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January 16, 2024
Where will the fintech industry head in 2024? Our fintech and financial services partners make a few predictions below.
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Artificial intelligence will continue to shape financial transactions, although perhaps in less splashy ways than we saw with generative AI in 2023. For example, everyone from day traders to professional asset managers to CFOs will have better tools to more quickly and efficiently develop and test bespoke investment strategies using AI-based tools. For their part, regulators will impose new standards and restrictions on the companies providing and using these tools, as some, including the SEC and its chair, have already proposed.
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Neobanks and banking-as-a-service business models will see a step change in their risks and rewards, amidst significant supervisory scrutiny of bank-fintech partnerships and the Fed’s looming slash to its Durbin Amendment interchange fee cap. It is more important than ever for fintech companies in this space to have the regulatory and risk-management fundamentals down. Fintech companies that can strategically navigate the pitfalls of this changing industry and the opportunities—including by partnering with small Durbin-exempt debit card-issuing banks—will reap the revenue rewards.
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The SEC and CFTC will continue to bring enforcement actions against crypto asset issuers and trading platforms. NFTs and DeFi products and platforms will likely be among the major new targets of such regulatory attention. However, incremental steps toward the integration of crypto assets into traditional finance will also continue—the SEC’s approval of several spot Bitcoin exchange-traded products (ETPs) last week may be followed by the approval of a spot Ether ETP, particularly now that Ether futures ETFs are available.
Outside the U.S., the European Union’s Markets in Crypto Assets (MiCA) regulation comes into force in December 2024, with certain provisions regarding stablecoins expected to take effect in June. While MiCA may cause some U.S. crypto market participants to consider offshoring parts of their operations, it may also increase the pressure on Congress to enact comprehensive crypto-focused legislation.
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The cautious optimism in the crypto venture market will spill over into 2024, with new deals for crypto infrastructure startups backed by crypto funds with dry powder. This renewed activity—including offshoring activity as a reaction to regulatory developments—will continue in the first half of the year buoyed by the SEC’s approval of several Bitcoin ETFs, followed by a push for an Ethereum ETF. The parts of the crypto market touching web3, consumers, and NFTs will likely remain lackadaisical until much more optimism returns to the market.
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New regulations in the U.S. and abroad (including with respect to banking, crypto, and AI) together with increased regulatory scrutiny and enforcement will result in a consolidation or contraction of certain fintech companies or services. It will become even more important for fintechs to stay ahead of the regulatory-enforcement curve, including by proactively considering strategic commercial partnerships with banking, payment, or technology partners that are designed to ensure that the business survives regulatory review while remaining profitable.
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Open Banking and the proliferation of real-time payment schemes will continue to 1) drive collaboration between financial technology firms and depository institutions; 2) enhance the pricing and delivery of financial products; and 3) empower financial services customers to exercise greater control over their financial data.
Opportunities to build businesses at the intersection of open banking and real-time payments are abundant and will continue to accelerate in 2024. Those doing the building must 1) pay attention to evolving regulations in the U.S. and Europe; 2) consider their licensing strategy thoughtfully; and 3) build robust compliance functions to prevent financial crime and protect customer data.
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Despite a cautiously improving but generally anemic venture funding environment, boldly innovative companies throughout the Latin American fintech ecosystem will continue to build value successfully tackling historically intractable regional problems (underbanked population, poor access to credit, sub-par digital offerings) and acting as a sandbox for globally relevant solutions, facilitated by increasingly development-friendly and savvy regulators (especially enabling open banking and crypto markets).
Due in part to rapid digital adoption by the Latin American population since the pandemic, neobanking competitors will continue to disrupt traditional banking, digital (instant) payment solutions will further streamline e-commerce and catalyze the evolution toward fully digital currencies, and open banking, crypto proliferation and novel retail investment opportunities will further democratize financial services throughout Latin America as it continues to shift from a laggard to pioneer in the global financial system.
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