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.

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CrowdStrike’s update to its flagship cybersecurity product, Falcon Sensor, late last week caused an impressive amount of panic across a wide swath of industries. Many computers running Microsoft were stuck on the “blue screen of death” (BSoD), which would not allow users’ computers to load.

Immediately, the update caused flight cancellations, train delays, broadcasting problems, hospital issues, and disruptions at businesses across all sectors that could not log into their computers for the day. But aside from these fleeting, yet major, problems the botched software update will have lasting implications.

Opportunity for competitors

Impacting the cybersecurity industry as a whole, many organizations will see last week’s update failure as an opportunity to market their own fraud fighting technology to organizations big and small that were impacted by last Friday’s events. We may even see a slight increase in new cybersecurity company launches. According to TechCrunch, as of last year, CrowdStrike enjoyed a 14.7% share of global revenue from security software sales. This may decrease as some clients seek alternative technologies. It is unlikely, however, that we will see a mass exodus from CrowdStrike.

Information for hackers

Perhaps one of the biggest concerns for CrowdStrike clients is that the update failure offered hackers all over the globe a visual of which companies use CrowdStrike as a vendor to fight fraud. Cybersecurity companies rarely disclose client names, especially in banking and finance, and for good reason. When hackers know which security software vendors a firm is using, they are able to gather a lot of information they can use to try to circumvent the software for nefarious purposes.

In addition to offering visibility into which banks are working with CrowdStrike as a security vendor, the fallout of the update also offers fraudsters an open door to send consumers phishing emails and phone calls to exploit the situation by asking consumers to divulge passwords and sensitive codes.

Loss of consumer trust

End consumers, especially in the banking and airline industries, will likely lose some amount of trust in the security of online businesses. Many saw firsthand how far reaching and potentially catastrophic software disruptions can be, and unfortunately, many consumers incorrectly assumed that the BSoD was the result of a cyberattack rather than an update glitch. As a result, consumers may be more wary of sharing their sensitive details online and may be less willing to trust the security of their financial institution, even if it was not impacted by Friday’s events.

Heightened regulatory concern

Regulators are consistently being challenged by today’s fast-moving technological environment. Now, they have a new worry to add to their list. Regulators have a responsibility to ensure that they are not only retroactively responding to IT outages, but also actively working to help prevent them from occurring in the first place. This will likely lead to more stringent regulatory guidelines for cybersecurity measures, mandatory incident response protocols, and regular stress testing of critical IT systems to ensure their resilience.

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Can’t sleep? Maybe that’s because you’re among the BaaS-enabled banks worried about consent orders.

Since late 2023, the FDIC and CFPB have issued seven consent orders because of BaaS-related issues. In addition to two consent orders issued this month to Sutton Bank and Piermont Bank; Lineage Bank, Blue Ridge Bank, Cross River Bank, Green Dot, and First Fed Bank have all been hit with consent orders in recent months.

BaaS was once considered the key to having it all; banks could maintain their legacy core technology while quickly adapting to consumer trends by bolting on the newest fintech innovations. Many BaaS-enabled banks are starting to discover that using third-party technology may not be the best solution, however. As it turns out, implementing another company’s technology comes with its own set of issues.

Part of the problem stems from the fact that regulators have been eschewing formal rule-making, and have instead been making examples of particular firms by enforcing consequences in the form of consent orders.

But where are things going wrong? Below are four things banks are (or should be) worried about when it comes to using BaaS partners:

Data privacy, security

While every bank executive worries about fraud, security, and data privacy, BaaS-enabled banks face double the concern because they not only need to worry about the security of their own institution, but also that of their third party partners. That’s because BaaS involves sharing sensitive customer data with third party providers. Banks need to ensure that their partners comply with data protection regulations and stay up-to-date on regulatory changes.

Regulatory compliance and reporting

Speaking of regulations, banks that use BaaS tools need to ensure that their own organization, as well as their third party partners, are complying with all financial regulations such as AML and KYC requirements. To verify ongoing compliance, banks need to implement vendor management practices to oversee the compliance efforts of their BaaS providers and mitigate risks on both sides.

Almost as important as complying with regulations is proper reporting around activities. Banks should make sure that they can accurately report on their activities and compliance efforts, even when using BaaS tools. Banks should maintain proper records and be able to provide information to regulators upon request.

Consumer protection

Banks must not only safeguard their consumers’ data privacy, but they must also protect consumers from misinformation. Banks are responsible for ensuring their BaaS providers are relaying information regarding their products and services accurately and clearly to customers. This will both facilitate fair treatment and reduce redlining concerns.

Operational risk

Adding to the list of concerns is operational risk. When working with BaaS providers, banks are responsible for things outside of their control, including service disruptions and clunky or broken user interfaces. To reduce these issues, banks should have risk management processes in place and regularly check in with their partners.

When it comes down to it, banks can’t oversee every part of their BaaS partners’ organization. However, by conducting proper due diligence, regularly updating controls, and learning from other institutions’ mistakes, firms may find it easier to sleep at night.

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The EU Parliament approved the Artificial Intelligence (AI) Act today. Member states agreed upon the regulation in December 2023. Today, members of the European Parliament endorsed the act, with 523 voting in favor, 46 voting against, and 49 abstaining from the vote.

It’s no secret that AI is a double-edged sword. For every positive use case, there are multiple ways humans can use the technology for nefarious purposes. Regulation is generally effective in creating safeguards for the adoption of new technologies. However, delineating the boundaries of AI’s applications and capabilities is challenging. The technology’s vast potential makes it difficult to eliminate negative uses while accommodating positive ones.

Because of this, the European Union’s new Artificial Intelligence Act will have both positive and negative impacts on banks and fintechs. Organizations that learn to adapt and innovate within the boundaries will see the most success when it comes to leveraging AI.

That said here are four major implications the new law will have on banks:

Prohibited AI applications

The new law prohibits the use of AI for emotion recognition in the workplace and schools, social scoring, and predictive policing based solely on profiling. This will impact how banks and fintechs use AI for customer interactions, underwriting, and fraud detection.

Compliance and oversight

The ruling specifically calls out banking as an “essential private and public service” and categorizes it as a high-risk use of AI. Therefore, banks using AI systems must assess and reduce risks, maintain use logs, be transparent and accurate, and ensure human oversight. The law states that citizens have two major rights when it comes to the use of AI in their banking platforms. First, they must have the ability to submit complaints, and second, they have the right to receive explanations about decisions made using AI. This will require banks and fintechs to enhance their risk management and update their compliance processes to accommodate for AI-driven services.

Transparency

Banks using AI systems and models for general purposes must meet transparency requirements. This includes complying with EU copyright law and publishing detailed summaries of training content. The transparency reporting will not be one-size-fits-all. According to the European Parliament’s explanation, “The more powerful general purpose AI models that could pose systemic risks will face additional requirements, including performing model evaluations, assessing and mitigating systemic risks, and reporting on incidents.”

Innovation support

The law stipulates that regulatory sandboxes and real-world testing will be available at the national level to help businesses develop and train AI use before it goes live. This could benefit both fintechs and banks for support in testing and launching their new AI use cases.

Overall, the EU AI Act isn’t requiring anything outside of banks’ existing capabilities. Financial institutions already have processes, documentation procedures, and controls in place to comply with existing regulations. The act will, however, require banks and fintechs to either establish or reassess their AI strategies, ensure compliance with new regulations, and adapt to a more transparent and accountable AI ecosystem.

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Here’s an interesting way to celebrate the last day of Black History Month. Let’s talk about what banks and fintechs can learn from Beyoncé.

Affectionately known as Queen Bey, the black music and entertainment icon released a single this month called Texas Hold ‘Em, the pop singer’s first ever country music song.

The song, which you can listen to on Spotify (beware of the NSFW album cover image), has sparked a flurry of debate among die-hard country music lovers and pop music fans. Some country music enthusiasts perceive the lyrics of the song as inauthentic and the beat too poppy to be considered country. Others really enjoy the song and are offended that some country radio stations have refused to play the song. The new beat has even caused some pop music fans to start listening to country music. On both sides, however, Beyoncé’s new hit has divided people. Listeners either love it or hate it.

I’m far from a music critic, but I like Beyoncé and because I live in rural Montana, I listen to a lot of country music. However, I can’t stand the lyrics of the new song. I love the beat, but I feel like she used ChatGPT to gather a handful of “country” words– dive bar, tornado, liquor, slow dance, hoedown, whiskey– and poured them all into the song. Has Beyoncé really ever been to a true dive bar? I digress.

While everyone is entitled to their own opinion about the hit single, there are a few hidden lessons in the controversy and conversation surrounding Texas Hold ‘Em. So what can it teach banks and fintechs?

Embrace change

Beyoncé showcased an impressive ability to convert serious pop music fans into country music enthusiasts. Listeners who would have previously never even considered playing a country music song on purpose have gained a new appreciation for the genre. This power to open consumers’ minds highlights the importance of embracing change and adapting to new trends. Despite the challenge of staying on top of trends, fintechs and banks should be open to evolving technologies and customer preferences.

Authenticity matters

Just like how listeners of all music genres value the authentic beat and genuine lyrics of their favorite type of music, so do customers appreciate a genuine experience from their financial services provider. It is easy for consumers to tell when a brand is trying to be something that they are not. Fintechs and banks should strive to be transparent and true to their brand values.

Don’t limit your audience

The song’s polarizing effect shows the power of how music (or products) resonate differently with various audiences. Financial services companies should occasionally revisit their offerings to see how they can expand and fulfill needs of a wider audience range. As long as it is authentic to the brand, banks and fintechs should consider offering a more diverse range of products and services that cater to more audiences, serving their varied needs.

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The National Payments Corporation of India (NPCI) launched the country’s Unified Payments Interface (UPI) in 2016 to serve as a real-time payments system to facilitate peer-to-peer and person-to-merchant transactions via mobile phones. Since then, the payments infrastructure has seen massive growth, having reached its peak in December of last year, when it surpassed 12 billion transactions worth $220 billion (Rs 18.23 trillion) in the single month.

The U.S. launched its real time payments initiative, FedNow, last July and has a lot to learn from India’s UPI. As the U.S. seeks to modernize its own banking infrastructure, here are five key lessons that can be learned from India’s experience with UPI.

Simplicity and accessibility

One reason for UPI’s growth is its simplicity and accessibility. The payments system allows users to transact using their smartphones with just a few taps. Notably, UPI doesn’t require the user to remember long bank account numbers or Indian Financial System Codes (IFSC). By simplifying the user experience in this way, UPI has helped drive adoption, especially among the unbanked and underbanked populations.

U.S. financial services can learn from this focus on the user experience that ultimately makes digital payments more intuitive and easy to use. When friction is reduced for end users–especially with underbanked populations in mind– adoption has the potential to skyrocket.

Interoperability

With a lack of open banking regulation in the U.S., the banking system severely lacks interoperability. UPI, on the other hand, is built on the principle of interoperability, allowing users to make payments across different banks and payment platforms. Facilitating payments among all players has helped create a level playing field for consumers and merchants alike and has contributed to UPI’s rapid growth.

In the U.S., interoperability among banks and payment platforms is still a challenge because many systems operate in silos. Many fear that cooperating will lead to a loss in competitive advantage. However, adopting a standardized, open, and interoperable approach as outlined in the proposed Section 1033 of the Consumer Financial Protection Act has the potential to not only drive innovation but also improve the overall user experience.

Security and fraud prevention

The NPCI built UPI on a robust security framework to ensure that transactions are safe and secure. The payments systems’ security has earned consumer trust and has therefore been a critical factor in driving adoption.

Security concerns surrounding digital financial services abound in the U.S., however, where many consumers worry about the safety of their financial information and are concerned for their own privacy. Established financial services firms and fintechs alike should prioritize security and adopt best practices from UPI in order to improve trust and confidence in their digital payments operations.

Low transaction costs

One things UPI transactions are known for is the low cost per transaction, which makes them an attractive alternative to cash payments. The cost savings has been a key driver of adoption, especially among small businesses and consumers.

Many digital payments solutions in the U.S., however, still carry high transaction fees, thanks to the large number of middlemen involved. The costs associated with digital payments stifle adoption, and incentivize cash usage or even paper check payments. Reducing transaction costs would change the incentives, driving more people and businesses toward digital payments.

Government intervention

One of the biggest lessons the U.S. banking system can learn from UPI is the role of government support in driving innovation. UPI was developed and rolled out by the NPCI with the support of the Indian government, as part of the country’s push towards a cashless economy. The government’s proactive approach has been key to the success of UPI and has helped create a culture that fosters innovation.

In the U.S., greater government support and collaboration with the private sector could help drive similar advancements in digital payments. This idea carries significant challenges, however, as many Americans shy away from governmental intervention, especially when it comes to their finances.

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