GenAI is more than just a complex technology evolution with serious potential to become ubiquitous in work and social life. It also has an esoteric philosophical battle happening behind the scenes. Proponents of GenAI argue that it will impact the ultimate fate of humanity; critics say it will primarily impact the fate of Silicon Valley.

Concepts such as artificial general intelligence (AGI), the technological singularity, effective altruism, the future of robotics, transhumanism, and so on make for great conversation topics (and subject matter for countless think pieces and blog posts). Yet, these topics are all secondary to the mundane day-to-day realities within banking that GenAI is well placed to transform. These more esoteric aspects of the philosophical underpinning of GenAI development are nonetheless fascinating. They will likely have a major influence on how this technology develops over the next few years. The recent drama at OpenAI and the ousting (and subsequent quick return) of CEO Sam Altman are one example.

At the center of this philosophical battle is a conflict between two schools of thought. The first is “effective altruism,” a modern rehashed form of utilitarianism that quickly goes to weird places, such as colonizing space with sentient artificial life and a strong concern over existential risks to humanity (e.g., rogue AGIs). Proponents here include Elon Musk and now disgraced and jailed Sam Bankman-Fried. The second is the “effective accelerationist” camp, sometimes abbreviated as e/ACC. Those on the e/ACC side argue that technology development and AI, in particular, are social equalizers. They believe the only moral stance is to develop these capabilities at top speed with minimal regulation so as not to impede progress. In the battle over OpenAI’s direction and management, the E/ACC proponents, backed by the significant funds and power of Microsoft, have essentially won out. Thus, the speed of GenAI development will only increase, barring any stringent regulations.

Much of the debate on GenAI focuses on these long-term and often morally grey areas, which risks distracting from the real-world impact these technologies can have in the here and now. Banking, in particular, is a key industry for GenAI, wherein routine and mundane manual processes that nonetheless remain technical and complex are major pain points for financial institution solution providers and their end users. Banking is, if anything, a practical industry. Outside of investors, it is less likely to focus on long-term projections of space colonization, AGI, or the technological singularity. Instead, banks want help with streamlining processes, generating efficiencies, and solving day-to-day problems. Areas such as payment exceptions handling, cash forecasting, reporting and analytics, and enterprise content management are the primary focus of banks today in deploying these capabilities.

GenAI providers who can help banks manage day-to-day pain points and ultimately build a clear business case will see significantly faster growth and deployment. If GenAI vendors do not focus on meeting these needs and solving actual business challenges, then many may dismiss GenAI as yet another technology hype cycle that they can ignore for the time being. Banks will need to focus on investigating and, in some cases, developing these practical use cases in conjunction with their technology partners, who will undoubtedly have less of an understanding of the needs of financial services.

Fortunately, the GenAI world is expanding rapidly, and the range of options and technology partners is advancing at a rapid pace. GenAI does not exclusively belong to OpenAI and Microsoft. Newer capabilities, such as small language models, and new players like France’s Mistral (an AI firm that achieved a double unicorn valuation of over US$2 billion on a Series A funding round), as well as development platforms like AWS Bedrock, and NTT Data, all grow the potential for banks to develop and launch GenAI solutions that can solve their practical problems.

As outlined in the recent Datos Insight Report Generative AI in Banking: Use Cases and Opportunities, less than a year after the public launch of ChatGPT, 60% of surveyed banks report they expect to launch GenAI capabilities within the next two years. That’s a shockingly high number for an industry typically seen as risk-averse and inherently conservative.

While the philosophical underpinnings of GenAI are fascinating (and frankly often alarming), banks and technology partners alike need to prioritize the day-to-day problems they face rather than get distracted by the esoteric hype and promises emanating from many. 

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Regardless of the outcome, it is likely that recent events will be seen as a milestone in the tech startup space. At the very least, they will serve as a vibe shift as banks, fintech companies, and regulators adjust to an altered landscape, where scrutiny is high and liquidity is tight. While the freewheeling, cheap money days are over for fintech for now, the need for fintech capabilities is only going to keep growing, and the market will adapt to these new conditions.

Aite-Novarica Group will be following these developments closely, but at this point it is safe to assume a few likely impacts for the broader bank-fintech partnership ecosystem as well as some implications for the wider financial services landscape. These likely impacts will be felt in a variety of different ways ranging from the immediate to longer-term shifts.

Near-Term Changes

• Existing bank-fintech partnerships will be under intense scrutiny in the near term. Fintech vendors should be highly communicative with banking partners, particularly around their financial health, existing financial institution (FI) partners, and contingency planning. Communication will remain key. Even for more established partnerships, especially with smaller fintech vendors, banks should be undertaking audits of relationships in place and pinpoint any potential pain points. Staff at all levels should brace themselves for more questions from the C-suite.
• Expect to see large financial institutions make a big play to attract potential fintech and tech clients and partners. This move will likely come as many fintech firms scramble to rebuild or reenvision their existing banking relationships, both in terms of providers of underlying banking services, as well as with their own deposit-taking institutions. Tier-1 FIs will be an attractive and logical next step for many fintech vendors (and their venture capital funders). Many large FIs have posited they want to become the Amazon Web Services of fintech—expect to see a renewed play here during current market churn.
• FIs should not assume all fintech vendors will gravitate to Tier-1 establishment bank providers and partners. Startup culture runs deep among fintech and tech companies; many will continue to seek alternatives that are more in line with their attitudes toward disruption and technological revolution. This may create opportunities for other bank partners, including regional banks and alternative providers. Early reports suggest that even neobanks and alternative providers such as Mercury and Brex have seen a major client influx as a result of the challenges at SVB.

Medium-Term Changes

• Fintech startups should become more forthcoming about support from banking partners. Agency banking models, sometimes referred to as Banking-as-a-Service, where banks provide the underlying plumbing and regulatory compliance that fintech startups need, have long been an open secret in the market. The “next big thing” in fintech has often been powered behind the scenes by established FIs with a less trendy image, but these relationships have typically been underplayed in broader marketing messages about these fintech companies being revolutionary and disruptive upstarts. Expect to see this situation flipped—fintech vendors will likely become more vocal about their banking partners as they seek to gain an image of gravitas and stability with clients and prospects.
• Due diligence is only going to get harder. Compliance is a, if not the, critical plank when navigating potential bank-fintech partnerships. While information security (InfoSec) and technical due diligence will not go away, other factors will become increasing priorities. Risk, financial and commercial due diligence (including cash runway), and governance structures have always been important, but they will be moving up on the agenda.
• Expect to see further acquisitions in the near term of fintech vendors and their related technologies. The fintech winter that began in 2022 with a slowdown in venture capital investment looks like it will continue for the time being. This suggests that there may be opportunities for market consolidation, whether that is through bank acquisitions or via competitor market roll-ups.
• Market turbulence will likely lead to a slowdown at the very least in new market entrants and angel round investments in fintech. This could give some valuable breathing room for more mature fintech vendors to grow their market presence. Proven track records and a history of stability, particularly through rocky periods, will become increasingly powerful marketing messages.

Long-Term Changes

• Integration into legacy infrastructure remains a key pain point in bank-fintech relationships. From the bank perspective expect to see a renewed focus on solutions which are easier to implement and integrate with other fintech partners, in turn achieving best-in-class capabilities. Many banks will want reassurances that, should a fintech partner face troubles, they can be removed or swapped out with less fuss. This could vary from extended usage of fintech marketplaces such as those now offered by many core and digital banking providers, through to the use of more containerized bank capabilities and fintech enablement platforms.
• Fintech platform architecture is likely to continue to change as cloud capabilities, API connectivity, and containerization of services become more important to fintech vendors. From the fintech perspective, being able to add or change banking and payment providers quickly and easily—essentially commoditizing these relationships—will become more valuable to investors and end customers alike. Likewise, expect to see more diversification in banking relationships, with fintech firms working with multiple providers, both as deposit holders and as agency bank providers.
• Expect to see renewed focus among larger fintech firms on gaining their own full regulatory compliance, all the way through to bank licensing, wherever possible. While this is easier to achieve in some jurisdictions than others, namely the EU vs. the U.S., this is likely to be a global push to greater self-reliance across many fintech startups. Fintech organizations that can operate more individually will be less prone to challenges with their bank partners. Likewise, this may give a push to regulators on fintech regulation and drive them to formalize initiatives such as fintech sandboxes and access to payment rails.

As the fintech market—and the broader technology landscape—goes through a period of turbulence, forecasts of the death of fintech are way premature. The underlying drivers of fintech from the demand side remain unabated, even if the supply side faces struggles. The shift to greater automation, personalization, usability, and embedded capabilities, not to mention the ongoing shift to data-rich and cloud-driven business processes, means the need for new technologies and innovation in financial services will carry on.

Fintech as a sector will make it through the fintech winter, and the market as a whole, including FIs and bank partners, should be prepping itself for the inevitable return of fintech spring.  

To learn more about how the commercial banking fintech ecosystem is evolving, read my recent reports The Benefits of Fintech Enablement: New Approaches to Ongoing Innovation and Commercial Banking Fintech Spotlight: Q4 2022.

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With tech stocks taking a beating in recent months, and a growing list of scandals and debacles, from the sentencing of Theranos founder Elizabeth Holmes; the drama of the self-induced implosion of Twitter; unprecedented layoffs at tech giants like Meta, Amazon, Lyft, and Stripe; and now the collapse of the reputable face of cryptocurrency via the Ponzi scheme of FTX, many would be forgiven for thinking that this will lead to a crisis for the fintech space.

Reports of the death of fintech are greatly exaggerated, but the financial services industry as a whole needs to take note that the market is at a critical inflection point, with longer-term repercussions for innovation and fintech partnerships.

Levels of fintech investment are undoubtedly dropping in 2022, and this trend looks likely to continue into 2023. Early indications suggest fintech investment will end up 41% down from the highs of 2021. However, 2021 was an outlier of a year, fueled by a craze for crypto and the very high growth seen by many fintech startups as a result of the pandemic—further buoyed by a wave of acquisitions and IPOs across the fintech space.

The Drivers of Fintech Have Not Changed

This, in turn, provided a clear and profitable exit strategy for investors, helping to fuel overall market exuberance. Despite the cries of panic among some, the slowdown in fintech investment looks more like a return-to-earth market correction than a popping of a fintech bubble.

The fintech industry undoubtedly benefits from the fact that these companies tend to be revenue positive early on, with clear profitability models and scalable models for growth. While some subsectors, such as crypto, are undoubtedly in for a very bumpy ride, other areas such as payments, lending, cash management, customer experience, trade finance, and so on have seen significant growth in recent years.

There is little to indicate that the underlying market drivers of this growth (shifting customer expectations, regulatory drivers, new routes to market, embedded finance, etc.) will experience any significant shift in the near term. Even recent fintech unicorns like Stripe and Adyen look likely to survive long term even if their stock prices take a momentary dive.

Down With Visionaries, Up With Business Fundamentals

Undoubtedly, however, the broader technology and investment space is changing. At the root of much of this change is the fact that interest rates are rising, and money is not as cheap as it once was. As a result, investors throwing money at what some would call “tech visionaries” and others would call “idiot CEOs” is likely to wane for the foreseeable future.

Barefoot gurus focused on creative destruction and plans to grow users, but with no clear path to revenue, will face growing levels of questioning and lower levels of investment (hopefully). Expect to see a return to a focus on revenue models, efficiency, and good corporate governance across all technology sectors, including fintech.

With Mark Zuckerberg spending billions so far on the metaverse, with little to show for it and even less market interest (and much internet mockery), and Elon Musk seemingly turning into the Liz Truss of technology at surprising speed, blindly following the whims of autocratic technology leaders will no longer be acceptable to investors—or to potential banking partners.

Essentially, the fintech space is likely to see a tightening of belts and a closer look at first principles and business fundamentals. Ultimately, this will benefit the broader financial services space as it will help weed out weaker fintech startups without a solid grounding and help existing financial institutions (FIs) have greater assurance in the capabilities of their fintech partners.

The recent employee churn in technology also holds further opportunities for FIs and existing fintech vendors. Long-sought-after talent is suddenly becoming available on the market, which should provide good staffing opportunities (as long as FIs do not insist that employees sign decrees of being “hardcore”). Expect to see further acquisitions in the near term, albeit with less volatility than recent headlines have shown.

To learn more about how cryptocurrency is impacting the financial services industry, check out some of our latest cryptocurrency research or reach out to me at gubaghs@datos-insights.com.

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With an estimated 16% of Americans now owning some form of cryptocurrency, the fallout from this latest bubble burst could serve as a turning point in the market and how banks treat cryptocurrency. Cryptocurrency is likely to rebound from these latest crises, but it is imperative that banks begin to ask the emperor exactly what he is wearing.

The Rise of Crypto

Interest in cryptocurrency-related technologies hit record highs in 2021; KPMG estimates that US$210 billion worth of private equity and venture capital investments were made into crypto-related firms last year across 5,684 deals.

This comes against a backdrop of growing marketing toward consumers to invest in cryptocurrency, with notable cultural markers such as Super Bowl ads, the renaming of sports arenas, and high-profile celebrities such as Matt Damon and Larry David giving the technology a familiar face, even if they remain vague on what the technology is or what it does.

Adding fuel to the fire has been the sharp rise of NFT hype—and the subsequent collapse against much public mockery—as well as emerging promises from tech giants that the future of the internet resides in building blockchains tied to everything, financializing all aspects of life and driving us toward a Web3, decentralized Metaverse future. 2021 even saw El Salvador become the world’s first country to accept bitcoin as legal tender.

With Great Growth Comes Great Volatility

But the challenge with the bold proposals, hype, and huge levels of investment pouring into cryptocurrency is that it remains a horrible form of currency that offers no benefits over existing payment mechanisms. The volatility of cryptocurrency is already well noted and understood, but more crucially, the transactions per second rate (TPS) remains ludicrously poor. Bitcoin averages 7 TPS, Ethereum perhaps double that. Visa holds an average TPS of 1,700, while Mastercard claims a maximum TPS of over 5,000.

Furthermore, the immutability of the blockchain under almost any cryptocurrency means that reversing payments or solving disputes are usually impossible and at best extremely difficult. If users are hit by scams, they often have little recourse or potential for redress. These challenges have notably increased, with total crypto-crime levels reaching US$14 billion in 2021, almost doubling from 2020 levels according to research from Chainalysis.

While cards globally saw losses of nearly US$28 billion in fraud in 2020, this is against a backdrop of enormously higher transaction numbers along with regulations and security measures. Furthermore, while Decentralised Finance, aka DeFI, is aimed at liberalising financial services for end users, it also places all risk squarely on said users, an outcome most consumers and businesses are unlikely to find acceptable.

Ironically, the best way to help combat crypto-crime is through more centralization and regulation, precisely the sort of approach decentralized cryptocurrency is supposed to avoid.

Behind the Hype

While the hype for cryptocurrency has undoubtedly gone mainstream, the average number of bitcoin transactions per day has declined slightly in recent years. The bitcoin blockchain recorded a global average of 245,000 transactions per day in January 2022, down from over 350,000 per day in early 2019. This should come as no surprise since most cryptocurrencies are not treated or used as a payment mechanism; they’re treated as an investment asset.

The promise to consumers and even most crypto-enthusiasts isn’t to ease payment challenges, it’s to get rich and get in on this investment opportunity early. The details of how they will get rich or what the cryptocurrency actually does are frequently buried under technical jargon that means little to most people.

Many of the initiatives from the thousands of cryptocurrency fintech startups out there are essentially “blue sky security”—that is, security based on little more than the rising value of said security. Many initial coin offerings in these crypto-launches are a means to pump up the value of their own cryptocurrency assets.

Blue sky laws have been in place for decades. As regulators finally come to grips with cryptocurrency, it is likely that either regulations will become stricter and provide more guidance, thus ensuring the protection of both retail and commercial investors, or the decentralized, Wild West nature of most crypto-initiatives will be rife with scam artists and grifters, scaring off most mainstream participants.

What Banks Should Avoid

The latest challenges to the market—the recent near collapse of stablecoins Tether and Terra, as well as the freezing up of the Ethereum blockchain due to the latest Bored Ape Yacht Club NFT release, which at one point saw “gas” transaction fees rise to thousands of dollars—all point to the severe technical challenges facing the broader cryptocurrency space.  

Many of these systems are not as stable, or as neutral, as they appear. As the financial impact of cryptocurrency becomes more tangible, it’s unclear just how beneficial it is to have protocols that are censorship-proof, that avoid regulated centralization, or that use automated contracts with no guarantee of being any better than a standard contract. While avoiding censorship sounds good on paper, breaking anti-money-laundering restrictions or funding nefarious activities are not capabilities that most banks want to enable.

The enormous ecological impact of blockchain technologies can also no longer be ignored. While some cryptocurrencies, such as Ethereum, claim to be moving to a more ecofriendly proof-of-stake model, these promises are constantly on the horizon and have yet to actually occur. Banks are rightly wary of vaporware from vendors, and they should be wary of vague promises that don’t go beyond greenwashing by cryptocurrency firms.

Building a Better Crypto Future

Despite the enormous, and increasingly visible, challenges posed by cryptocurrency and the broader related distributed ledger space, there are potential uses for the technology. This includes traceability of authenticity on items linked to a blockchain, creating networks of networks through linked chains, or even basic cross-border capabilities.

As with many new innovations, the actual problems solved by blockchain and cryptocurrency remain unclear. Much of the conversation around these technologies is overfocused on putting everything on a blockchain without asking, “What is the benefit of putting this on a blockchain?” In most instances, aside from being a speculative asset, cryptocurrency and related technologies are not yet the best solution to any actual existing problems.

Banks should not ignore cryptocurrency or its related technologies. However, it is time to be realistic and ask outright: What problem does this actually solve? Are there better ways to do this? Rather than jumping on the hype bandwagon and accepting bold promises of future capabilities, now is the time for banks to ask the most important question of all: What does this technology actually do?

To discuss this topic further, please contact me at gubaghs@datos-insights.com.

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