Rethinking Fintech: Dispelling Myths and Embracing Realities

We at Fasanara are expecting big things to come this year. In lieu of this, we wish to delve into the transformative year of finance in 2023 and what this means for the year ahead. This exploration investigates the notable rise of fintech from a niche sector to a driving force, challenging traditional banking norms and embracing the dawn of technological innovation.

Looking ahead to 2024, we uncover a landscape shaped by resilience in the face of economic shifts, the emergence of non-bank players and big tech, and the evolution of payment systems and regulatory frameworks. This narrative is not just about the adaptation of financial institutions but a panoramic view of an industry at the forefront of innovation, grappling with challenges and seizing new opportunities. We attempt to unravel the future of finance, revealing transformative trends and opportunities that align with Fasanara's forward-thinking vision.

Fintech: From Periphery to Prominence

Fintech, initially a peripheral component of the financial sector, has now emerged as a central player, particularly in the manufacturing (underwriting, alternative data in trading & asset management, and other predominantly back-office functions) aspect of finance. This shift is not just technological but also structural, fundamentally altering the strategy and framework of financial services. Fintech's resilience in the face of rising interest rates, a scenario where traditional banking was expected to resurge, further underscores its robustness. Contrary to expectations, fintech has thrived, bolstered by the rise of private credit and a noticeable slowdown in bank deposit growth. This resilience is a testament to fintech firms' ability to navigate dynamic environments, successfully attracting deposits and achieving impressive net interest margins (NIM), as seen in situations involving major institutions like Silicon Valley Bank (SVB), as depicted in Figure 2 whereby 29% of SVB deposits went to two prominent B2B fintechs – Mercury and Brex.

Figure 1: Global Banking Annual Review 2023: The Great Banking Transition (McKinsey & Company)

Figure 2: Silicon Valley Bank Account Transfers (Kruze Consulting)

Challenges and Adaptations for Traditional Banks

Concurrently, traditional financial institutions faced their own set of challenges in 2023. While they relied on established moats such as high switching costs and the economies of scale inherent in their balance sheets, they also grappled with unique challenges due to the intricate and high-stakes nature of finance. Regulatory constraints further inhibited their growth, and many struggled to achieve more than mediocre performance in the digital domain. This gap in digital proficiency has increasingly been filled by shadow banking systems, offering an alternative to traditional banking services.

Figure 3: US bank stocks sink to all-time low against the S&P 500 (Financial Times)

The Rise of Non-Bank Lenders and Big Tech's Entry

The financial services sector is also witnessing the rise of non-bank lenders and big tech firms, which are increasingly becoming the primary interface for consumers in financial transactions. This shift represents a paradigm change in the sector, with these new players redefining the traditional rules of engagement and altering the industry's trajectory. The trend towards non-traditional banking is further emphasised by the shift in distribution channels, moving away from traditional banks towards shadow banking. This transition is providing fresh perspectives in financial manufacturing and creating new opportunities for strategic partnerships.

Figure 4: Global Private Debt Assets Under Management (Preqin)

A Glimpse into 2024: Trends and Predictions in the Finance Sector

As we look ahead to 2024, we believe the finance sector is set to undergo significant transformation. These changes are reshaping the landscape of financial services, driven by a combination of technological innovation, regulatory shifts and consumer behaviour. Here is an in-depth look at the emerging trends and predictions:

Technological Innovation and New Market Entrants

• Fintech's Resilient Growth: Fintech continues to thrive, bolstered by secular trends and evolving regulatory landscapes. The industry's agility in adapting to these changes, coupled with its innovative use of technology in offering bespoke financial solutions, is key to its sustained growth.

Figure 5: Global Fintech 2023: Reimagining the Future of Finance (Boston Consulting Group and QED Investors)

• Big Tech's Foray into Finance: Apple's expansion into financial services is indicative of a larger trend of technology companies venturing into this space. With its vast resources and customer base, Apple is poised to become a major player, redefining financial interactions through its integrated digital ecosystem.

Figure 6: From iPhone to iBank: Analysing Apple’s Embedded Finance Adventures (Whitesight.net)

• Rise of B2B and Consumer Neobanks: The emergence of B2B Neobanks and the growing necessity for consumer Neobanks to acquire charters highlight a diversification in banking models. These institutions are adapting to market needs by offering digital-first services while seeking stability and credibility through traditional banking frameworks.

Evolving Payment Systems and Financial Models

• Payment Industry's Value Race: The payment sector is evolving from a focus on price competition to offering value-added services. Companies are now prioritising seamless, secure and comprehensive financial experiences that extend beyond basic transaction processing.

Figure 7: Accenture Reinventing Commercial Payments Study, 2023 (Banking and Payments Provider Survey and Commercial Payments Client Survey)

• Real-Time Payments Challenge: The United States continues to grapple with implementing efficient real-time payments. The complexities involve creating a system that balances speed, security and universal accessibility.

• Persistence of Buy Now Pay Later (BNPL) Schemes: The enduring popularity of Buy Now, Pay Later schemes underlines a significant shift in consumer financing. These schemes are not only about offering flexible payment options but are also generating valuable consumer behaviour data.

Figure 8: Prime Time for Real-Time Global Payments Report (ACI Worldwide)

Regulatory and Economic Challenges

• Banks' Regulatory Burden: Traditional banks face a tough regulatory environment, necessitating a significant increase in operational efficiency. Strategic partnerships emerge as a potential solution to foster innovation within the constraints of regulation.

Figure 9: The Not So Hidden Costs of Compliance (Ascent RegTech)

• Crypto's Evolution and Challenges: The cryptocurrency market is maturing, moving towards structured tokenisation. However, the sector continues to be plagued by scams, calling for enhanced regulatory frameworks and increased vigilance.

Figure 10: Forecasts of tokenised asset market size by 2030 (21.co)

Emerging Trends and Untapped Potential

• Open Finance and Insurtech's Emergence: The arrival of Open Finance marks a new era in financial data accessibility, although it confronts challenges in aligning stakeholder incentives. Similarly, Insurtech is beginning to disrupt the insurance industry, following a trajectory similar to fintech.

Figure 11: Global State of Open Finance (F5 and Twimbit)

• Embedded Finance's Potential: The concept of embedded finance, akin to a Costco-like model, proposes a revolutionary approach to integrating financial services into various industries. This model aims to balance regulatory requirements with efficient balance sheet management.

Figure 12: Simon Torrance’s Follow-on Analysis from Matt Harris, Bain Capital Ventures

• Generative AI and Machine Learning's Role: While generative AI is celebrated for its creative and problem-solving capabilities, it is not a tool for accuracy. Conversely, the potential of Machine Learning in data analysis and decision-making remains largely untapped, especially in the finance sector.

Figure 13: Generative AI in the Finance Function of the Future (Boston Consulting Group Analysis)

The Overshadowed and Overhyped

• Underestimated Influence of TikTok: The finance industry tends to overlook TikTok's e-commerce strategies, potentially missing out on key trends shaping the digital economy. In contrast, the focus on personalities like Elon Musk might be drawing attention away from more substantive developments.

Figure 14: 2021 Survey by Morning Consult

The Ever Present Threat of Fraud and Scams

• Security Risks in Finance: Fraud and scams continue to be significant threats, impacting everything from cyber insurance to anti-money laundering measures. The finance sector must enhance its defences to effectively address these evolving challenges.

Conclusion

Over the past years, the emergence of fintech as a central force, challenging traditional banking norms and adapting to rising interest rates in 2023, signifies a new era in financial services. Traditional banks, while grappling with regulatory hurdles and digital challenges, find themselves increasingly competing with non-bank lenders and big tech firms, signalling a paradigm shift in consumer financial interactions.

Looking ahead to 2024, with trends like the evolution of payment systems, the rise of Neobanks, and the increasing importance of technological innovations like generative AI and machine learning, the finance sector is poised for transformative changes. As we embrace these realities, Fasanara – a leading institutional asset manager and a fintech investing pioneer - remains at the forefront, ready to capitalise on these emerging opportunities.

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