Financial technology challenges and trends of 2024
IT’S that time of year again when we invite Sean Kiernan, founder and CEO of Greengage to give his thoughts on key technology trends impacting the financial services industry in 2024 and beyond…
Under-banked and ‘unbanked’ segments accelerating pace of adoption of Web3-enabled financial services
While some banks are tentatively embracing Web3 technologies to deliver process efficiencies — for example in wholesale cash management, custody and asset servicing — they face a growing threat and challenge from non-bank disruptors in the form of fintechs and non-financial technology-led platforms. Traditionally underserved customer segments including SMEs, and non-banked or de-banked players like many crypto-native firms that don’t satisfy traditional bank risk appetites, are increasingly turning to non-traditional financial service providers.
A key challenge for ‘new wave’ crypto firms seeking financial — or other — services is overcoming the hurdles of traditional AML/KYC management processes. Web3 and decentralised technologies offer the potential to reshape the personal identification process, establishing proof of identity that is vested with individuals and ‘fungible’ with respect to any and every application for which proof of identity is required.
Enhanced security offered through blockchain networks underpin the development of a secure, non-transmutable, digital ID that, over time, will do away with today’s convoluted, non-transferable document-based model in which banks, utility providers and all other entities requiring proof of identity may have different requirements with respect to the number and height of the hoops through which potential customers must jump.
In the new model, individuals will ‘own’ their own ID (secured by the likes of zero knowledge proofs) and also have much more freedom to switch between service providers — opening up the real promise of open banking.
Continuing rise of stablecoins, opening the door to more complex digitally-native financial products
As the name implies, stablecoins are considered as the ‘safer’ (less risky) way to access new — and typically volatile — cryptocurrency markets. Issued on a blockchain, they share the same characteristics as other crypto with the notable exception that they are not ‘mined’ but ‘minted’ on a 1:1 basis - i.e. against an underlying (traditional) asset (traditional and non-traditional), and can be ‘redeemed’ against that asset at the issue price by any party that receives it in a transaction on a 1:1 value basis. Stablecoins issued against, say, £1 in asset value will always hold that same value on ‘redemption’.
In addition to fiat currency, stablecoins can be ‘backed’ by a multitude of ‘assets’, including other cryptocurrencies, commodities and even algorithms (for example Frax and FEI). Stablecoin ‘risk’ can be further mitigated by buying them on different blockchains.
The Bank of England has recognised the growing relevance of stablecoins in payments, for example, at both the wholesale and consumer level, and the need for their inclusion in regulation that focuses on preserving financial markets integrity and protecting consumers.
Recent changes to UK rules have recognised sterling-backed stablecoins as ‘digital settlement assets’ within systemic payment systems. The UK’s FCA and PRA are working to provide clarity with respect to the regulatory regimes under which stablecoins and other ‘money-like instruments’ — e.g. e-money fall, and associated obligations.
We expect to see continued adoption of stablecoins and related instruments particularly given their capacity to support T-0 (real-time) settlement which is relevant particularly for cross-border transactions, where some of the more traditional means of moving money including SWIFT at times can take several days for money to land.
We have already seen some e-commerce business models (e.g. drop shipping) or traditional import / export businesses with a cross-border component start to shift to using stablecoins given their security and capacity to reduce FX, settlement, and credit risk given their higher velocity of settlement (near instant) versus traditional means.
Given all of this, we expect to see the launch of more innovative financial products, including yield-bearing instruments such as those launched recently in the US, including Mountain Protocol and Midas, both of which are backed by yield-bearing US Treasuries. Available across myriad DeFi protocols, Mountain Protocol particularly seeks to give non-US investors access to US Treasury yields.
New, challenger digital debt products for SMEs
Web3 and blockchain technologies also support the creation of new digital debt products that may be particularly attractive to SMEs. Similar to traditional commercial papers in application, digital debt products are created and issued using blockchains and smart contracts, and can be offered at much more competitive rates than traditional commercial paper.
For the poorly served SME community, who are more open to novel sources of funding to them grow their businesses, these new routes to access debt capital are likely to be extremely popular, challenging today’s corporate finance model.
Fintech solutions have already made it easier for SMEs to access financial services (mobile phones, for example) digital lending solutions and debt products will further level the financial inclusion playing field, accelerating the shift by this segment from the traditional to new financial services pioneers.
Greater convergence of financial services and gaming and lifestyle ‘tech-first’ environments
As keen gamers know, the metaverse takes the concept of virtual reality to the next level, creating a world in which users can interact seamlessly within ‘real world’ and simulated environments. Immersive games like Fortnite and Roblox (the scourge of parents worldwide) were the forerunners of today’s ‘augmented reality’ metaverse worlds which will increasingly shape and influence the way that we work — and play (leisure and entertainment), education, how we conduct business and how we interact with brands.
Like it or not, the lines between physical and digital worlds are becoming increasingly blurred and it is therefore inevitable that financial service providers will be looking closely at how they can and should be involved in this — estimated at $900 billion — space.
Some banks, keen to be first adopters, are already opening virtual branches in metaverses, seeking to attract the ‘digital-native’ communities of gamers and to avoid — or at least delay — disintermediation by new decentralised financial services. Their challenge is ensuring that virtual branches in which ‘real’ individuals can open bank accounts and access other services offer the same security, rigour and protections as their physical infrastructure and operations.
Beyond FOMO with respect to virtual branches, we expect to see more movement by major financial services players with respect to investing in the development and operation of financial ‘rails’ within metaverse infrastructure.
AI and blockchain — when two transformative technologies collide
At the same time as new ‘decentralised’ digital technologies and associated digital assets from coins to tokens continue to gain purchase in the traditional financial and broader commercial services landscape, the opportunities presented by AI and machine learning are also gaining momentum.
The combination of these two dynamics — blockchain and its impact on more transparent and efficient information flows and AI’s role in greater predictability of events and associated activity execution — make for a very interesting future in financial markets operations. Outside of the merits of AI to enhance crypto-native blockchain applications in terms of speed of transaction processing and data security, there are broader financial services opportunities, as illustrated by Numerai’s innovative AI-enabled product that brings together AI, blockchain technology and crowd-sourced stock market prediction models within a quant-based hedge fund.
We can expect to see more of these types of financial products emerging as these early pioneering products gain purchase amongst the more digital-savvy investor community.
