Recent technological developments like generative AI, open banking, and decentralised finance will be critical to the financial industry's future, stability, and growth. The list of the financial sector trends and developments includes some transformative solutions that are here to stay.
➔ Technological Innovations Driving Change: New technologies, such as generative AI, open banking, and decentralised finance (DeFi), hold the key to the future of financial system, their interaction with customers, and improving services.
➔ Financial Inclusion as a Global Priority: The financial industry is paying more attention to people's basic needs, especially the financially excluded, mainly via digital channels in emerging markets.
➔ Regulatory Developments in DeFi and DLT: DeFi and DLT are now coming under regulatory pressure, with the EU’s DLT Pilot Regime and the UK’s Digital Securities Sandbox offering safer spaces for innovation.
➔ BNPL and Open Banking Growth: The Buy Now, Pay Later (BNPL) model and open banking are revolutionising consumer finance. These financial sector trends indicate that both sectors will experience immense growth by 2032 due to consumers’ demand for convenience and flexibility.
➔ Sustainability in Financial Services: More and more financial institutions have integrated ESG factors into their investment decisions and adopted energy-saving and environmentally friendly strategies in line with the international community’s fight against climate change.
➔ Disruptive Innovations: Modern, robust innovations keep changing financial services' structure, delivery, and consumption. Although economic outlooks for 2024 are relatively low, we can foresee a mild slowdown in economic growth in a cautious, optimistic way.
The following year also poses other challenges; even though inflation will likely slow down, consumer demand changes and a downward trend in housing prices will continue. However, armed with solid technological breakthroughs, the financial services sector is ready to respond to these requirements and challenges appropriately.
This article discusses critical technological trends and developments in the financial services industry. Comprehending and integrating these developments will give your organisation a competitive advantage and improve its operational performance.
Recent technological developments, such as generative AI, open banking, and decentralised finance, will be critical to the financial industry's future, stability, and growth. Below, we will discuss each of them.
This pillar explores the impact of industry transformation on the financial system’s dual objectives: capital allocation promoting economic growth and financial stability that would assure continuous confidence in the system. Focus areas include:
• The fast technological development in the financial system and the resulting public policy issues.
• The transformative impacts of regulatory policies on financial systems.
• Effect of alternative credit strategies on different economic sectors.
Building a framework for inclusive economic growth is a big challenge for the financial sector. Despite the apparent demand for financial services at all income levels, supply has been insufficient. Thus, many people are driven towards risky, costly savings, borrowing, and asset security alternatives.
A portfolio of “impact” projects seeks to recognise and seize the best opportunities to improve access to affordable and high-quality financial services for the unserved and underserved. Current initiatives include digital Inclusion, which involves seeking to facilitate the incorporation of large traditional retail markets into the financial mainstream with a focus on Indonesia, India, and Mexico.
The latest developments in generative AI have reshaped many financial offerings, including personalised customer experiences and improved operational efficiency, data analysis, customisation of financial products, and more.
The market is expected to grow to $118 billion by 2032, providing custom investment strategies and financial advice according to individual customer behaviours and preferences. The innovation already saves billions for banks and will grow as market values are estimated to skyrocket.
The open banking market is projected to surge, possibly reaching $164 billion by 2032. Powered by API technology, open banking changes the traditional process of sharing and using financial data, creating a customer-oriented, secure, and innovative financial environment. Customer demands are set to drive open banking innovations more and more, with users wanting faster, more comfortable, and more personalised banking services.
A report by PwC expects that around 71% of small and medium-sized enterprises (SMEs) will adopt open banking by 2024 to improve their service offerings, including real-time payments and advanced financial management tools, competitive lending rates, and bespoke insurance products, among other benefits. The success of open banking depends on a solid regulatory framework, robust security measures, consumer protection, and the industry's ability to innovate and meet customers' needs.
Recommended Read: How Does DeFi Work?
Decentralised Finance (DeFi) and Distributed Ledger Technology (DLT) will be used in the future of the financial system as they seek to decentralise and revolutionise global financial markets. According to Statista, DeFi is expected to grow at a compound annual growth rate (CAGR) of 42. 6% and the market for DLT is expected to grow to $140 billion by 2030.
Image: How distributed ledger works, by Freepik
DeFi, building upon DLT, such as blockchain, enables various financial applications and services—lending and borrowing, asset trading, and risk management—on a decentralised platform. A report from Deloitte points to the transformative potential of DeFi to create an ecosystem of open, inclusive, and fairer financial markets available to anyone with an internet connection.
Worldwide, the growth of DeFi and DLT is increasingly coming under regulatory attention. The European Union’s DLT Pilot Regime is seeking to establish a sound platform for trading and settling transactions in financial instruments on DLT platforms, providing legal certainty and regulatory clarity. This initiative is critical to the adoption and development of DeFi and DLT.
Similarly, the UK’s Digital Securities Sandbox allows companies to experiment and develop digital securities trading in a safe and protected environment, meeting compliance and consumer protection.
Buy Now, Pay Later (BNPL) is a new model in financial services that has changed how traditional credit is obtained. It is more prevalent among low-credit consumers because it offers interest-free, fixed instalments that are due in a shorter period, such as three months.
This model is less risky than credit cards, and companies like Apple already use it. Juniper Research predicts that BNPL will represent 1/4 of all e-commerce transactions by 2026, more than triple the 2021 figure, illustrating the innovation’s massive potential.
Financial gamification is a concept that uses gaming components such as graphics, point systems, challenges, and rewards to improve customer engagement and knowledge of financial services.
Image: Gamification in financial services, by Freepik
This approach makes financial topics impersonal and informative, providing people with the knowledge to make informed decisions. Financial institutions are set to introduce even more gamified elements in their offerings to make the segment more aware and involved.
Recommended Read: Game Finance (GameFi): What's So Attractive About It?
A recent trend in robotics is its integration into fintech. This enables higher automation, improves service delivery, data processing, and fraud detection, and provides faster and more accurate operational flow.
To illustrate, robotic process automation (RPA) focuses on simplifying rule-based tasks, which allows financial institutions to allocate resources to service areas that require more complexity. In addition, robo-advisors are becoming increasingly popular as they provide users with automated, algorithmic investment methods.
Sustainability in the financial services industry is becoming increasingly important as organisations and consumers focus on socially and environmentally responsible behaviour.
FinTech companies are embracing green initiatives through paperless transactions and investments in sustainable technologies, which aligns the financial services industry with the global move to address climate change and achieve a sustainable future. Hence, many fintech platforms are expected to incorporate ESG criteria in their approaches to promote responsible and ethical investment.
As the industry grows, some challenges for financial services should be addressed to ensure its further development. The first challenge is economic instability, which results from fluctuations in inflation rates and changes in the consumer’s purchasing power. This greatly influences the performance of financial institutions. Also, the increase in housing prices can lead to economic pressure for borrowers, so banks and mortgage companies need to be more flexible.
Another concern is meeting legal requirements. New technologies such as DeFi and open banking, to which governments and regulators pay more attention, mean financial institutions must be cautious about the legal issues surrounding them. Another challenge are the increasing cybersecurity risks, which require financial institutions to spend more on the latest security technologies to counter hacking and other forms of fraud.
Financial services are shifting in an often-unpredictable manner and pace, with both opportunities and risks. To be competitive in the ever-demanding market, financial services providers must innovate in areas such as AI and blockchain. However, the key to long-term success will be managing these investments with an added focus on cost and value provided, and guaranteeing that all consumers, including those in the underpenetrated markets, reap the benefits of these developments for years to come.
The future of financial services lies in between–the progress that is too fast for some and too slow for others. The combination of radical transformations in financial services and innovative technologies will shape the future of financial services firms. These technologies include generative AI, blockchain, VR/AR, and environmental-conscious innovation, among others, and will tend to make the industry more personalised, efficient, and sustainable.
The future of the financial industry will depend majorly on innovation such as artificial intelligence (AI), open banking, and blockchain technology. Such technological developments will enable financial services providers to offer improved, cheaper, and personalised financial solutions.
As a result, fintech will grow further thanks to generative AI, decentralisation, and environmental friendliness that will improve the accessibility and efficacy of financial services.
Some financial sector trends that will shape the future are open banking, the growth of artificial intelligence in customer relations and operations, and the emergence of digital and decentralised banking services.
Open banking, real-time payment (or instant payment), AI-powered banking and customer support, and blockchain applications are expected to become the next big things to take over the industry.
There are four big trends in financial services and fintech at the moment, and they include:
• The rise of decentralised finance (DeFi).
• The integration of finance into other industries.
• The increased application of AI and automation.
• The focus is on building customer loyalty.
The use of generative AI in financial services has been felt in personalised investment advice, improved business processes, and speedy decision-making through data analysis.
Consumers gain from improved control of their data, improved access to tailored banking services and increased financial information.
The financial services industry increasingly pays attention to sustainability as ESG standards enter the mainstream and businesses go greener with their operations to meet world sustainability goals.
DeFi is set to offer a more inclusive approach of financial services compares to traditional finance which would eliminate intermediaries. This will enable more transparent and inclusive financial markets to anyone with an internet connection.
Technological advancements are set to massively impact the financial future, with artificial intelligence (AI) and blockchain leading the way. These innovations will make financial services easier, more efficient, and more affordable and help spread financial inclusion globally.
This article is for informational purposes only and not intended as investment or financial advice. It contains opinions and speculations that are subject to change without notice.
The author and publisher disclaim any liability for decisions made based on the content of this article. Readers are advised to conduct their own research and consult a financial advisor before making investment decisions.
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