The financial services industry experienced rapid digitization throughout the COVID-19 pandemic, and growth of the financial technology market is expected to continue in 2023. The global fintech market grew to $158.9 billion in 2022, and projections estimate it will continue to grow at a CAGR of 17.7% over the next five years, reaching a value of $449 billion by 2028. Fintech is a broad industry that includes digital banking services, payments, online investment, marketplace lending, cryptocurrencies, NFTs, and more. With such a wide landscape, there is ample opportunity for innovation, so we can expect exciting developments in the space as the market continues to expand this year. Top fintech trends that we expect to grow in 2023 include Artificial Intelligence (AI), digital payments, and embedded finance.
Artificial Intelligence will continue to grow in the financial sector in 2023, as more institutions seek to reduce costs and improve business processes. The global value of AI in FinTech is projected to reach $7.9 billion this year, registering a steep growth rate of 49.6% between 2018 and 2023. We can expect AI and its subset Machine Learning (ML) to soon become a cornerstone for the financial services industry. By automating processes using AI, organizations can streamline time-consuming tasks while improving overall accuracy and efficiency. Use cases for AI in finance include lending and investing services, data management, risk assessment, fraud detection, customer service, and more.
The latest advancements in conversational AI, like Chat GPT, have gained mainstream popularity in recent months, and financial institutions are recognizing the tech’s potential for customer service. According to Forbes, one in four credit unions have plans to invest in conversational AI in 2023. While customers prefer interacting with humans over chatbots—especially bots with scripts limited to general FAQs—the latest conversational AI technology has the potential to serve as effective support for both customers and employees. Conversational AI can be trained with a deep data library, and has the capacity to analyze language usage patterns, so it can understand inquiries and act as a knowledgeable banker to guide customers through their financial questions. Conversational AI’s ability to use natural-sounding language helps humanize the experience for the customer, so the support experience feels more personalized. Adopting this technology can help banks bridge the “personalization gap” that a 2022 Cornerstone Advisors Report identifies as a weakness affecting 94% of banks. This year, we will see more financial institutions adopting intelligent digital assistants as part of the team.
The payments space is evolving rapidly, and consumers and businesses have been moving away from cash in favor of other payment methods for the past decade. Contactless payments, which include payments made with cards, mobile apps, and digital wallets, are a secure form of payment that operates using near-field identification or radio-frequency identification (RFID) at point of sale. To complete a contactless payment, customers simply hold their mobile phone or card in close proximity to a retailer’s card reader, which then automatically communicates with the payment method. The pandemic accelerated the adoption of contactless payments for many businesses, growing from an estimated 18% of all transactions in January 2020 to 43% in October 2021. A report by Juniper Research predicts that payments from mobile devices will outpace other forms of contactless payments this year, with transaction volumes doubling from $26 billion in 2021 to $49 billion in 2023.
In addition to the retail space, payments modernization is happening at the federal level in the US. Federal Reserve Banks are developing FedNow, an instant payment service that is slated to be released mid-2023. Through financial institutions that participate in FedNow, businesses and individuals will be able to send and receive real-time payments with immediate access to funds. FedNow will be the first new federal payment infrastructure in the US since ACH was introduced in the 1970s. On the new payment platform, clearing functionality will be incorporated into the settling process of each payment, allowing for instant exchange of necessary account information. FedNow will expedite B2B payments, payroll deposits, and account-to-account transfers, giving individuals more flexibility to manage their money and make instant payments 27/7, even on weekends and holidays. While many non-bank payment platforms like Paypal and Venmo already offer instant transfers and payments, FedNow will open up instant payment functionality to more banks, including smaller community banks. The competitive pricing structures of FedNow will help more small banks adopt the service, allowing local businesses and individuals to have instant access to their money.
This year, we also expect more businesses to add embedded finance options to their digital environments. Embedded finance is the integration of a financial service directly into a non-financial product or service, creating a convenient, seamless experience for the customer. Payments are the biggest use case for embedded finance, and companies like Apple, Starbucks, and Uber have been the most successful in implementing embedded payments into their platforms. By securely storing credit card info in the app, the act of paying becomes invisible, making it easier to complete purchases, and increasing customer satisfaction and loyalty. According to estimates by Statista, embedded finance in the United States is expected to grow to $230 billion in revenue by 2025, compared to the $22.5 billion it generated in 2020.
The fastest-growing embedded payments model is Buy Now, Pay Later (BNPL), which offers short-term financing directly at point of sale. The e-commerce boom of the COVID-19 pandemic helped BNPL grow rapidly in just a few years; a report from the CFPB found that loans issued on BNPL platforms increased tenfold between 2019 and 2021. In 2022, the global BNPL market was valued at $22.86 billion, and forecasts estimate the value will reach $90.51 billion by 2029. BNPL services are loved by merchants and shoppers alike, so we can expect to see more online retailers integrate BNPL services into their platforms this year.
With rapid digitization happening across the financial services landscape, demand for technology that will streamline business processes and create a more convenient customer experience will continue driving innovation. Financial institutions making plans for digital transformation should consider the trends outlined above to have an impact on the future of your firm.
When planning your organization’s investments in technology, it’s important to work with an experienced partner to guide you along the way. At Sourcetoad, we’ve been building financial software applications for more than a decade. Our dedicated team of industry experts loves to tackle complex business problems, and we welcome the opportunity to work with you to create a successful project.
If you have questions about developing custom finance software for your business, reach out to schedule a 30-or 60-minute call. We’d love to introduce ourselves, learn about your needs, and hear how we can help turn your idea into reality.