Instant payments, BaaS and GenAI: A fintech industry review of 2023
2023 has proven to be another transformative year for the fintech and banking sectors, which have come together to inspire, indulge, and instigate disruptive innovation across all aspects of their services.
FinTech Futures joins the industry in taking a look back over 2023
With the end of 2023 on the horizon, FinTech Futures takes a look back over a year full of highs, lows, innovations, challenges, and transformative moments across the fintech landscape, featuring insights from the likes of JP Morgan Chase, Citi, IBM, Nova Credit, and Arteria AI.
All in for AI
Artificial intelligence (AI) has taken the opportunity to firmly and forever make its mark within all faculties of financial services. Building on the successful applications of previous years, the technology has this year, with the rise of generative AI (GenAI) in particular, become a proven mainstay in the realms of credit decisioning, operational efficiency, risk management, anti-fraud efforts, and ultimately, the realisation of key growth areas.
This is evident in the case of Arteria AI, a start-up using the technology to automate manual documentation processes. The company raised $30 million in a Series B round in October, with its co-founder and CEO Shelby Austin describing 2023 as “a formative year in the world of fintech”.
“In banking specifically, AI remains a catalyst for core strategic priorities,” she says, citing strengthened demand for AI-powered software in core transformation areas.
“Offerings that can augment top-line functions, improve client service, better control risk, and reduce operating expenses remain in high demand.”
Yet despite AI’s “meteoric rise” throughout the year, Austin asserts that the journey “has not been short of challenges”.
She says the macro environment and increased cost of capital has “punished inefficient growth” for all start-ups, and that “a premium has been placed on strong fundamentals and tangible value”, coming in tandem with increasingly conservative investment strategies and restrictive operating budgets.
Other notable movers in the space include IBM, which launched its AI and data platform Watsonx in May along with a $500 million venture fund for AI start-ups.
Nick Levy, consulting partner at IBM, says it has been a year of “ground-breaking achievements” for the technology at large.
“Across the fintech and banking sectors, we have witnessed a remarkable surge in the exploration and adoption of AI technologies. The industry’s rapid pace in integrating AI solutions underscores a shared commitment to harnessing the power of intelligent technologies to drive innovation.”
All of these industry developments have been backed by a growing regulatory stance on how AI, and particularly GenAI, should be used. IBM was among those to support the arrival of new legislation with the introduction of its compliance toolkit, Watsonx.governance, this year.
One of the forerunning legislations within the offering’s sightline is the EU AI Act, a landmark regulatory effort being led by the European Parliament to make all systems at play within member states “safe, transparent, traceable, non-discriminatory, and environmentally friendly”.
Working in conjunction with the Digital Markets Act, Digital Services Act, Data Governance Act, and Data Act, this fifth pillar of EU legislation sealed a provisional agreement earlier last month, and is expected to continue its passage into law over the coming year.
Instant payments
Keeping on the theme of European regulatory shifts, 2023 has become synonymous with appeasing the industry’s insatiable need for speed.
Enabling the growth of instant payments has been a key trend over 2023
Efforts in Europe have centred largely around the connectivity and unification of different payment systems to power the realisation of the European Parliament’s SEPA Instant Payments system.
Much of the regulator’s focus this year has been on preparing industry players for its incoming mandate that would require banks and payment service providers to offer instant payments, broadening access to the benefits for consumers and businesses across the continent. The final rules eventually met the stamp of approval in November.
SEPA Instant Payments strikes key and intentional similarities to parallel initiatives currently underway over the pond. The Clearing House, operator of the Real-Time Payment (RTP) system in the US, spent most of the year collaborating with the Federal Reserve to bring FedNow into fruition in July, debuting with 35 participants.
Enabling banks, individuals, and businesses to transfer money instantly, the FedNow service has grown to 331 participating institutions as of this month.
“These are still early days for the FedNow service, and we are pleased with the robust level of adoption over the first few months as we transition from launch phase to standard operations,” says Ken Montgomery, first vice president of the Federal Reserve Bank of Boston and FedNow programme executive.
“We commend the growing number of financial institutions, service providers, and other organisations in the payment ecosystem that are embracing the vast potential of this modern, instant payments system.”
Among the first cohort of participants to lead the service’s debut was JP Morgan Payments – an increasingly active player in instant payments.
The bank leveraged its payments arm to launch a Tap to Pay on iPhone offering in August as part of a strategy Max Neukirchen, head of payments and commerce solutions at JP Morgan Chase, says was “to help streamline omnichannel payment acceptance for our merchant clients”.
“In 2023, significant trends swept through the US payments landscape, including the modernisation of payment rails, which we’ve seen transition to 24/7/365 operations,” says Neukirchen.
The appetite for instant payment capabilities remains a global trend across the industry. The South African Reserve Bank (SARB) marked its entry with PayShap, the “low-value, real-time rapid payment platform” launched by the central bank in March. The system’s reach was expedited by MultiChoice’s partnership with UK fintech Rapyd two months later.
Meanwhile, after first revealing its plans in February, the Central Bank of the UAE (CBUAE) launched its instant payments platform, Aani, in October.
Balancing act for BaaS
At the core of trends to emerge from 2023 is the desire to fulfil the needs and desires of the end consumer quickly and with as little bureaucracy as possible.
Banking-as-a-Service (BaaS) and embedded finance form convenient options for fintechs and non-bank players looking to behave with the convenience of a bank but without overcoming the necessary licencing hurdles.
First gaining traction over a decade ago, BaaS and embedded finance have earned their place within the industry’s arsenal with a continuous stream of developments.
This year, those developments have included UK-based BaaS provider Griffin landing its banking licence from the Prudential Regulation Authority (PRA), FIS’ purchase of BaaS start-up Bond, the arrival of a new “coreless” banking platform by Monese, and Citi’s launch of embedded digital payment products.
Terry O’Neil, head of connected commerce and strategic growth for Citi Retail Services, says the US bank’s launch of Citi Pay in May was part of a strategy to “embrace a new way of digital” and expand its available offerings.
“Our digital-only credit card and monthly instalment loan are designed to meet the evolving needs of merchants and consumers and deliver on the flexible, secure, and intuitive payment products at checkout that they are increasingly coming to expect.”
The launch was succeeded by the launch of the offering as a payments app on Shopify, and the unit’s partnership with payment platforms ChargeAfter and FreedomPay.
“These collaborations allow interested merchants to onboard seamlessly in a matter of weeks, helping the business efficiently scale its Citi Pay products to merchants in each of their networks quickly,” O’Neil explains.
Meanwhile, the speed of innovation across the industry has seen regulators casting a much closer eye on BaaS to ensure compliance as the space grows.
In June, the US Federal Deposit Insurance Corporation (FDIC), the Board of Governors of the Federal Reserve System (FRB) and the Office of the Comptroller of the Currency (OCC) issued final guidance for the BaaS sector to manage the risks associated with third-party relationships.
The guidance states that providers must take into account the level of risk, the size and complexity of a banking organisation, and the nature of the third-party relationship.
Legislators put forward the measures after proposing interagency guidance in 2021, with the hopes of promoting “consistency in supervisory approaches”.
Having brought its BaaS and corporate API banking platform to life in 2022 via a partnership with FIS and Treasury Prime, newcomer Grasshopper, a digital commercial bank based in New York, says the resulting sector downturn has come as a surprise.
BaaS has had a rollercoaster ride over 2023
“We knew there was regulatory pressure, but it was more of a widespread issue than previously realised,” says Grasshopper’s director of product, Luther Liang.
“Everyone in the market (fintechs and banks) is picking up the pieces from all that has transpired this year, so the ones that figure it out will become stronger than ever.”
For Lauren McCollom, director of BaaS at Grasshopper, the biggest trend to shape banking in 2023 was “redundancy, redundancy, redundancy”.
“Following major events in the banking landscape this year, many bank customers and BaaS partners wanted both redundancies in their banking infrastructure, as well as enhanced FDIC insurance,” she adds.
“The shock to the start-up ecosystem this year has opened 2024 to be the time for non-bank lenders to step up and take hold of that gap in the market.”
There’s bound to be buoyancy issues when the regulatory anchor is dropped, and despite the impact on BaaS and the wider embedded finance landscape this year, opportunities for market capitalisation appear to remain strong.
UK challenger Starling Bank announced its plans in August to take its BaaS platform, Engine, to the Asia Pacific (APAC) region, followed by French fintech Swan confirming its intention to double down on its BaaS European market presence with a recently completed €37 million Series B.
The same month, Codebase Technologies partnered with UAE-based digital commerce company Network International to bring a BaaS solution to the Levant region and made ground in neighbouring Egypt through its separate collaboration with Visa and eFinance Investment Group announced in November.
Considering market activity throughout 2023, the flyers and fallers of the BaaS and embedded finance sectors over the next year will be those who can realise the gaps for growth in the most compliant and straight-forward way possible.
Inclusive lending
As in recent years, a major trend to sustain the length of 2023 was the promotion of financial inclusion, and the continued personalisation of key services like credit and financial management.
Consumer fintech start-up Salmon opened the year by launching in the Philippines in January. Salmon’s first product offering, initially live with 30 merchants, enables underbanked and unbanked Filipinos specifically to spread the cost of payments at the point-of-sale (POS).
It went on to secure $20 million in debt financing from US investment firm Argentem Creek Partners in July, and said it would work throughout the second half of the year to scale its lending operations in the Philippines, expand its loan book, and develop and launch new products.
George Chesakov, co-founder and CEO of Salmon, describes the past year as “a year of change and opportunity” for the fintech, which he says is tapping a market that has been “unfairly overlooked by so many in the global fintech space”.
“We’ve proven there’s massive growth potential for modern financial services in this country, especially for consumer lending if you have the right technology and know-how to lend responsibly, sustainably, and profitably.”
Also realising how improved lending services advocates for financial health is US bank Chase, which reports an uptake in related consumer tools throughout the year.
Rohan Amin, chief product officer at Chase, gives the bank’s Score Planner as an example. The tool gives consumers recommendations on how they can improve their credit score, a tool Amin says has “gained significant engagement in the last few months with nearly two million plans created by customers”.
“Personalisation is also continuing to grow,” he continues. “We’re creating a more personalised experience for mobile users, serving them more relevant content right on the home screen so they can see everything they need up front.”
“We continue to focus on building these tools and evolving our app experience, with an eye toward how our customers interact with Chase products and the feedback they share.”
For credit bureau and data analytics company Nova Credit’s general manager of Cash Atlas Solutions, Chris Hansen, a deepened level of innovation in credit underwriting has “surged forward” throughout 2023, emphasising the need to connect customers with the right tools.
He says that this reached a head when the US Consumer Financial Protection Bureau (CFPB) issued its Personal Financial Data Rights rule in October.
The legislation emphasises greater consumer control over data and targets those that choose to horde rather than share it. With this, it promotes an active shift across the industry towards open and decentralised banking, which CFPB director Rohit Chopra said at the time he hoped would “supercharge competition, improve financial products and services, and discourage junk fees”.
Hansen says the move “highlights the importance of lenders adopting a consumer-centric approach to lending” and that the right partnerships will prove “pivotal for banks and lenders looking to address explainability and regulation with principled foresight”.
Saving savers
A mutual issue across the industry this year was easing the ongoing cost-of-living crisis and enabling consumers to make the most of their money, whether they were spending it or saving it.
“There’s long been an opportunity for fintech to revolutionise the American savings landscape”
Amid the current crisis, there has been a growing focus on meeting the needs of this latter action. Among the most notable efforts was the Financial Conduct Authority’s (FCA) action against disproportionate interest rate rises for UK savers in August.
The regulator’s figures at the time indicated that nine of the UK’s biggest savings providers only passed through 51% of the base rate on notice and fixed term deposits between January 2022 to May 2023. Worse yet, the same nine passed through only 28% of the base rate rise to their easy access deposits.
With these findings, it held meetings with firms to discuss whether or not their rates represented true and fair value.
Against this backdrop, a number of start-ups and digital banking challengers have looked to boost their savings offers to provide better value for savers and potentially entice customers looking for better deals away from high-street banks.
One notable mover was Kroo, with the UK challenger securing new funding this year to pioneer transparency across banking.
Also realising the need to connect savers to the most equitable savings products is the German fintech Raisin, which offers savings, investment, and pension products, and which began the year by raising a €60 million Series E.
It said at the time that it would use the fresh capital to develop new products and further establish its position within markets such as the US, where the fintech has been live since 2020.
“There’s long been an opportunity for fintech to revolutionise the American savings landscape,” explains Raisin’s US CEO, Cetin Duransoy. “Community banks and credit unions need deposits to serve their communities and don’t have the requisite deep pockets to compete with Wall Street behemoths.”
“Consumers have a high level of interest and are willing to shop around for better rates so inflation doesn’t eat away at their savings. At Raisin, we bring together these constituencies with a turnkey digital platform for small to mid-sized banks and credit unions to get the funding they need while keeping savers happy with some of the highest rates in the nation, and almost definitely higher than what big banks offer.”
In conclusion
There’s no doubt that 2023 has been an extremely productive year for the fintech and banking sectors worldwide. From the unstoppable advances made in AI to meeting the needs of the world’s most underserved communities and overcoming barriers to funding, the industry’s faced it all.
Throughout the year, there was a clear emphasis on leveraging the power of partnerships and realising that a problem shared is a problem halved. The intersection between banks and fintechs continues to develop while the demand for digital climbs to new heights.
A key takeaway from the activities of this year is that the supporting hand of regulation is being increasingly extended, not only to protect players in the industry, but to ensure that above all, consumers receive the products and services they need at the right time and in the very best way. And it’s a fair observation to say that the industry has excelled in achieving this throughout 2023.
