Fintech is a fast-changing ecosystem where there are few certainties. As 2023 comes to an end, it’s worth taking a temperature check and assessing the lay of the land.

For the past few years, fintech pioneers have been breaking new ground and pushing financial services to heights never before seen. However, post-pandemic the fintech landscape has been a tricky place for those trying to challenge the status quo. A degree of correction has occurred as the world returns to normal – whatever normal is now – and tough economic conditions are putting pressure on consumers’ wallets.

Fintechs and banks as partners, not opponents

The change in outlook from an investor perspective is possibly the most important trend we have seen in fintech over the last year. The market is applying much more scrutiny to fintech organizations than it has done in the past. As a result, we've seen a lot of fintechs struggle, particularly those that don't have a path towards profitability. The consumer credit side of the equation has been hit especially hard, with the Buy Now, Pay Later model looking to be unsustainable in this economic climate.

Though times are tough, there’s no need to sound the alarm just yet. Fintech is here to stay – but its relationship with traditional banking is changing. The fintech organizations that are performing best are the ones that are working alongside traditional banks, rather than in opposition to them. The solution providers in regtech and operational tech are generally doing well, and I expect to see continued investment in these providers – as long as they have established financial institutions as clients.

Fintech is powering the digital finance revolution

While established banks look to have been riding out the economic storm well, there’s no doubt that the way people manage their money has been irreversibly changed by fintech and the digital finance revolution. This has involved the breaking apart of traditional pathways into discrete components. People used to go to a bank for their checking account and their mortgage and their credit card and so on. Now, banks are looking to outsource many of those components in their own consumer journeys, and customers themselves are also willing to break apart these activities among a whole set of different providers.

For instance, you might have your credit card with Apple, your deposit account with Goldman Sachs and your investments with Robin Hood. The digital financial revolution has not only seen us spread our activities among discrete providers, but also allows interoperability between them so we can move our money easily. Through the use of APIs and cloud architecture, financial services are now componentized from a consumer's point of view. There’s greater choice and convenience for customers, while there’s also enough competition in the market to ensure the best providers rise to the top – with underperforming institutions weeded out.

One cloud good, two clouds better

It’s important to emphasize the need to consider ‘the cloud’ as not being a singular entity any more. When it comes to financial services, providers that rely on just a single cloud provider to handle important processes such as payments could find themselves in real trouble if that provider suffers an outage. And while resiliency is an issue that financial services organizations need to take very seriously – especially if they plan on being involved in the FedNow network launching in July – there’s another issue that being tied to just a single cloud provider raises. 

Interoperability within the broader economic infrastructure is vital for fintechs and banks that want to future-proof their operations and be able to work with any and all potential partners. Being tied to just one cloud provider could be a severe impediment. Regulators are also bound to insist on multi-cloud interoperability in the future – in order to ensure stability and maximum resiliency for services essential to the smooth operation of the economy – so it’s time for all financial institutions to get ahead of the game and move to multiple cloud providers.

AI is already shaping financial services

It’s still unclear how generative AI chatbots such as ChatGPT will impact traditional banking, but financial services organizations and banks are already adopting AI for a number of reasons. Financial analysis reports, customer support chatbots, investment advice and so on are all utilizing AI, and it's playing a key role in fraud detection. AI can deal with massive datasets very quickly, spotting trends and patterns, making it ideal for spotting fraudulent activity in payments data. 

However, digital-first organizations will be able to adopt AI more quickly than traditional banks with legacy infrastructure. It's likely that the banks will look to partner with smaller AI-focused startups and technology providers rather than make heavy investments in proprietary AI tech. Again, this is indicative of the wider trend that banks are now more prepared to invest in or partner with fintech companies rather than try to do everything themselves. Why build when you can buy?

The future of fintech is customer-centric

The smart banks will eventually become more like holding companies for fintech investments that they've cobbled together into a solution for their customers. JP Morgan has announced that it is going to invest heavily in tech and acquisitions. We're also seeing that it's possible for new banks to start up and offer compelling products in a very short period of time, by leveraging technologies that are provided by the fintech space. Revolut and Mercury Bank, for example, have been able to stitch a solution together and get it to market very quickly. 

As fintech and financial services progress into the future, banking is likely to become a much more varied experience for consumers. As mentioned earlier, the traditional pathways are being replaced by bespoke journeys, with many more options for customers. Banks will offer a number of different services – all held together by a single user interface – with numerous choices in each category, like a marketplace of financial services. Again, interoperability will be important, as will flexibility, as cloud-based microservices and APIs will need to be linked to one another to enable all of these options. The key is to make sure that your infrastructure is as future-proofed as possible, as innovative new products and features that haven’t even been dreamt up yet will need to be integrated into banking services at some point down the road.

As I previously mentioned, things change fast in fintech and it’s hard to predict where we will be six months from now. However, we look to be on a path towards better services and greater choice for customers, which can only be a good thing. Those organizations that can get their services to the biggest audiences through partnerships with the top tier banks will be well-placed to enjoy long-term success. Those that don’t have a clear path to monetization will be the ones that lose out.