The information age has ushered in a speed of change not seen since the Industrial Revolution, and nowhere is this more apparent than in the area of artificial intelligence. AI is changing the way people interact with technology and performing tasks in mere moments that would take a human being hours to complete, and few industries have been as eager to embrace it as banking. Financial technology is evolving at a breakneck pace, and banks must adapt to these changes quickly if they wish to remain competitive. Here are five fintech trends that banks cannot afford to ignore.
1. Adoption of AI and Machine Learning
Banks have been early adopters of AI technology because it speeds up complex processes and eliminates human errors. When consumers apply for credit cards or loans, their applications are often reviewed by an AI program instead of a human being. Instead of relying on credit reports and scores, AI lending platforms analyze hundreds or even thousands of data points to evaluate credit applications. This reduces risk for lenders and leads to faster approvals and happier customers.
Banks are also using AI platforms with natural language processing (NLP) capabilities to provide live chat features, direct phone calls to the right department, and answer consumer questions. NLP is a form of machine learning that allows AI platforms to better understand what customers mean when they don’t know the correct terminology, which avoids misunderstandings and prevents customers from becoming frustrated and angry.
AI technology can make life easier for a bank’s employees as well as its customers. AI can study enormous amounts of data quickly and efficiently, which could save financial analysts a lot of time and identify trends and opportunities for investment advisors. The value of the global AI in the banking market is expected to reach $315 billion by 2033. That figure was just $19.9 billion in 2023.
2. Growth of Open Banking and Data Sharing
The way financial information is accessed and shared is being revolutionized by application programming interfaces (APIs). APIs are rules and protocols that allow software platforms to communicate and exchange data, and they will soon change the way consumers handle their financial affairs. Instead of logging into several different websites to check account balances, manage investment portfolios, and pay bills, consumers will be able to use a single dashboard to take care of all of these tasks.
Experts say that financial institutions will have to embrace open banking or risk being left behind. As APIs become more capable and efficient, consumers will begin to expect and demand the convenience they provide. When banks are not willing to share data with APIs, consumers may choose to move their accounts to more accommodating financial institutions. Open banking is still a relatively new concept, but it is already quite popular. About $4 billion in transactions were processed using open banking platforms in 2021, and that figure is expected to continue to rise.
3. Rise of Decentralized Finance
Cryptocurrencies and the blockchain technology that makes them possible are changing the way people and organizations do business. Decentralized finance, which is often referred to as DeFi, describes transactions that are completed using peer-to-peer networks instead of banks. The chunks of data that form a blockchain are encrypted and cannot be changed, which makes doing business in cryptocurrencies safe and secure. Transactions conducted in cryptocurrencies are increasing in popularity because doing business without the help of a bank or other third party speeds things up and eliminates fees.
Blockchain technology can also be used to transfer the ownership of physical and digital assets through tokenization. Once created, a token becomes a digital certificate of ownership. The sale of tokenized assets is still in its infancy, but many experts predict significant growth in the years ahead. The World Economic Forum believes that 10% of global GDP will be made up of tokenized assets stored on blockchains by 2027.
4. Expansion of Embedded Finance Solutions
The early information age was marked by website proliferation and data fragmentation, but things quickly began to coalesce. Just as retailing has evolved from specialty shops to big-box stores that sell everything from groceries to furniture, online commerce is moving toward platforms that allow consumers to do everything they want to do without hopping from website to website. Embedded finance solutions make this possible.
Embedding allows consumers to visit a website and pay for products or services without logging into a separate banking application. The consumer is still dealing with their bank, but they are using an alternative gateway to send and receive data. This is crucial because it ensures that sensitive personal information is protected. The website that offers embedded payments never sees credit card or debit card numbers, and it has no access to this information after a transaction has been completed. The value of the embedded finance market was estimated to be $82.7 billion in 2023, but that figure is expected to grow to almost $571 billion by 2033.
5. Focus on Cybersecurity and Fraud Prevention
The information age has changed forever the way people and businesses communicate and share information, and it has also created lucrative new opportunities for criminals. World governments have responded to these evolving threats by passing strict anti-money laundering and know-your-customer laws, and financial institutions can face severe punishments when they violate them. To avoid these penalties, banks are using AI and machine learning to remain in compliance.
AI platforms are continuously learning, which allows them to quickly identify anomalies that could be signs of fraud or money laundering. They can also communicate with each other and share information about questionable funds and identities that may have been stolen. These capabilities will become increasingly important in the years ahead as new and even more complex and onerous regulations are put into place to prevent cryptocurrency money laundering and large data breaches.
The Future of Banking
Advances in communication and data processing technologies have equipped banks with powerful tools to enhance customer service and operational efficiency. At the same time, these innovations have opened the door for other businesses to compete in areas traditionally dominated by large financial institutions. Embedded finance solutions and AI lending platforms are simplifying financial processes for consumers while blockchain technology and cryptocurrencies enable companies outside the financial sector to handle significant transactions securely. As these trends gain momentum, experts predict the global banking system is on the cusp of a transformative decade.
