State of play: US fintech

Each month, Philip Benton, Principal Fintech Analyst at Omdia, explores a new topic and assesses the “state of play”, providing an analysis and understanding of the market landscape.

FinovateFall was held in New York City in early September

This month, Philip takes an in-depth look at US fintech.

Finovate hosted its flagship event, FinovateFall, in New York City earlier this month. Finovate is renowned for fintech demos where start-ups have just seven minutes to demonstrate their technology, and I was lucky enough to be amongst those in attendance. It provides an ideal setting for assessing the state of play of US fintech, which will be the focus of this month’s column.

The US fintech sector is unique

As a Brit, I find the US fintech sector equally fascinating and baffling. New York is home to some of the most innovative fintechs in the world, yet contactless technology is seemingly still a novelty in most shops and restaurants, where I’m expected to write down my tip and assume the correct payment is taken.

However, when you consider the country is home to more than 10,000 financial institutions across 50 federal states, it is no surprise that change doesn’t occur as quickly as you might expect.

The US is home to a vibrant fintech scene and accounted for almost half of global funding deals in 2023, according to S&P Global Market Intelligence. It is the growth of fintechs that has forced banks and credit unions to modernise and innovate that much faster, with Finovate the premier fintech showcase.

‘Best of show’ winners illustrate diversity of US fintech

FinovateFall was host to 65 demoing companies ranging from regtech and payments to wealth management, lending and beyond. Eight of which were lucky enough to be crowned ‘best of show’. What struck me most was the diversity of solutions that won, and despite AI dominating a lot of the demos, only two of the eight winners were AI-led demos (Nest Bank’s virtual AI-powered assistant and Delfi Labs’ AI-driven risk management platform).

The most memorable demo for me was surprisingly a software tool for branch expansion, with Bancography’s presenter packing more in seven minutes than most would manage in seven hours. Despite many banks closing their branches due to the popularity of digital banking, 60% of US consumers and businesses still visit a branch on a weekly basis.

My favourite demo was from Credit Mountain due to its simplicity. Its platform intervenes when an applicant is declined for a loan, digitalising the process and providing transparency to the applicant as to why they were rejected and the actions needed to be approved – the ‘path to yes’. Not only does it make the decline process more efficient (saving banks money by not having to send out needless decline letters), but it also helps them to retain, nurture and cross-sell to declined borrowers.

I didn’t witness it live, but the demo I was told most about by other attendees was a Y Combinator-backed start-up called CardLift, which only officially launched in August 2024. CardLift enables companies to build a co-branded extension for their partners that automatically finds and switches users’ card-on-file to their partners card, allowing consumers to choose the card which maximises the card rewards for that specific transaction. Browser extensions are a neat overlay – I’m a regular user of PayPal Honey, which automatically applies online coupons to e-commerce websites – and I think the concept has a lot of potential.

Risk management takes centre stage with regulatory focus on BaaS

Unlike most other fintech events, Finovate doesn’t set a “theme”, which ensures market trends dictate the demoing and exhibiting companies in attendance. Regtech (regulation technology) was evident throughout, and three of the eight ‘best of show’ winners had a regtech focus: investment risk management platform Delfi Labs, voice authentication and fraud prevention firm Illuma, and governance and compliance risk specialist Themis. Omdia identified “meeting regulatory requirements” as a top three IT priority for 43% of respondents in its IT Enterprise Insights: Retail Banking – 2024-5 survey.

US regulators have had their sights firmly on third-party risk management this year, with Banking-as-a-Service (BaaS) providers (and in turn their sponsor banks) under scrutiny. This was discussed at length during the panel discussion “Why BaaS is facing regulatory headwinds”, with panellist Kiah Haslett, a banking and fintech journalist, commenting on the popularity of fintechs having taken regulators by surprise. “Fintechs are a victim of their own success. Consumers don’t realise that fintechs aren’t banks. Banks have all the accountability to the regulator. Fintechs don’t have the responsibility,” she said.

Third-party risk management is also under scrutiny because of the increased cyber threats that banks face. The current cybersecurity threat landscape remains dynamic and challenging. New threats continue to emerge as adversaries leverage new technologies, such as generative AI, to create new methods of attack. Traditional attack vectors, such as phishing, continue to confound even savvy end users, while traditional criminal business models, such as ransomware, continue to mature and evolve.

Across the pond, European banks are preparing for DORA (the Digital Operational Resiliency Act), which forms the European Union’s ongoing attempt to weave together an industry increasingly reliant on an intricate network of connections. Similarly in the US, that ecosystem is increasingly important, with demoing company iDentify showcasing their platform’s ability to organise third-party data sources to ensure compliance, including pre-built connectors with the likes of FIS, nCino, and Jack Henry.

AI is everywhere in fintech, but it’s still at a nascent phase

Artificial intelligence has been the theme that has dominated conferences for the past two years, and FinovateFall was no exception. Omdia, in its report ‘AI in Financial Services’, found that return on investment will initially be delivered on efficiency gain and not revenue growth, with the priority for financial institutions to identify use cases where AI can enhance, not replace, existing processes. Chris Brown, President of Intelygenz USA, echoed this point of view during his keynote, saying: “85% of AI projects fail. Failure isn’t because it’s an immature technology, but too many organisations get bogged down in the hype, rather than practical applications.”

Omdia’s AI in FS report also uncovered the leading AI use case from a software perspective to be virtual assistants, anticipated to generate software revenue for IT vendors of more than $2.6 billion by 2028. Although many banks are striving to be the “first” to launch GenAI-based virtual assistants as a tool for attracting new customers, there is a danger that it could alienate existing customers if not executed effectively. ‘Best of show’ winner Nest! Bank demonstrated strong execution with its AI chatbot, N!Assistant, which is able to understand complex context and deliver simple answers to intricate questions. Nest! Bank uses AI to understand the intent by dissecting information into smaller chunks to make more reliable prompts and minimise hallucinations.

The other interesting AI applications on display at FinovateFall included Sei AI, who build AI agents for fraud and compliance teams with their bot, which is able to review call transcripts in real-time to flag potential issues and can monitor communications conducted by third-party partners. Meanwhile, Carrington Labs uses explainable AI for loan underwriting, another key application identified by Omdia, with its platform providing a suggestion of the optimum amount to loan out based on the lender’s appetite. Finally, Zingly.AI showcased its ability to personalise communications using its AI chatbot which specifically targets dormant customers, who the start-up claims are three times more likely to engage in marketing communications than a new prospect.

Many international fintechs (Monzo and N26 to name just two) have struggled to break the US market, perhaps underestimating the difficulty of replicating their domestic success. I was even told by a US representative of a European fintech that when speaking to US bankers, they simply don’t care about European logos no matter the size, which highlights the uniqueness of the US market. Despite a decline in venture capital funding rounds due to challenging macroeconomic conditions, it was evident at FinovateFall that US fintech continues to thrive.

About the author

Philip Benton is a Principal Fintech Analyst at Omdia and writes analysis on the issues driving technological change in financial services. Prior to Omdia, he led consumer trends research in retail and payments at strategic market research firm Euromonitor.

In this column, Philip discusses the technological implications and consumer expectations of the latest fintech trends.

You can find more of Philip’s views on fintech via LinkedIn or follow him on X @bentonfintech.