credit line, perhaps giving BNPL an edge at the point of sale and expanding its customer base with in-person transactions.
At the same time, big tech is becoming a major factor at play and could use digital wallets to dominate the BNPL market. Google announced in December a pilot program with Affirm and Zip, and Apple Pay Later went into general release in October. By embedding BNPL, Apple and Google probably lower the friction of adopting it. But Apple competes directly with traditional BNPL providers, and in the end, Google could squeeze its suppliers.
B2B “BNPL” is also emerging. It looks kind of like a short-term working capital loan in which buyers are on the hook for payments. Sellers are paid immediately while the BNPL provider underwrites the loan. Affirm does this for small sellers with its Amazon Business partnership. And large enterprises have gotten involved: Allianz Trade and Santander formed a partnership for underwriting and funding B2B BNPL. But it’s early days.
There is no question that AI stole the spotlight last year. And it will probably continue to do so into 2024. However, this year we are watching for signs of how the industry will adjust to support the adoption of AI — specifically, from an infrastructure standpoint.
In particular, many institutions continue to operate on legacy technology with data housed in silos, making it largely unusable for basic use cases let alone AI-driven ones. Moreover, many banks still don’t have a fully developed data strategy, which is a prerequisite to any meaningful AI initiative. As Santanu Pal, partner at PwC, penned in a recent article, “Given the complexity of data, legacy technical debt, evolving regulations, and advancements in the field of data and AI, it is critical for every bank to clearly define a data strategy that would drive growth and justify the investments needed to enable this critical capability.”
Ultimately, while AI is set to be a transformative technology in financial services — with implications for everything from customer service to underwriting — if you don’t have the foundations in place to support such technology, you’re not going to be able to do much. We believe bank leaders will begin to wake up to this reality in the near future.
It’s been 6 months since FedNow went live, and at last count in December, 331 financial institutions (FIs) were participating. That’s a large increase from the 108 that were sending and receiving payments on the network in October. We’re now waiting to see which and how many FIs go live this year. The size of the US banking system puts the odds against speedy adoption, but the industry could surprise us if things continue at this pace. And, as more jump on board, we should start to see some of the benefits of instant payments in the wild, including in consumer account-to-account (A2A) payments as well as in areas like early wage access and other business-related disbursements.
Meanwhile, in consumer payments specifically, banks have another “almost” that we are keeping an eye on. Paze, a digital wallet product built for banks, was unveiled in March last year by Early Warning Services. Paze’s killer edge is distribution: Everyone with online banking credentials will allegedly be signed up automatically. It’s reportedly running late, but once it’s live with a critical mass of banks, Paze could contend with popular wallets like PayPal, Apple Pay, and Google Pay for clicks at checkout.
The biggest splash in 2023 for financial regulation was the CFPB’s release of proposed rules for open banking. The draft sheds some light on how the agency plans to settle disagreements about data access, compliance, and liability, but the final rule due in 2024 should bring some still-much-needed clarity. One thing it may revise is the compliance burden on smaller FIs, a nerve-wracking question mark. Another is what role the CFPB thinks it will play with technical standards within a quasi-open banking system that has worked out standards on its own. But most tantalizing is any further hint of open finance regulation, something the market hasn’t created for itself and something the CFPB addresses only in passing in its draft.
Meanwhile, we’ll also be keen to see how the CFPB’s approach to big tech evolves. In November, it proposed a rule “to define a market for general-use digital consumer payment applications,” covering apps for peer-to-peer (P2P) or retail payments (wallets), and subject larger providers to the CFPB’s supervision. It’s easy to guess that “larger providers” include Apple and Google, which have played in consumer payments since 2014, when Apple Pay was released. Mobile wallet adoption has since become massive, and tech companies can own much of the customer relationship for day-to-day payments. Banks surely want a level playing field, and we should be anxious to hear what both FIs and big tech firms have to say about it. Public comments on the CFPB’s proposed rulemaking are due next Monday.
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