Changing end user expectations, emerging technologies and new business models are fundamentally changing the ways we pay, shop and save. Lockdowns caused by COVID-19 certainly accelerated a behavior shift, leading to a 72% rise in the use of fintech apps in Europe alone, but banking was on the move long before the pandemic. The relentless rise of digital banking was in motion long before. But where is it heading?
The digital banking sector in North America will grow annually by 8.3% through 2027, when it is expected to be valued at $721 billion, driven by the need to deliver operational efficiency on the one hand and meet end-user expectations on the other. Here are seven fintech trends that look set to define the future of banking and challenge banks and credit unions to adapt.
1. Look out for the invisible bank
One of the key fintech trends is the shift from banks as service owners to service connectors, offering features that work “invisibly” in the background of linked digital platforms. The key to success is a heavy accent on autonomous finance using AI and machine learning. Using robotic process automation, financial service providers can automate back-end processes and handle recurring tasks more fluently.
For the end user, digital banking services that leverage AI, chatbots and biometrics promise 24/7 convenience and enhanced personalization, as well as more robust fraud prevention.
2. A Fresh Perspective on Open Banking
Until now, financial institutions might have seen open banking and the revised Payment Services Directive 2 predominantly as a compliance issue. Sharing end-user banking data with third-party financial institutions via application programming interfaces posed more challenges than it offered opportunities. That attitude is now shifting, with financial service providers ready to invest in open banking as a competitive strategy. By unbundling services and outsourcing to specialist providers, banks and credit unions can offer a better user experience with faster onboarding, enhanced security and deeper insight into each end user for more personalization.
3. Empowerment for Financial-Education Tools
When financial-literacy videos are trending on TikTok, it’s a sign that the appetite for financial education starts younger than we might have thought — and urgently needs satisfying. Start-up investment is flooding into tools and apps that give users greater visibility of where their money is going, how their transactions are categorized and what insights their spending patterns reveal. “Financial health” is the new buzz phrase in banking, with the implication that financial-health scoring cannot be far behind. Banks and credit unions can respond with add-ons and tools that engage end users and help them establish strong financial habits.
4. The Changing Shape of Contactless Payments
More than half of U.S. consumers now use at least one form of contactless payment, with the pandemic motivating many to switch to “tap and go” payments for the first time. The numbers may lag behind Europe, where cash-free contactless payments now account for some 80% of in-store purchases, but we can expect contactless adoption to feature as a key fintech trend in coming years. By 2025, payments may even have moved from cards and phones to wearables and biometric devices, according to one industry expert.
5. A New Approach to Regulatory Technology
Increasingly, the challenge for financial services institutions is not pushing the boundaries of technology but operating within the constraints of laws and regulations. The ultimate goal is to offer a service that is compliant without interrupting the user experience. Once again, AI provides a solid fintech solution, harnessing the power of Big Data to spot money laundering and data breaches, for example, without requiring the end user to run the gauntlet of checkboxes, CAPTCHAs and other forms of identification. Regulatory tech will continue to emerge not just as a seamless solution to “know your customer” but also as a valuable opportunity to reduce risk and overheads.
6. Digital Ledger Tech Will Go Mainstream
The hysteria around a much-discussed Bitcoin bubble is a distraction from more measured conversations about the role that blockchain and digital ledger technology can play in the future. Until now, the focus might have been on the fluctuating price of digital currencies, but it’s time to look at long-term value. Blockchain is as much a philosophy as a technology, and the idea of a transaction record that is independent of a centralized trusted authority is an attractive proposition. With the launch of the Sand Dollar, the Bahamas became the first country to issue a central bank digital currency, with many more national banks and governments poised to invest. Expect to see permissioned digital ledgers feature more prominently in the services offered by financial institutions, where they can facilitate compliance with “know your customer” guidelines and other anti-money-laundering regulations.
7. The Growth of Payroll Fintech
Traditionally, financial institutions have concerned themselves mainly with payment technology. Now the moment is ripe to move innovation up the value chain. Payroll fintech solutions can give end users more flexible access to earned wages through features such as salary on-demand or early direct deposit. Instead of borrowing against a salary, account holders can access portions of their wages in advance. For the financial institution, there’s an opportunity to integrate payroll data with financial education and tax and loan services. For the end user, payroll fintech solutions make it easier to plan and manage payments by avoiding last-minute emergency borrowing or fines.
How Can Banks and Credit Unions Compete?
Paradoxically, none of these fintech trends signals the demise of traditional banks and credit unions. Fintech is certainly disrupting the landscape, but it is not changing the fundamental principle of financial services. That’s because although Big Data is the dominant catalyst for change, the focus is still on the end user. Traditional banks and credit unions can integrate digital fintech solutions to their brick-and-mortar offering, facing down the challenge from branchless banks with a relentless focus on the end-user experience.
Deloitte – Bank of 2030: The Future of Banking
Gasser, Gassmann, Hens, Leifer, Puschmann, Zhao – Digital Banking 2025
KPMG – Pulse of Fintech H2’20
International Banker Fintech Trends 2021