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Finovate Blog
Tracking fintech, banking & financial services innovations since 1994
You may not think of the U.S. when it comes to having a czar in a leadership role. However, Axios reported last week that President-elect Trump is considering naming an AI czar that would be responsible for coordinating policy and governmental use of AI. This is notable because, as of now, the U.S. does not have a central agency governing and regulating the use of AI.
If put into power, a U.S. AI czar would potentially be responsible for unifying the country’s AI strategy across government and private sectors. The AI czar would also be charged with creating regulatory clarity and streamlining regulations for AI development in key industries such as fintech, healthcare, and eCommerce. Given the U.S.’s current role in the global economy, an AI czar could play a role in setting global standards for fintech AI regulation.
Benefits
There are some surprising benefits to a potential AI czar taking leadership in the U.S. First, the leader would have the potential to coordinate AI innovation and guide global efforts. This centralized orchestration could accelerate the development of AI-powered fintech solutions like fraud detection, credit scoring, and personalization strategies. Additionally, for both banks and startups, having clear, government-issued guidelines for the use of AI offers many benefits, including increased investor confidence and faster adoption of AI across subsectors. Finally, having an U.S.-led AI strategy could foster cross-border partnerships and may also be able to influence international fintech standards.
Risks
As with many applications of AI, however, there are potential risks and challenges associated with the crowning of an individual as AI czar. First, there is significant potential for favoritism to shape the role. According to Axios, the AI leader will not require Senate consent. Rather, Elon Musk and Vivek Ramaswamy, who Trump has selected to lead the new Department of Government Efficiency (DOGE), will have input into who is selected for the AI czar role. This raises concerns over potential favoritism and bias. Regardless of who is placed in the potential role or how they are appointed, there are also risks that the use of AI will end up over-regulated and that centralizing control of AI usage could stifle fintech innovation across the globe.
Global impact
U.S. policies created under an AI czar might intensify competition with other countries in the AI-arms race. Specifically, the role may help the U.S. compete with China, which has heavily invested in AI. Creating an AI czar could help the U.S. catch up with China by fostering rapid advancements in AI applications in fintech and related fields. In addition to clarifying regulation around the use of AI, the appointed person could help by coordinating research, funding, and partnerships at a national level. This streamlined approach might also encourage collaboration among U.S. fintech companies, making them more competitive in global markets.
What’s next?
Regardless of what happens (or doesn’t happen) with the AI role, both banks and fintechs should pay close attention while monitoring any U.S. AI policy changes. This applies to both firms that are creating their own AI-driven solutions in-house, as well as to those that leverage AI-driven solutions from third party providers. Everyone is in the AI game– whether they think they are or not– and the decisions made by policymakers will shape the rules of that game.
74 hours, 52,012 steps, 6 cups of coffee, 8 selfies, and one unforgettable experience.
I am, of course, talking about Money20/20, the mega fintech and banking event that has been taking place in Las Vegas since 2012. With over 10,000 attendees and 300+ vendors, this year’s U.S. event was just as brilliant as in years past.
Themes
Money20/20 is a choose your own adventure type of show, with six stages and two podcast recording studios that each host a range of rotating content throughout the course of four days. Given the wide variety of content available, it was hard to see everything. However, there are three major themes that stand out as highlights: open banking, AI, and the evolution of the payments experience.
Open banking
Open banking– specifically the recently released Section 1033 of the Dodd-Frank Wall Street Reform and Consumer Protection Act– was one of the hottest topics of the show. The majority of people on the networking floor I spoke with had not read the entire, 594-page ruling. However, everyone seemed to agree that the scope of 1033 extends far beyond simple account switching capabilities. Panel discussions surrounding the rule also tended to agree that the purpose of the rule is data ownership, and not necessarily data portability.
AI
The topic of AI pulsed throughout almost all on-stage conversations, and was very visible in sponsor pitches on the exhibit hall floor. Money20/20 even featured its own AI bot named Aiana who interacted with the MC on one particular stage. At times, Aiana’s conversation with the MC seemed to be quite coherent and relevant, but the bot occasionally missed the mark.
Perhaps the thing about the AI discussions that surprised me the most was that it was rarely the main feature of a discussion. Instead, conversations tended to pose AI more as a technological enhancement to current offerings, rather than featuring it as the main technology that firms should focus on. This shift gives me some hope that we have moved past talking about the hype of AI and into thinking of it as an enabling technology.
Payments
Payments was a huge focus for multiple on-stage discussions at the show. Among the hottest topics were cross-border payments, stablecoins, and instant payments. What was missing from many conversations that I saw in this realm, however, were discussions of the impact of fraud and regulation. I think this may have been because many speakers on stage represented larger firms or fintechs in the payments space who wanted to get a more positive message across without bringing up the topic of risk.
AI Adoption Index
In addition to these on-stage themes, I was able to review data published in Money2020’s very first AI Adoption Index report, All in on AI: Financial Services Adoption Index 2024. Produced in conjunction with Acrew Capital, the index surveys 221 leading financial institutions and combines that with data about all publicly announced AI initiatives since the start of 2023. Here are some of the top highlights:
76% of companies indicated they have announced an AI initiative
46% of companies have announced GenAI initiatives
Out of all initiatives, 57% are put in place to generate revenue, while 43% aim to reduce costs
Public companies announced 40% more initiatives compared to private companies
Block, Intuit, JP Morgan, Chime, and Stripe account for 15% of the total AI initiatives
51% of companies surveyed have built AI into their core customer-facing product. This figure does not include AI usage in a CRM setting.
Conversations
As always, the highlight of the event was the people. After working in this space for 15 years, I’ve found a diverse network that fosters community and works to build each other up. During last week’s event, I met Finnovator Founder Michelle Beyo, who discussed the benefits of personal data ownership; caught up with Sam Maule, who talked about the downsides of pay-by-bank (and was forced into yet another conversation about Walmart); Tiffani Montez, who explained why open banking is far superior to ye olde account aggregation; as well as multiple others who added depth and color to the topics being discussed.
Experience highlights
Money20/20 is now part of a newly launched Informa division called Informa Festivals, and the conference fits this description quite nicely. There are multiple elements of the conference that are all about the experience. And while not all of them are officially sanctioned by Money20/20, each element comes together to craft an amazing conference experience.
Throughout the event venue there were multiple photo opportunities, including a talking selfie wall that lit up, greeted conference goers, and invited them to get their picture taken. Then there was the connection wall, where attendees could scan their badges in conjunction with others, see their names projected onto a wall, and receive a Money20/20 branded coin that they could use to exchange in a merchandise store. There was also a video studio where the conference recorded a video of attendees in front of an animated “honey wall,” complete with a live beekeeper who danced at the end (yes, you kind of had to be there for that one).
Outside of the event, I enjoyed a morning of yoga sponsored by Mesa, Visa, and JP Morgan; a women in fintech happy hour event (complete with a Dolly Pardon impersonator) sponsored by Alloy; and a Halloween-themed happy hour with costumes and Beetlejuice selfies sponsored by SentiLink. Thanks to everyone for putting on such great events, and a huge thank you to Money20/20 for hosting me!
Which presidential candidate will be better for fintech over the next four years?
Of all the issues roiling the presidential campaign in 2024, it is safe to say that the future of fintech is not among the top two or three. Nevertheless, it is also safe to say that the fintech industry under a Trump administration will face different challenges and opportunities than it would under a Harris administration.
Let’s first look at how the policies of Republican candidate Donald Trump might impact fintech and financial services more broadly.
“The Crypto President”
Whether or not “they” are calling Donald Trump “The Crypto President,” the man who once called Bitcoin “a scam” has since had a change of heart when it comes to cryptocurrencies.
The now-famous quote — “You know, they call me the crypto President …” — comes from an ad the former president ran in August marketing his fourth series of non-fungible token (NFT) digital trading cards. Earlier this year, Trump suggested creating a “strategic national bitcoin stockpile” with the goal of ensuring that America is the “crypto capital of the planet.”
While not prominently noted on the Trump campaign’s website, the Republican party platform with regards to digital assets includes a reference to the opposing party’s “unlawful and unAmerican Crypto crackdown” on the one hand and opposition to “the creation of a Central Bank Digital Currency” on the other. The party, whose positions are likely identical to those of the former commander-in-chief, also pledges to defend the right of American citizens to mine Bitcoin and to self-custody of their digital assets.
Republican re-deregulation
The idea of a Republican president embracing deregulation in general has been baked into voter perceptions of the party since the 1980s, at least. And as Jamie Dimon, Chair and CEO of JPMorgan Chase, rails against regulators (“if you’re in a knife fight you better damn well bring a knife,” he recently told attendees at the American Bankers Association Convention), the question is whether the Trump administration is likely to supply Mr. Dimon with the silverware he seeks.
Looking again to the RNC platform, the most specific reference to deregulation is a pledge to “reinstate President Trump’s Deregulation Policies” as part of the former president’s plan to “Cut Costly and Burdensome Regulations.” If past is prologue, then Trump’s signing of the Economic Growth, Regulatory Relief, and Consumer Protection Act in 2018 could provide some clues. Here, we find initiatives to expand access to mortgage credit, incentivize capital formation, and provide additional protections for student borrowers.
Do tax cuts + tariffs = inflation?
Aside from tax cuts, the most noteworthy element of Trump’s economic plan is his embrace of tariffs on goods manufactured outside of the United States. In fact, the former president has gone so far as to suggest that the income tax be eliminated in favor of his new, tariff-based approach to funding government operations.
And while this is extremely unlikely, the combination of Trump’s tax cut proposals and his enthusiastic attitude toward tariffs could ironically pave the way for an economy that is more vulnerable to inflation. This could lead, ultimately, to higher interest rates and tighter monetary policy compared to where the American economy is at the end of 2024.
You don’t have to be a long-time, fintech veteran to remember the devastating impact that higher borrowing costs can have on the startup community — or its financiers. And it is hard not to fear that a “double-dip” resumption of these conditions could leave startups and their backers in an even more constrained and risk-averse position than they have been this year.
Now let’s look at how the policies of Democratic candidate Kamala Harris and how they might impact the fintech industry.
From big banks to junk fees
A story in today’s Washington Post highlights Vice President Kamala Harris’s tenure as California attorney general and her role in strengthening a “multibillion dollar mortgage settlement” with major banks in the wake of the Great Financial Crisis. Not only is this a significant component of Harris’s resume, it is also a tale she eagerly tells while on the campaign trail.
It is worth noting that, for all the fighting words, most observers expect the Vice President to be more business-friendly than the notoriously pro-labor current President. Nevertheless, it is easy to see a Democratic administration looking to fortify and even extend a range of consumer protections in financial services.
That said, the emphasis from the campaign is less about bashing the big banks and more about addressing the smaller annoyances of everyday consumer life. Under the banner of ‘Lower costs by protecting consumers from fees and fraud,’ for example, the Harris campaign pledges to ban junk fees across the board and make it easier to cancel unwanted subscriptions.
Economies of opportunity
The Harris campaign has touted its concept of an “Opportunity Economy,” in which the federal government plays an active role in helping individuals, families, small businesses, and communities maximize their ability to thrive in a capitalist economy. This includes launching a small business expansion fund that leverages low- or zero-interest loans to help entrepreneurs grow their businesses and create jobs. This “Opportunity Economy” also mandates that the federal government commit to allocating a third of its contracts to small businesses, reducing the number of excessive occupational licensing requirements, and helping small businesses cut bureaucratic red tape and file taxes more easily.”
The Vice President’s plan does target startups specifically, setting a goal of 25 million new business applications over the next four years, and a tenfold expansion of the startup expense deduction from $5,000 to $50,000. Additionally, Harris’s campaign calls for an “America Forward” tax credit designed to incentivize investment and job creation in “key strategic industries” as well as “scaling up and making permanent” the National Artificial Intelligence Research Resource. The latter is a shared research infrastructure that provides startups and researchers with access to computing power, data, and analytics tools to support innovation in AI.
Housing and the “sandwich generation”
Two areas of the Vice President’s agenda — the pledge to build more housing and the goal of making both day care and elder care easier and more affordable for caregivers — could have interesting impacts on financial services and fintech. The former, which includes a plan to build three million additional homes and provide $25,000 in down payment assistance, could send a jolt through the financial services industry that would impact bankers, lenders, and mortgagetechs alike. The campaign is also championing tax credits to encourage homebuilders to build affordable homes and a Neighborhood Homes Tax Credit, which supports “investment in homes that would otherwise be too costly or difficult to develop or rehabilitate.”
The latter proposal — to ease the financial burden of Americans who are caring for both young children and elder parents — does not make a prominent appearance in the Harris campaign’s website. But those who have heard the Vice President speak in recent weeks are familiar with the challenge, which she describes as the fate of the “sandwich generation.” The Harris campaign has suggested a number of remedies — from Medicare expansion to boosting the pay of homecare workers. What is interesting from a fintech perspective is the idea that resources devoted to eldercare in particular could draw attention to the work of fintech innovators from Golden, to Eversafe, to Bereev that specialize in providing financial services to seniors and those who are caring for them.
Many of these plans from the Harris campaign will require the approval of a Congress that could easily remain split between the two parties. While that may limit the scope of even the successful initiatives, it would provide the kind of balance (or, if you prefer, gridlock) that has often accompanied strong economies. And that, in itself, would be a good thing not a bad thing for fintech and financial services.
Today is a day the U.S. financial services community has been waiting for for at least a year– the Consumer Financial Protection Bureau (CFPB) issued its final 1033 rule making. The new rule, issued in the form of a 594-page document, aims to enhance consumers’ rights, privacy, and security over their own personal financial data.
In order to accomplish this, the CFPB is requiring financial institutions, credit card issuers, and third-party fintech providers to make consumers’ personal financial data available to transfer to another provider for free. As a result, consumers will be able to add or switch providers in order to access better rates, receive better terms, and find services that best suit their needs. The CFPB states that the rule promotes competition and consumer choice, and will ultimately help improve customer service.
“Too many Americans are stuck in financial products with lousy rates and service,” said CFPB Director Rohit Chopra. “Today’s action will give people more power to get better rates and service on bank accounts, credit cards, and more.”
Today’s rule comes about a year after the CFPB issued a much shorter, 29-page document that proposed the change. So, aside from the document length, how does last year’s proposal differ from this year’s official ruling? Here are a aspects to note.
As you may expect the final ruling provides a much more comprehensive and detailed explanation of the CFPB’s approach to regulating consumer access to financial data. The new document offers the rationale behind the rule, defines key terms, specifies requirements for data providers and third parties, and analyzes the rule’s potential impact on the market. Here are some specific differences between the proposed rule-making and today’s official rule.
Transitioning away from screen scraping
The final rule-making discusses the issues of screen scraping and emphasizes the aim to promote safer and more standardized methods to access data via developer interfaces.
Liability considerations
Today’s rule touches on the liability that stems from data sharing and explains the CFPB’s approach to addressing the liability with regulations and industry standards.
Interaction with other laws
The final rule includes a discussion on how it interacts with other existing laws, such as the Fair Credit Reporting Act (FCRA) and the Gramm-Leach-Bliley Act (GLBA).
CFPB oversight and enforcement
The rule released today includes the CFPB’s plans for overseeing and enforcing the rule’s requirements, including details on supervising third parties and addressing consumer complaints.
Scope of data coverage
The final rule offers a detailed look at the types of data covered by the rule, including discussions about specific data fields and potential exclusions.
Definition of consumer
Today’s rule specifically defines what constitutes a consumer for the purposes of the rule. It also offers explanations about why it includes trusts established for tax or estate planning purposes in its definition of consumers.
Requirements for developer interfaces
The final rule lays out specific requirements that data providers must adhere to when it comes to the performance, security, and functionality of their developer interfaces.
Prohibition on fees
Today’s rule offers an explanation on why it is prohibited to charge fees to access data.
Authorization and revocation procedures
The final rule details how consumers can authorize and revoke third-party access. It also discusses what organizations must put into their authorization disclosures, and details the consumer notification process.
Third-party obligations
Today’s final rule details obligations for third parties that access consumer data, including limitations on data collection, use, and retention, as well as requirements for data accuracy and security.
Impact analysis
The final rule analyzes the potential benefits and costs of the rule for various stakeholders, including data providers, third parties, and consumers.
After rumors swirled over the weekend, we now know that it is official: payments processing company Stripe has acquired stablecoin platform Bridge for $1.1 billion.
For Stripe, which was valued at $70 billion earlier this year, the Bridge deal marks its largest acquisition since it was founded in 2010.
Bridge was founded in 2022 to serve as an alternative payment method to compete with SWIFT and credit cards. The company’s technology allows businesses to move, store, and accept stablecoins using just a few lines of code. Companies can also leverage Bridge’s Issuance APIs to issue their own stablecoin and accept USD, EUR, USDC, USDT or any other stablecoin. After integration has taken place, companies can move money near-instantly and at a low cost around the globe.
“As we’ve gotten to know the Stripe team, it’s become clear that we both share a vision for what’s possible with stablecoins and an excitement around the opportunity to create and build this future,” said Bridge Co-Founder Zach Abrams in a LinkedIn post. “Stripe operates globally and understands better than almost anyone the problems created by our existing localized payment systems. Our teams share an excitement about stablecoins and vision for how to maximize their impact. Together, we’ll be able to solve bigger problems, support more developers, and help more consumers and businesses all across the world.”
Stripe processed $1 trillion in payment volume in 2023, a metric that places the fintech among the top payment processors in the U.S. With this influence, there are a few implications that Stripe’s Bridge acquisition holds for the U.S. stablecoin market.
Increased stablecoin adoption
Once it integrates Bridge’s technology, Stripe will be able to offer instant, low-cost settlements through stablecoins. Creating a low-cost alternative to traditional payments will make stablecoins more attractive for businesses and could lead to wider adoption in mainstream payment systems.
Cross-border payments expansion
The Bridge acquisition may enable Stripe to enhance its global payments infrastructure. This will place stablecoins as a go-to method for faster, cheaper cross-border transactions. In today’s landscape, where large, traditional players are developing new tools for cross-border payments, many still face high fees and longer settlement times. Stripe’s usage of stablecoins will help it circumvent many of those issues.
More competition
Stripe’s entry into the stablecoin space will increase competition among fintechs offering stablecoin-based payment services. The introduction of Stripe’s real-time, cross-border payment service may pressure other companies to create new offerings or improve their existing products to keep up with Stripe’s client base and new resources brought on by today’s acquisition.
Regulatory focus
As Stripe begins to use stablecoins in more traditionally regulated financial environments, it may gain the attention of U.S. regulators. This increased attention toward the stablecoin space may prompt regulators to increase enforcement efforts and could even lead to them creating clearer guidelines around stablecoin use.
Stripe’s acquisition of Bridge will position it as a key player in the stablecoin space. With Stripe’s long-standing payment processing infrastructure and global reach, once Stripe integrates Bridge’s stablecoin technology, it is poised to accelerate stablecoin adoption across mainstream payment systems.
FedNow, the U.S. Federal Reserve’s instant payment service went live in July of 2023. Now, 15 months later, adoption rates have been unpredictably slow, especially when it comes to banks that are able to send FedNow payments.
Before considering the challenges behind sending and receiving FedNow payments, here’s a look at some of the data behind adoption rates:
Only around 900 financial institutions have connected to the FedNow network, a fraction of the 8,000 firms the Fed stated as its goal.
Close to 60% of the financial institutions on board with FedNow can receive payments, while only 40% of firms have signed up to send payments.
Banks connected to the FedNow network range in size from under $500 million to more than $3 trillion in assets.
Of the FedNow participants, 78% are community banks and credit unions.
There are a handful of reasons why firms might be hesitant to participate in FedNow. The service faces competition with The Clearing House’s RTP platform, which was launched well before FedNow went live. Additionally, banks may be holding back because of the fees that come with participating in FedNow. Banks must pay $25 per month per routing transit number to use the service, plus a $0.045 per credit transfer fee charged to the sender and a $0.01 per RFP message, charged to the requestor. The Fed also charges a liquidity management fee of $1 per transfer.
Another reason firms may be reluctant to join FedNow is that the new payment rail comes with a set of challenges for both sending and receiving payment. Below, I’ve outlined five challenges financial institutions face for accepting FedNow payments, and five challenges they face when receiving FedNow payments, along with strategies to overcome each obstacle.
Challenges in accepting FedNow payments
1. Transaction validation in real time Firms may have difficulty validating incoming payments instantly, especially considering the need to check for insufficient funds and fraud, plus ensure compliance, all in real time.
To combat this, firms can implement automated validation systems to check the accuracy, authenticity, and compliance of payment transactions in real time. They can also use AI tools for fraud detection to help banks validate transactions without human intervention. Additionally, they should enhance their AML compliance systems to conduct rapid checks.
2. Managing customer disputes Customer disputes are always a headache when facilitating payments. And with instant payments, customer disputes can be even more of a challenge. That’s because instant payments reduce the time that dispute resolution can take place, since the funds are transferred immediately.
Banks should create dedicated customer service channels and clearly communicate the dispute resolution process to consumers. Additionally, banks should create robust communication procedures with other banks in the FedNow network in order to resolve reversals and other issues quickly.
3. Handling a high volume of payments If the adoption of FedNow grows, banks will need to process higher volumes of payments as more customers use the new payment rail. This increase could strain legacy systems– especially if they are not optimized for 24/7 processing at high volumes– and ultimately lead to payment delays.
To overcome this, banks should scale their payment processing infrastructure by adopting cloud solutions and ensuring they have sufficient bandwidth to handle high transaction volumes, especially during peak times.
4. Ensuring compliance in real time Just as they do with ACH payments, banks need to ensure they are complying with regulatory requirements, including KYC, AML, and other regulations. This is an additional challenge with FedNow payments, since the compliance checks and documentation need to be made in real time.
Banks can leverage automation for compliance checks and integrate real-time monitoring tools into their operations to ensure that incoming payments are compliant without delaying the transaction. As with all compliance training, firms should ensure that their compliance officers’ training is up-to-date. Fortunately, there are multiple regtech solutions, including ComplyAdvantage, Trulioo, and Fenergo, available to help.
5. Creating a seamless user experience In today’s digital age, consumers are not only used to receiving things instantly, they expect it. With instant payments as the standard, any delays or issues in receiving funds could create a poor user experience and tarnish the bank’s brand.
To ensure the best user experience, banks should first invest in a user-friendly interface. Transparent and timely communication is also key. Firms should offer real-time notifications and ensure that customers have easy access to their transaction history.
Challenges in sending FedNow payments
1. Ensuring adequate liquidity With the recent increased scrutiny on adequate liquidity, it is essential that banks ensure they have enough funds on hand. With instant payments, banks must have sufficient liquidity available at all times, even during weekends and non-business hours.
To overcome this, firms can implement real-time liquidity monitoring systems and use the Federal Reserve’s liquidity management services. Banks should also establish internal controls to maintain and managing their liquidity reserves effectively.
2. Maintaining 24/7 availability This may be one of the biggest headaches for banks looking to send FedNow payments. Because FedNow operates 24/7, banks need to ensure they have adequate infrastructure and staffing to support continuous operations. This can be a particular headache for smaller institutions, which lack resources to support such uptime.
To keep up with availability requirements, banks can adopt automated processing systems, use cloud-based solutions to keep their operations scalable, and partner with third-party vendors who offer 24/7 payment support. Additionally, firms should conduct regular system maintenance during non-peak hours to ensure they are not disrupting operations.
3. Ensuring fraud and security protection Just as when receiving instant payments, accepting instant payments does not leave banks much time to identify and stop fraudulent transactions. This increases the risk for loss.
Banks can add a layer of protection by deploying real-time fraud monitoring systems to detect suspicious activities using AI and machine learning. Also, firms can implement advanced consumer authentication methods and mandate ongoing fraud prevention training for staff to further mitigate risks.
4. Managing customer payment errors With instant payments, there is not much time to correct mistakes. When consumers fat-finger the payment amount or send the funds to the wrong recipient, they lose the opportunity to correct errors. This could not only create customer dissatisfaction, but also lead to financial losses.
Fortunately, there are ways to mitigate such mistakes. Banks can add confirmation steps into the user interface that require users to verify payment details before the transaction is sent for processing. It is equally as important to educate customers about the finality of real-time payments and provide them with a clear process for dealing with errors.
5. Creating interoperability with other payment networks As with other payment rails, banks need to ensure their systems are compatible across other systems. Banks should create a system that is not only compatible with FedNow, but also with other real-time payment systems, including The Clearing House’s RTP.
To ensure compatibility, banks can invest in unified payment platforms that integrate multiple payment rails. Additionally, firms may find it helpful to participate in industry-standard development efforts to help shape the conversation around compatibility and functionality.
We all know that the VC investment scene is nothing like it was in 2021 and early 2022. With Q3 of 2024 behind us, we now know that fintech is still experiencing a funding downturn. In fact, both deal numbers and funding totals are down from Q2 of this year, with 179 fewer deals and $2.4 billion less in funding volume.
While the drop is sobering, however, there are a few bright lights in recent funding data that may signal the potential start of a positive turnaround. I took a look at CB Insights’ recent State of Venture Q3 ’24 Report, and here are my major takeaways.
Areas of micro growth
As mentioned previously, there are a few aspects of CB Insights’ recent data that offer signs of potential recovery:
Deal size The drop in the average size is leveling off. So far in 2024, the average deal size is currently $12.7 million, and compared the 2023 average size of $13.2 million, deal size falls around $500,000 short. This is much smaller than the $3.2 million drop that took place from 2022 to 2023, and looks quite favorable when compared to the $11.6 million drop from 2021 to 2022.
Even better news is that the median deal size has increased for the first time since 2020. Thus far in 2024, the median deal size has increased by $1 million. This comes after the median deal size dropped by $700,000 from 2022 to 2023 and decreased by the same amount from 2021 to 2022.
Resilience in early-stage investment The data regarding deal stage distribution shows that 71% of deals are still going to early-stage companies. This suggests that investors remain optimistic about long-term innovation in fintech, even if they are currently more conservative with growth-stage investments. Investors’ focus on early-stage companies could signal that they are planting the seeds for future growth, and may be anticipating a recovery in the fintech sector.
Areas of concern
There are, of course, still some less positive aspects of the Q3 investment data, notably, M&A activity and unicorn valuations.
M&A environment
The data indicates that interest in acquisitions is dropping. In the third quarter of this year, we saw 146 exits made via M&A. While this is an increase of six acquisitions when compared to the same quarter last year, it is down from both the first and second quarters of 2024, which were 161 and 159, respectively.
Increased M&A activity often suggests that the market is stabilizing, so the decrease suggests that investors are either still concerned about market conditions or are holding out for lower interest rates.
New unicorns
The number of new unicorns has dropped. In the third quarter of 2024, there were just two newly minted unicorns. This level is equal to what we saw in the first quarter of last year. The number of new unicorns has dropped from three in the second quarter of last year and from seven in the first quarter of this year.
Is this the bottom?
Looking at the data, it would appear that we are pretty close to the bottom of the fintech funding slump. And while I said that last year at about this time, this year, we have small signals to back it up. Specifically, the first increase in the median deal size since 2020 is quite encouraging and may indicate the potential for increased investor appetites.
You’ve seen the hype around Generative AI (GenAI). And perhaps you even have an AI strategy in place at your organization. But because the development of AI moves faster than any enabling technology we’ve seen in banking in the past, it’s important to think ahead to the next iteration. In this case, the next evolution of GenAI is Agentic AI.
Agentic AI, also known as autonomous AI, refers to AI that can make its own decisions, form a plan, act on its own, and learn from its mistakes to achieve specified goals. Agentic AI can take a complex request and break it down into simple, achievable goals to solve complex problems.
Agentic AI has numerous possibilities for use in financial services, including:
Create a highly personalized customer experience
Agentic AI can automate routine interactions, allowing firms to launch chatbots or virtual assistants that can autonomously handle customer questions, suggest financial products based on specific preferences, and even analyze customer behavior to predict their needs.
Some of this is currently possible with GenAI, but Agentic AI will be able to handle even more complex tasks and make autonomous decisions without human intervention. Agentic AI customer service bots will also be proactive, and will be able to anticipate customer needs based on real-time data and past behaviors.
Offer autonomous roboadvisory with algorithmic trading
Roboadvisors have been popular in fintech since 2015, but Agentic AI will make it possible for firms to autonomously manage investment portfolios by analyzing market trends, risk profiles, and financial goals. The new enabling technology could also become more intelligent, providing financial institutions with scalable advisory services that make investment decisions in real time without human intervention.
Agentic AI will be able to execute algorithmic trades in real time and without human intervention by autonomously making buy or sell decisions based on market conditions, financial models, and pre-set objectives. The technology will also proactively adjust portfolios based on market trends, economic forecasts, and client life changes, continuously aligning investments with a client’s long-term goals.
Power fraud detection and risk management
While GenAI can continuously monitor transactions to detect anomalies and identify fraudulent patterns, Agentic AI can instantly flag suspicious activities, alert relevant parties, and even block transactions. This offers financial institutions an effective way to reduce fraud risks and improve compliance with regulatory requirements.
Credit scoring and underwriting
Agentic AI can autonomously assess creditworthiness by analyzing vast amounts of structured and unstructured data, such as transaction histories, social media activity, and economic conditions. The enabling technology will be able to independently decide whether to approve loans or credit lines in real-time, based on pre-determined parameters such as risk tolerance and regulatory requirements.
Compliance
With Agentic AI, firms will be able to autonomously monitor, detect, and act on compliance violations in real time. The technology will be able to autonomously make decisions– such as freezing an account or flagging a transaction– and take corrective actions. Also, as regulations change, it can adjust to rules without human intervention.
Back-office automation
Back-office automation is something that banks have been leveraging for a long time now. However, Agentic AI will be able to automate back-office functions like settlement processing, reconciliation, and financial reporting without human intervention and in real-time. Additionally, because Agentic AI can handle, complex, multi-step processes, it will be able to plan, initiate, and execute a task in a proactive manner.
Real-time risk assessment
To reduce operational risks, Agentic AI can autonomously assess the organization and market in real time. Firms with large, organized datasets may experience the most benefit, as the enabling technology will be able to make the most informed decisions based on large, clean sets of data.
These capabilities may sound equal parts idyllic and dystopian. However, it is difficult to prepare for an Agentic AI-powered future without knowing what role regulation will play. It is likely that regulators in the U.S. will mimic Europe in creating some form of AI regulation, especially for its use in financial services.
No matter what the regulatory future looks like, firms can take a handful of steps to prepare for the adoption of Agentic AI. So whether or not your organization even has an AI policy in place yet, you can start working on these things:
Create a robust data infrastructure Because Agentic AI relies on a huge amount of data, banks need to have strong data management systems that collect, store, and process both structured and unstructured data. Simultaneously, it is important that banks adhere to strong security protocols to protect consumers’ sensitive financial data.
Upgrade IT infrastructure and cloud capabilities Banks may need to move more of their operations to the cloud to free up computing power and storage facilities, both of which Agentic AI demands. Edge computing may be a solution to help reduce latency for AI applications, such as algorithmic trading, that require quick responses.
Build AI literacy into your culture Firms should consider investing in their workforce by offering AI training programs. This will help employees work with AI efficiently and creatively. AI education will also help keep employee AI usage compliant by setting boundaries, maintaining transparency, and ensuring ethical use.
Create an ethics and compliance framework Because Agentic AI has the ability to make autonomous decisions, it is essential that those decisions are based on ethical and regulatory compliant standards. Consider creating an AI ethics committee that is able to monitor and oversee AI decision-making. The committee can continuously ensure that the AI usage is not biased and will not harm customers, employees, or the organization.
Foster bank-fintech partnerships If not doing so already, banks should consider partnering with fintechs and AI technology providers to accelerate the adoption of Agentic AI. By collaboarting with third parties, banks can benefit from AI systems that leverage a broader ecosystem of services.
Begin using a different form of AI To prepare for the future of AI, one of the best things firms can do is to begin piloting AI in targeted, high-impact areas such as customer service or portfolio management.
You’ve likely been following the fallout from Synapse’s bankruptcy earlier this year. BaaS provider Synapse filed for Chapter 11 bankruptcy in April, leaving its clients, including Evolve Bank & Trust and multiple others, unable to verify and manage funds. In all, around $85 million in consumer funds are missing due to discrepancies in Synapse’s records.
Adding to the confusion, the dispute is ongoing in court, and because Synapse is a fintech and is thus unregulated, regulatory bodies are unable to protect consumers, many of whom are still missing their funds.
As a result of this nightmare, the FDIC has advanced a notice of proposed rulemaking for what it is calling Requirements for Custodial Deposit Accounts with Transactional Features and Prompt Payment of Deposit Insurance to Depositors. The regulatory body is currently taking public comment on the rule.
As it currently stands, the rule applies to bank accounts that fit into three categories:
The account is established for the benefit of beneficial owners
The account holds commingled deposits of multiple beneficial owners
A beneficial owner may authorize or direct a transfer through the account holder from the account to a party other than the account holder or beneficial owner
Here are five things banks with accounts that fit these categories should know about potential implications the rule may have on them.
Strengthened recordkeeping requirements
Advanced recordkeeping should already be part of a bank’s routine. However, the proposed rule is specific in its requirements, stipulating that banks working with non-bank entities (as in a BaaS partnership) must maintain accurate records that identify the beneficial owners of custodial deposit accounts that are held on behalf of consumers, which is typical in a BaaS agreement. Maintaining records of custodial accounts will help regulators ensure that deposit insurance can be quickly and accurately provided in the event of a bank failure.
Continuous third-party records access
The proposed rule states that if banks rely on non-bank companies to manage custodial deposits and their records, the bank must have continuous, direct access to records held at the third party organization. This requirement aims to prevent disruptions to operations, as what we saw in the Synapse bankruptcy case earlier this year. Ultimately, if banks have transparent access to third party records, they can help customers maintain access to their funds.
Annual compliance and validation
Under the new rule, FDIC-insured, BaaS-enabled banks will be required to conduct an annual, independent validation to verify that their third party partners are maintaining accurate deposit records. Banks will send the records, which must be accurate and compliant with the FDIC’s standards, to the FDIC and to the bank’s primary federal regulator. The purpose of this stipulation is to ensure consumers are able to access their funds without delays and to increase the reliability of custodial funds arrangements.
Consumer protection and transparency
Consumer protection is the underlying reason behind the new proposed rule. A large piece of this provides clarity about FDIC insurance. As such, BaaS-enabled banks will be expected to ensure that their consumers fully understand the coverage and protections of their deposited funds, particularly when dealing with non-bank custodians.
Heightened money laundering
The document also emphasizes that banks must exercise strengthened internal controls and anti-money laundering (AML) compliance requirements. Notably, the ruling also emphasizes that banks must ensure that their third-party partners do not facilitate financial crimes.
This week’s proposed rulemaking highlights two truths in financial services. First, the additional requirements can potentially add burdens on banks that are already weighed down by multiple reporting responsibilities. Yesterday, Vice Chairman Travis Hill voiced his concern, saying, “I recognize that certain types of pass-through arrangements have become much more complex in recent years, exacerbating the potential risks…” Hill said, however, that he is voting in favor of the proposal, explaining that, “improving recordkeeping and reconciliation practices (1) can reduce the likelihood of another Synapse-like disaster in the event of a third-party failure, and (2) may result in a more orderly resolution in the event the bank fails.”
The second truth today’s proposed rulemaking underscores is that the financial services industry needs a national fintech charter that can monitor, regulate, and enforce third parties that manage and handle consumer funds. Banks have long been subject to strict regulations and reporting requirements. But should banks that have conducted the proper due diligence be held responsible for the actions (or inaction) of their third party partners? It is time for fintechs to step up and share the responsibility.
There was a time when robo-advisory represented the peak of fintech’s contribution to the wealth management industry. And these services continue to be popular options for a new generation of savers and investors. The Statista Market Forecast indicates that the robo-advisor market worldwide is expected to grow by more than 6% by 2028, with more than 34 million investors relying on robo-advisors.
At the same time, enabling technologies like machine learning and AI are generating new ways for fintechs to bring the benefits of technological innovation to the wealth management industry. But it is important for fintechs to avoid building solutions in search of problems. What are some of the real trends and true pain points in the industry that fintechs may be able to help solve?
Democratization
One major theme in wealth management is democratization. For generations, wealth management has been the province of, to put it bluntly, the wealthy. Services were often expensive and opaque for the growing number of upper-middle class and middle-class investors of the 1980s and 1990s.
There is still a healthy market for high net worth investors, of course. But we have seen a major trend toward leveraging technology to make some wealth management services that were previously available only to the elites accessible to investors of lesser means.
There is also another way of looking at democratization in wealth management. In the same way that technology is enabling average investors to access increasingly sophisticated wealth management services, so is technology making it possible for smaller providers to compete with larger wealth management rivals. Fintechs that can help smaller firms and family offices do more with less may find significant opportunities among the growing group of wealth management entrepreneurs.
Personalization
Personalization has increasingly been seen as table stakes in financial services, and with good reason. Whether you are involved in payments or lending or ecommerce, the ability to get relevant products and services in front of your customers is paramount. Not just knowing what customers might want but also being able to deliver is what separates those businesses that gain new customers and keep the ones they’ve got, from those who struggle to do so.
Fintechs can enhance the customer experience by, for example, ensuring that wealth managers can communicate with clients in their channels of choice – and are able to bring significant functionality to those interactions in those channels with video or co-browsing. Knowing which customers are more likely to respond positively to new or alternative investment strategies, for example, or to other complementary products or services can go a long way toward building better engagement and loyalty.
Operations
One of the less flashy areas where fintech technologies can help drive innovation in wealth management is in back-office operations. This is also where enabling technologies like artificial intelligence (AI) and machine learning are delivering Automation 2.0 to intelligently streamline manual tasks and complex procedures. This trend, which has brought speed, accuracy, and cost-cutting to industries throughout financial services, is one that will benefit wealth management service providers significantly.
Moreover, many of the other trends in wealth management – such as the challenges of managing (and securing) ever-growing volumes of data, keeping up with evolving regulatory changes – are made possible by operations teams that have these powerful, enabling technologies at their disposal. For wealth management service providers who are not yet maximizing their teams or these technologies, fintechs can help them close the gap.
Decisioning
From buy-and-sell decisions to strategic portfolio allocations, wealth management is about making good, consistent decisions. Not only do wealth management service providers constantly seek to improve their investing strategies – one area where fintechs can provide specific expertise – but also these firms need to think about more than just maximizing returns. Keeping portfolio volatility at an acceptable level based on the risk tolerance and profile of the individual investor is just one example of another important function of the successful wealth manager.
Making good decisions is also about accountability. Having systems in place that ensure that processes are explainable and auditable is critical to accountability. It is also vital to an institution’s ability to learn, adapt, grow, and improve.
Compliance
Keeping up with the latest regulations is important for all financial service providers – and wealth management companies are no different.
As mentioned previously, one of the biggest benefits of enabling technologies like machine learning, AI, and Automation 2.0 is the ability for firms to track regulatory changes and ensure that their operations are able to meet new standards. An article earlier this year in Financial Planninglisted 10 separate regulatory issues that wealth management firms are likely to face this year, from regulations on marketing language to rules governing digital assets. Moreover, many wealth management firms have internal rules and mandates based on the type of investments they offer and to whom. As such, remaining compliant with an institution’s own governing policies is also a challenge for which regtechs in our industry can provide assistance.
Growth
One of the most exciting ways that fintechs can bring innovation to wealth management services providers is to enable them to grow and expand their businesses by offering services that, while complementary, could be difficult to offer (much less integrate) without technology partners.
Whether through APIs or embedded finance, there are a range of complementary services that fintechs can provide to wealth managers. From insurance to estate planning to secure document digitization and storage, fintechs are able to provide services that wealth management customers often need, but are inclined to get elsewhere. By adding these solutions and services to their product mix, wealth managers can dramatically increase their capacity to grow.
This morning CrowdStrike CEO George Kurtz reported that 97% of the Windows sensors knocked out during CrowdStrike’s botched software update a little over a week ago are back online. That’s great news for those companies still reeling from one of the biggest IT outages in history.
When it comes to cybersecurity companies, CrowdStrike is widely considered to be a belle of the ball. Here’s wealth manager Josh Brown, a shareholder in the company since 2020, bringing the roses less than a year ago:
You can talk as much about cloud and mobile and social and machine learning and distributed computing and generative AI as you’d like, if you can’t secure your data and provide safe access to users, you have nothing. Literally ….
Spending on top-of-the-line security solutions has now been enshrined into securities law, in addition to all the other reasons to take this stuff seriously, such as not getting sued into the stone age by your customers or forced to make Bitcoin ransom payments to international cyber terrorists ….
As a business manager, you would cut IT spending on literally anything else first. A small handful of publicly traded companies have what I consider to be a massive runway ahead of them. CrowdStrike is aiming to become the Salesforce of the industry.
To recap: Friday morning, July 19, a bug in a CrowdStrike software update resulted in major IT outages that grounded flights and brought chaos to banks and other businesses around the world.
“CrowdStrike is actively working with customers impacted by a defect found in a single content update for Windows hosts,” CrowdStrike’s Kurtz wrote on the social media platform X the morning afterward. “Mac and Linux hosts are not impacted. This is not a security incident or cyberattack. The issue has been identified, isolated, and a fix has been deployed.”
As we learn more about exactly what happened, is there a particular insight here for banks, fintechs and financial services companies? At a time of heightened concern over third-party risk in our industry, the CrowdStrike outage is yet another reminder of the importance of not only choosing technology partners carefully, but also of ensuring resiliency in the event of an issue with a partner.
The latter is especially pertinent here. Many of the challenges and controversies with regard to third-party risk management in financial services involve the latter, vetting issue, primarily. A signature example is the case of Synapse, the fintech whose allegedly improper handling of customer funds led to more than 200,000 users losing access to their money and numerous disputes with banking partners. CrowdStrike is being accused of no such malfeasance and will, in all likelihood, remain a major player in the cybersecurity industry, with its reputation scratched perhaps but probably not scarred.
That leaves us with resiliency. In banking, the definition of resiliency has expanded significantly in recent years. From the failures of the banking crisis to the strains of the COVID-19 pandemic and accompanying economic slowdown a little over a decade later, banks have dealt with major challenges to both financial and operational resiliency.
The CrowdStrike outage represented a different type of disruption, and one that may be less amenable to the solutions that have ensured bank resiliency in the past (i.e., leadership, talent, and technology). Given many of the common complaints when technology disappoints, it’s worth wondering if we should look at ourselves, not just our institutions, for greater “resiliency.”
To this end, compare the CrowdStrike outage to the AT&T breach this spring. Unlike with CrowdStrike, AT&T reported that “AT&T data-specific fields were contained in a data set released on the dark web.” The breach did not allegedly have “a material impact on AT&T operations.” But it did represent the kind of security challenge that cybersecurity companies are built to prevent, and that banks and financial services companies need to be prepared for. When I read “released on the dark web,” I thought of Finovate Best of Show winner SpyCloud, the Austin, Texas-based cybersecurity company that specializes in retrieving stolen credentials from the dark web.
And it appears as if more and more banks and financial institutions are getting the message. In the past few years, companies like Corsound AI (FinovateEurope 2024 Best of Show winner) to 1Kosmos (FinovateSpring 2023 Best of Show winner) have stood out among fellow fintechs for their innovations in everything from deepfake detection to passwordless authentication. As FinovateFall 2024 draws near, it will be interesting to see what innovations the current crop of cybersecurity specialists bring to the current challenges faced by banks and financial services companies alike.
We’re more than halfway through 2024 so there’s no better time for a trends temperature check to determine what we should be paying attention to throughout the second half of the year. Learning about the newest trends is crucial to understanding how your firm can better compete and ultimately succeed in the crowded fintech and banking arena.
Funding
Late last year, we were still in the metaphorical trenches of funding. As of mid-2024, fintech funding trends are mixed. For the most part, venture capital investment is still quite slow because of high interest rates and economic uncertainty. We may see a more positive shift after the U.S. election, as many investors have cited political uncertainty as a factor in delaying major strategic and investment initiatives.
There is, however, another aspect of the current funding scene. Startups in targeted subsectors that are leveraging generative AI in unique ways are still garnering attention and funding from investors, though not quite at the high levels we saw in 2021 and early 2022. These shifts have caused companies to focus on sustainable growth and profitability, rather than the aggressive growth-at-all-costs mentality that was common from 2010 to 2019.
Regulation
As expected, the regulatory landscape has tightened significantly so far this year. Regulators have intensified their scrutiny not only of financial institutions, but also of specific issues. In the U.K., the Basel III framework brought forth new regulations focusing on capital adequacy, liquidity, and operational risk. In the U.S., there has been increased scrutiny of banking-as-a-service partnerships. This has brought a pulse of new consent orders on a regular basis. On top of all of this, we’ve seen the CFPB take measures to further consumer protection, such as last week’s proposed interpretive ruling stating that some earned wage access tools should be considered loans.
Embedded finance and open banking
Predictably, the conversation around embedded finance and open banking has escalated in 2024 as consumers continue to seek digital experiences that offer seamless financial integration. Banks’ open banking initiatives have expanded, which is crucial given that the CFPB is expected to release the final ruling of Section 1033 of the Dodd-Frank Wall Street Reform, which will stipulate rules surrounding rules governing personal financial data rights.
Generative AI
It will not come as a surprise that both the use and mentions of generative AI technology in fintech and banking has increased. The use of the technology experienced major expansion after the general release of ChatGPT in late 2022. Now that both banks and fintechs have been able to see and experience first-hand the potential of generative AI, there has been a large spike in demand for integrating the technology into existing operations to help improve efficiency, personalize customer interactions, and enhance risk management.
