In 2019, financial technology companies stepped up their game with bank partnerships, mergers, acquisitions, and at least a handful of de novo bank applications. (A de novo bank is a state bank that has been in operation for five years or less that adheres to supervision standards.)
So, what’s coming up for fintech in 2020?
Here are some trends we’re keeping an eye on based on our ongoing engagement with the industry and things we hear from regulators around the globe.
Monitoring the Big Picture
We’re seeing competition over customer loyalty heat up between large banks and fintech companies. Large banks are expanding digital product offerings to offer better user experiences. Meanwhile, leading consumer-facing fintech companies are developing more comprehensive suites of products for their customers. Big tech companies are also in the mix as consumers grow increasingly comfortable relying on them to meet their day-to-day needs.
At the same time, bank-fintech partnerships are growing in number. We’re closely observing activities with community and regional banks looking to lower operational costs and diversify their portfolios.
All of these developments point toward a more diverse and complex financial market. Regulators are paying close attention to potential risks and opportunities, and not from the sidelines. They’re actively engaging with market participants and creating domestic and international information exchange networks. For example, the American Consumer Financial Innovation Network and the Global Financial Innovation Network.
At the San Francisco Fed, we’re monitoring the following major fintech sectors.
With increasing competition, lenders are looking to expand their borrower base to include new customer segments such as people with little or no credit history. And with the latest joint statement from federal regulators on the use of alternative data, more financial institutions and fintech companies could become interested in testing the use of alternative data in underwriting models. We are observing the potential impact of these models in terms of financial inclusion, consumer credit access, loan performance, liquidity, and fair lending.
2. Payments and Fraud Detection
While payment settlements are still processed by supervised financial institutions on the back-end, consumers have more choices than ever to send and receive payments with different apps. This may create new identity verification challenges for the processing financial institutions. We are following the increase in technological deployments in fraud prevention, which could encompass more comprehensive messaging systems and data trend analysis.
Last year’s headline-making digital currency announcements sparked a series of regulator responses around the world. Mass market adoption is still uncertain. Still, we’re tracking developments in the use of cryptocurrencies to hedge exchange risk and increase liquidity in multi-currency conversions for wholesale transactions by some financial institutions. Note: we define cryptocurrency as any digital or crypto-asset intended as a means of payment whose issuance, storage, and transaction validation depend primarily on cryptography and distributed ledger.
We’re seeing an increase in efforts to standardize both the method and format of financial data transfers among market participants. More large institutions are choosing to sign bilateral agreements with data aggregators to reduce screen scraping and adopt more secured application programming interface (API) integration. But this could also create barriers to how data flows from, or to, smaller firms. We are continuing to follow the conversations around consumer data control, liability sharing, and potential impact on the existing financial ecosystem.
5. Artificial Intelligence
Artificial intelligence continues to gain traction with firms exploring new uses and solutions to industry challenges such as these:
- ensuring comprehensive and representative data sets for training
- testing models for bias and unforeseen impacts
- solving explainability of these models so experts’ takes are easier for everyone to understand
Have questions about the trends affecting your business in 2020? Need help navigating the regulatory space for fintech? We welcome firms, banks, and other industry groups to reach out or schedule time to talk during our public office hours.
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The views expressed here do not necessarily reflect the views of the management of the Federal Reserve Bank of San Francisco or of the Board of Governors of the Federal Reserve System.