Fintech
The future of fintech predicted in Team8 report
A report from Team8, An unconventional look at the future of fintech, charts the industry’s path by predicting what stays and changes as it takes some big swings into potential mega-trends. Team8 builds and invests in companies focused on cybersecurity, data and artificial intelligence, fintech and digital health.
One constant is convenience. Any service that makes it easy to get what consumers want starts with an attractive proposition.
Another truth is that you can’t fight city hall. While some fintechs were founded to exploit a regulatory gap, Team8 partner Liran Amrany said a more sustainable strategy is to design companies focused on compliance first, recognizing that the purpose of regulation is to foster trust.
The incumbents aren’t going anywhere. We are no longer in the early 2010s, when bold startups made their best case by saying they were going to get rid of the banks. Incumbents in highly regulated industries like finance are stickier, harder to replace, and significantly more profitable. They enjoy economies of scale and have generated consumer confidence.
The report states that the conditions of the last decade from which we are emerging were anomalous. Amrany said it is wiser to work with them. Yes, there is a possibility that a startup could reach enormous size, but it is much more likely that it will be acquired, that its service will be replicated by a large bank with much better financing, or that its innovation will spawn an entire as-a-service industry .
Sorry, folks, but fraud will remain ubiquitous. Consider fraud an activity where professionals want to maximize ROI. They are early technology adapters, so companies need to be vigilant.
Naturally, this presents opportunities for fintechs in fraud detection and prevention. Amrany said one of these could address the impact of generative AI on fraud, which he said is only just beginning. Generative AI’s ability to lower the entry threshold for fraudsters and assist with better fraud tactics at scale could impact entrepreneurs’ ability to build businesses with manageable fraud risk.
What will change in fintech
Many things will change, starting with the improvement of banking technology. Banks will view acquisitions as a cost-effective means to upgrade technologies, preserve advantages and attract talent.
Embedded finance will expand, with hard-working entrepreneurs seeking opportunities in harder-to-reach areas such as brick-and-mortar small businesses, nonprofits and local government. Amrany said innovative fintechs like Toast have incorporated financial services into their systems. Future successful companies will find ways to incorporate financial services into their products and user bases.
Prepare for interoperability between countries, especially with global payments. The report states that no global payline has 100% coverage. Existing infrastructure is slow and expensive. For a glimpse into the future, look to the integration of India and Singapore’s digital payment systems.
Amrany sees room for companies to shape such regional synergies, especially in emerging markets that don’t have to contend with cumbersome infrastructure.
“You will see some new payment networks, as they come into the world, be more configured to be more interoperable and have more API connections than most of the legacy infrastructure that we have today.”
Expect new infrastructure to drive opportunities, especially in faster payments and stablecoins. FedNow is designed with third-party developers in mind, which means rapid growth is likely.
The report states that “dollar-backed stablecoins represent a fast, interoperable, and programmable alternative to legacy payment systems that currently dominate use cases such as cross-border payments, B2B payments, and supply chain financing.” Many large incumbents, from PayPal to JPMorgan Chase, are experimenting with stablecoin use cases, which is a trend to keep an eye on.
Amrany finds better current use cases in developing countries, where people want to store money in US dollars but can’t. Retail investors are starting to stimulate demand, which national treasuries usually stimulate.
“I see a need for many people who want a more stable currency to keep their money or put their funds in stablecoins,” he said.
B2B innovation has just begun
A trend that has just begun but is destined to grow is the arrival of fintech in B2B. Traditional vendors cannot analyze businesses at a granular level, hurting SMBs. By leveraging artificial intelligence, fintechs can check creditworthiness, assess risk and better process financing.
Countries approach open finance in different ways. Early practitioners are mostly driven by legislation, with the advantages of standardization and ubiquity but the disadvantage of a narrow scope.
The United States is taking a more encouraging stance.
“The US market’s broadest definition of open finance is about to be codified into regulation, as the CFPB finally proposed its rules for data sharing via Section 1033 of the Dodd-Frank Act,” the report said. “These rules, which will start with a narrow focus and expand over time, will significantly improve the reliability and overall performance of financial data sharing between banks and non-banks.”
Compliance will become a competitive differentiator as companies realize it is more economical to invest in compliance from the start. Investments in personnel and technology will increase.
Where to aim for the fintech fence
Grand slams could be hit in digital identities, self-custody, fully immersive financial services, and financial services where climate concerns reset incentives.
“I think the possibilities, the way people manage their money, will change a lot in the next decade,” Amrany predicted. “Digital identity is really interesting. We don’t yet know exactly what it will be like; we don’t know if it’s Google or Facebook, if it comes from the banks or the government. With fraud and how scary it could get in the next two to four years, digital identity is the one thing that could bring us back to a world where fraud is much more manageable.”
Generative AI promises to narrow the development gap between legacy institutions and startups. Improvements that took banks two years could be cut to weeks.
“Gen AI can greatly accelerate this, as it gets to the point where banks can easily deploy and test the codes generated by Gen AI,” Amrany said.
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Tony is a long-time contributor in the fintech and alt-fi spaces. Twice named journalist of the year at LendIt e winner in 2018, Tony has written more than 2,000 original articles on blockchain, peer-to-peer lending, crowdfunding, and emerging technologies over the past seven years. He has hosted panels at LendIt, the CfPA Summit, and DECENT’s Unchained, a blockchain expo in Hong Kong. Email Tony here.