In 2023, startups faced challenges in fundraising amid macroeconomic uncertainty. Capital became expensive due to interest rate hikes, and investors became cautious due to market downturn expectations. Valuations consequently declined, leading to flat or down rounds. The aftermath included a historically low number of IPOs. Early and mid-stage funding saw a resurgence in 2023, surpassing 2020 levels.

While early and mid-stage companies experienced a boost in funding, the late-stage sector encountered a funding squeeze. The preference for business models also shifted from rapid hyperscaling to prioritizing fundamental and sustainable unit economics. 2024 will be a pivotal year for fintech, while navigating the investment ecosystem will remain a challenge.

Below, we touch upon some of the key megatrends we see coming in fintech in 2024.

Fintech Trend #1: Sustainable finance

The world is currently not on track to achieve the Paris Agreement's goal of limiting global warming to below 2°C. Progress towards net-zero emissions has been slow, with a 60% increase in CO₂ emissions from energy and industry since 1992. Despite some momentum, achieving net zero by the end of the century is doubtful based on current trends.

Key considerations for incumbents include:

1. Embracing renewable energy sources to transition to cleaner alternatives and reduce reliance on fossil fuels.
2. Utilizing carbon capture and accounting technologies to capture and manage emissions for accurate measurement and reporting.
3. Implementing circular economy practices to minimize waste and promote resource efficiency in business operations.
4. Adopting precision agriculture with technologies like IoT sensors and data analytics to optimize resource use, reduce waste, and mitigate climate risks for farmers.

The Voluntary Carbon Market (VCM) is a segment where entities voluntarily buy carbon credits to offset their greenhouse gas emissions. Unlike the compliance carbon market regulated by governments, the voluntary market is driven by entities taking voluntary actions to address climate change. Valued at $2 billion in 2021, it's projected to reach $40 billion by 2030, with multinational companies being primary buyers.

Challenges in transparency arise, especially with emerging technologies, but various technological solutions are being implemented. Automated verification tools streamline processes, predictive analytics optimize emissions reduction, and blockchain ensures transparent transactions. Smart contracts eliminate intermediaries, and distributed ledger technology facilitates efficient data capture and tracking. These tech solutions aim to enhance efficiency, transparency, and equity in the Voluntary Carbon Market.

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ESG regulations and reporting requirements are tightening, leading to scrutiny of existing ESG ratings. Challenges include a lack of transparency, standardization, and accurate granular data, raising concerns about greenwashing. This is crucial for the venture capital industry as public investors are now required to disclose the environmental impact of their investments, extending ESG reporting throughout the value chain.

Fintech Trend #2: Generative AI and RPA

In 2023, Generative AI, exemplified by Open AI's ChatGPT, gained prominence for producing various content types. However, enterprise adoption of AI systems faced challenges, with only a small percentage managing implementation due to integration complexity, data quality issues, and technical challenges. Aligning AI with industry practices emerged as a crucial challenge, emphasizing the need to embed human values and objectives into language models and comply with relevant regulations.

There are key challenges associated with gen AI:

• Slow adoption
• Alignment with industry practices
• Multimodal approach
• Verticalization in fintech

Over the past decade, Robotic Process Automation (RPA) has become prominent in B2B software tech. A report (Forrester, 2022) predicts the market size to reach $22 billion in 2025. RPA utilizes automated "bots" to handle high-volume, low-complexity, and repetitive tasks, freeing up human resources for more valuable tasks, reducing costs, and operating error-free 24/7. In the banking sector, RPA is particularly well-suited for back-office functions like transaction processing, data manipulation, query responses, and system communication.

In the current fintech landscape, RPA is expected to be a significant trend as banks actively aim to reduce costs and workforce, seeking innovative solutions to streamline operations through workforce reduction and increased automation.

Fintech Trend #3: CFO (Chief Financial Officer) Tech and B2B Stack

Finance teams face challenges managing and analyzing data due to its disparate nature, involving tedious processes of collecting and cleaning data from various sources. The next generation of financial tools aims to automate workflows, enhance collaboration, and empower teams for a more proactive approach across the value chain. In 2024, the FinTech tech stack will include programming languages, frameworks, databases, and applications connected through APIs. Choosing the right tech stack is crucial for fintech startups, especially with the expected rise in cutting-edge technology use, including blockchain, AI, and IoT in financial transactions.

Fintech Trend #4: WealthTech empowering financial prosperity

Asset tokenization is gaining traction, boosting liquidity and investment opportunities. The trend is driven by transparency, lower transaction costs, and improved security. The European security token market is expected to grow 81% annually, reaching €918 billion by 2026. Financial institutions like JPMorgan and ABN AMRO are adopting the trend, developing infrastructure for the digital economy.

Alternative assets, such as private equity, luxury goods, art, and real estate, offer diversification for investors. Empowering both institutional and retail investors to allocate funds to these alternatives is a key focus. Educating investors on benefits like hedging against inflation, portfolio diversification, and higher returns is crucial for customer acquisition.

Private banking, once exclusive to HNWIs, is now becoming more accessible, a trend known as private banking democratization. Fintech platforms are driving this shift, making private banking more efficient and inclusive for personalized wealth management services to a broader audience.

Early crypto custody leaders like Fireblocks and Gemini, driven by the initial crypto bull run, faced trust issues after scandals in 2022-2023. Traditional financial institutions, including banks, stepped in to address the demand for secure custody solutions. Beyond traditional finance, digital wallet technologies present a significant opportunity for customer engagement. Examples include Lufthansa's NFT-based loyalty program and Nike's web3 marketplace, SWOOSH.

As of 2022, the US and Europe ETF market stands at around $6.7 trillion AUM, experiencing growth in areas like Pure Active, Thematic funds, and Smart Beta Funds. Custom indices, allowing more targeted investment strategies, have been a key driver. Many asset managers lack in-house capabilities for index development and benchmarking. In the coming year, companies like Foxberry and Merqube are expected to play a crucial role, providing infrastructure for designing and maintaining indices, especially for thematic ETFs.

Fintech Trend #5: Next generation KYB/KYC and AML

Financial crimes and fraud, costing up to $3.5 trillion annually, remain a persistent challenge, exemplified by FTX's $14 billion fraud. The evolution of AML (Anti Money Laundry) solutions from mobile-driven to AI-backed platforms in 2022 has introduced a new generation of technologies. These utilize generative AI, modular architecture, and real-time decisions, enhancing user behavior analysis and reducing false positives. Looking ahead to 2024, advanced generative AI models are expected to positively impact KYC/KYB/AML frameworks. Compliance 2.0 startups integrate KYC (Know your Business), KYB (Know Your Customer), and AML capabilities, emphasizing continuous customer monitoring, streamlined onboarding, and ongoing anti-fraud controls.

Conclusion

The trends we've explored shed light on the exciting opportunities and inevitable challenges awaiting the fintech landscape in 2024. Startups and incumbents will need to adeptly respond to disruption across several megatrends. Unlock deeper insights into these transformative trends and uncover the trailblazing startups that are propelling financial institutions into a new era of change in 2024 in our Fintech Megatrends Report. Stay ahead in the dynamic world of financial technology!