The Biggest Developments in Banking and Fintech From 2023

The Biggest Developments in Banking and Fintech From 2023

The Biggest Developments in Banking and Fintech From 2023

The Biggest Developments in Banking and Fintech From 2023

2023 was wild. From bank failures to fintech turbulence but also the rise of generative artificial intelligence (AI) and promising developments in areas like real-time payments and open banking, it was hard for anyone in financial services not to feel like they were on a rollercoaster this year. To us, that feels worthy of a retrospective. So, as the year draws to a close, we’re taking a look back at some of most notable ups and downs from the last 12 months.

  1. A cascading banking crisis

Silicon Valley Bank (SVB) and Signature Bank collapsed in March. For a few harrowing days, it felt like US regional banks would fall like a house of cards. The Federal Deposit Insurance Corporation (FDIC) stepped in to guarantee all deposits above the federal insurance limit, but First Republic Bank still folded in May and was acquired by JPMorgan Chase.

The run on Silicon Valley Bank was caused by sudden panic over the decline in value of SVB’s bond portfolio while it held billions of dollars in uninsured deposits owed to cash-rich startups and institutional investors. First Republic suffered a similar fate for similar reasons, and it bled out over the course of two months. But the year ends without the emotion and panicked behavior that marked the first half of 2023. By rescuing depositors and introducing a new lending facility, regulators propped up the banking system at a crucial moment.

That said, we expect banks to continue to feel pressure to attract deposits while preserving and improving margins in an extremely competitive environment.

     2. Instant payments leap forward

With the long-awaited introduction of FedNow in July, the US government began to get in step with countries that have implemented or are on the cusp of implementing instant payments systems. (The UK launched Faster Payments in 2008, followed by Singapore in 2014, India in 2016, the Eurosystem in 2018, Brazil in 2020, and South Africa in March.) This puts the US on the road to catching up with many of these other countries when it comes to real-time, 24/7 payments (though it does follow the launch of an existing network from The Clearing House).

FedNow is far from widespread adoption: As of October, only 108 financial institutions were sending and receiving payments on the network. However, the volume of ACH transactions processed by the Fed suggests potential for transformative change in US payments as more financial institutions get on board. If FedNow and FedACH had the same proportion of ACH and instant payments as the UK’s BACS and Faster Payments systems, FedNow would process 10.8 billion transactions in a year.

Meanwhile, in Europe, two things of note happened in payments. The European Payment Council launched cross-border instant payments for transfers destined for Europe, and the European Commission said that an agreement had been reached on rules that would require payment service providers to offer instant payments to customers at the same price as slower transfers. As a result, instant bank transfers may become de facto across the Continent.

  1. The generative AI boom

After its electrifying mainstream debut on the back of the launch of ChatGPT in November of 2022, generative AI quickly reached peak hype status. But this year also brought real applications for the technology, including in financial services.

Among banks, JPMorgan Chase, for example, is introducing proprietary large language models (LLMs) for cybersecurity. And it’s been testing a generative AI-driven bot for investment advice. Fintechs also rolled out generative AI-driven features in their products. Brex, for instance, announced in March that it would launch tools for chief financial officers based on machine learning and natural language processing (NLP) technology from OpenAI. And, in May, Kasisto announced that it had launched an LLM designed specifically for the banking industry. It’s since built a business-to-business (B2B) chat product designed to provide answers to customer service employees on top of that model.

Going forward, it’s important to remember that, while the glitzy, consumer friendly ChatGPT brought attention to AI, advances in this space for banking and fintech predate it. Common applications in addition to NLP and LLMs include recommender systems (which target content to users), portfolio optimization, early conversational AI, and extensive use cases in fraud detection for payments and anti-money laundering (AML) and know-your-customer (KYC) tools. It’s a field moving at a blinding pace, and what AI looks like at the end of 2024 will almost certainly be very different. So, hold on tight.

  1. Open banking rules come closer to reality in the US

It’s been more than a decade since Dodd-Frank was signed into law and 7 years since the Consumer Financial Protection Bureau (CFPB) started the related rulemaking process to give consumers control over their personal financial data. With this fall’s release of those proposed rules, the US took a big step toward creating regulation that would satisfy such requirements and bring the country closer to developing a true open banking framework as laid out in other jurisdictions. Countries and continents besides the US that have open banking systems live or in the works include the UK, Europe, Japan, Australia, New Zealand, South Africa, and Saudi Arabia, South Korea, and Canada.

As regulation becomes reality, participants in the US open banking ecosystem will face forced agreement over issues the industry never settled. While they might agree in principle on consumer protection, financial institutions and aggregators, like Plaid and MX, have argued over the scope and scale of data-sharing. And enabling technology has spread unevenly: Parts of the banking industry have only in the past few years developed application programming interfaces (APIs) that enable secure data-sharing, and the rest haven’t done so at all.

Mandated adoption of secure data-sharing may make potential uses cases for open banking realistic across the industry while keeping consumers’ data secure. Risk scoring and underwriting based on cash-flow data, for example, or more personalized financial services have greater potential with holistic spending and saving data saved in any of a consumer’s deposit or credit account histories. The customer experience for account-to-account (A2A) payments may improve across the long tail of smaller financial institutions (FIs) as instant identity verification and balance confirmation make using checking accounts easier and safer to pay with. When consumers apply for a loan, instead of downloading months’ worth of statements, the lender may be able to retrieve the right transaction data from a bank.

  1. BaaS under fire

Banking-as-a-Service (BaaS) — which refers to providing access to the financial system to allow nonbanks to offer financial services — came into serious question in 2023 as loose compliance practices began to cause problems and pressure on private capital made business more difficult for startups that use BaaS. Recent regulatory actions aimed at BaaS include the Office of the Comptroller of the Currency (OCC) issuing a consent order to Blue Ridge Bank and the FDIC issuing one to Cross River Bank. Additionally, this summer, the OCC, FDIC, and CFPB issued joint guidance on third-party risk management, with a focus on due diligence, risk monitoring, and contract clarity.

Amid this mess, there was consolidation. FIS acquired BaaS platform Bond in June. A consortium of investors acquired embedded finance player Railsr. Fifth Third bought embedded payments platform Rize Money. Synapse didn’t sell, but it laid off 40% of its staff in October. Meanwhile, the capstone of the tumult, though not a surprise to anyone, was Goldman Sachs exiting its Apple relationship imminently and continuing to wind down its consumer operation. But it wasn’t all bad — BaaS provider Treasury Prime, for example, raised $40 million in its Series C, following a partnership agreement it signed a partnership with FIS last year.

We expect BaaS to continue to experience growing pains, but it’s not down for the count. As BaaS banks and their partners sort out compliance issues and look to build more sustainable models, we’re likely to see stronger propositions emerge. And that’s especially true as the industry looks toward embedded finance uses cases that position delivery at the point of need.

  1. The fintech reset

In 2023, the consumer fintech market contracted amid business model challenges in a less attractive funding environment, and B2B fintech took to the limelight. Infrastructure was a theme: Some large capital raises this year belonged to Stripe and QI Tech, a Brazilian BaaS provider. Sizeable deals also included US core banking company Nymbus, US payment tech company Volante, Norwegian open banking payments company Brite, US payments infrastructure company Episode 6, and US embedded payments company Moov. Those all raised money in deals worth $45 million+. There was also a big acquisition in this space: Visa bought Pismo, a Brazilian payments infrastructure company, for $1 billion.

Going into 2024, the environment for fintech is uncertain: It is unclear exactly what the Fed will decide on interest rates, and funding appears to have bottomed out. High-flyers from the fintech frenzy, like Chime, have gone quiet. They’re not publicly raising money, if they are at all, so it’s hard to say how far the market thinks they’ve fallen.

If this year taught us anything, though, it’s that fintech is evolving. The market is being challenged, and it’s changing. That’s not necessarily a bad thing.

Leaders in Bank Consulting