OBSERVATIONS FROM THE FINTECH SNARK TANK
Having complained in a recent post on LinkedIn that a lot of the predictions I see are nonsense, you may think I’m crazy for posting my own set of predictions for 2024.
You’re probably right.
That said, here are my banking and fintech predictions for 2024:
1. A big(ger) bank will acquire a BaaS bank
A sneak peek into Cornerstone Advisors’ forthcoming What’s Going On in Banking (WGOIB) study shows that the percentage of banks looking to get into the banking as a service (BaaS) space is down from previous years. Big surprise, eh? Regulatory headwinds, iffy economic conditions, and a more conservative approach to tech innovation spending are combining to put a damper on BaaS growth.
The drop in interest in BaaS doesn’t change the fundamental underlying demand for BaaS services, however. Fintechs have an increasing appetite for new products, better tech integration, and diligent compliance.
That adds up to opportunity for larger banks (>$100 billion in assets) to get into the space more aggressively.
Prediction: A $100+ billion bank will acquire a smaller BaaS-focused bank in 2024 to accelerate its entry into the BaaS market, and then bolster that acquisition by adding a healthy dose of technology, compliance, and business development resources to the BaaS bank.
Over the next couple of years, we’ll see more of these acquisitions as larger banks take over the BaaS space.
2. Bank-offered BNPL will grow significantly
Speaking of the WGOIB report, in past years I’ve asked financial institutions about their plans to offer buy now, pay later (BNPL). The response has been tepid, at best. Consumer interest and activity in BNPL—with the threat, if not reality, of lower interchange revenue—is becoming too much for banks to ignore in 2024.
As Nandan Sheth, CEO of fintech Splitit, wrote here in Forbes:
“Banks have not moved fast to address the consumer demand for pay later solutions embedded within the merchant purchase journey. Banks miss the critical ‘in-checkout’ moment, ceding ground to fintechs with integrated installment plans.”
Sheth believes that banks have advantages in terms of scale, trust, and available credit. According to Sheth, “the key to triumph in the ongoing contest for the future of BNPL lies in synergizing the strengths of banks to offer a distinctive set of differentiators through strategic partnerships.”
I agree.
And when I say “bank-offered” BNPL will grow significantly, it will (and should) be credit unions leading the way. Tech companies that enable banks and credit unions to provide BNPL will have a good year in 2024.
Banks offering BNPL, on the other hand, will struggle to see significant volume. Why: Because BNPL is a much a pre-payment part of the purchase process as it is a payment decision.
Firms like Klarna (don’t call them a BNPL company) understand this, and offer tools and technologies to their merchant partners to help them influence consumers’ choice or product and provider—not just their payment mechanism.
3. The “employee experience” will be an area of focus
C’mon, you’ve got to be at least half as tired hearing about the “customer experience” as I am. For more than 15 years now, self-proclaimed “customer experienceists” (or whatever they call themselves) have asserted how important CX is, how it’s the key to differentiation, blah, blah, blah.
It’s time for a change of focus. With a renewed focus on efficiency—coupled with sure-to-come layoffs in the banking industry—smart bankers (and tech companies) will realize that the “employee experience” is the new way to realize productivity gains and buoy employee satisfaction.
One enabler of the new and improved employee experience: the continued deployment of chatbots that are often more effective at helping employees get their work done than they are helping customers get their questions answered.
4. Real-time payment volume won’t materialize in 2024
For sure, the number of banks signing up with FedNow will continue to grow, and the percentage growth of real-time payment (RTP) volume will be high—because it’s easy to produce a high growth rate on small volume. As a percentage of all payments, however, RTP won’t make a dent.
Two things will hold down RTP volume in 2024:
- Receive-only dominates. Most of the banks that have signed up for RTP through FedNow are in receive-only mode. As a friend joked on LinkedIn recently, “everyone has a mail box but no one is sending mail.”
- Lack of a RTP “solution.” Tony Hayes, founder of the Banking & Payments Group, recently pointed out that “ if priced correctly, real-time payments could boost forward-thinking banks’ income.” “If priced correctly” is a big if, however. Pricing—particularly for fee-based services—is hardly a strong point for many financial institutions.
At a recent payments conference, a number of bankers referred to FedNow as a “solution.” This is a misconception. Better to think of FedNow as a “capability.”
You don’t price—and sell—capabilities. You package capabilities into a solution—a “product” or “service offering”—then determine what pricing options are most attractive to your target market and market the solution to them.
It will take some time and effort for banks to get this right.
By the end of 2025, however, commercial RTP payments will start to grow more significantly, as smart banks realize that’s where the opportunity (i.e., money) is.
5. Generative AI use will be under- and over-stated
No list of predictions for 2024 would be complete without some mention of artificial intelligence (AI), right?
Except for a handful of larger banks with innovation teams focused on the use of Gen AI tools, most mid-sized and small banks and credit unions won’t do much with Generative AI in 2024.
More accurately: They won’t know that they’re doing something with it.
What I mean by that last comment is that, when you ask senior bank execs what their institution is doing with Generative AI, many say “nothing right now” or “we’re exploring opportunities” (yeah, right).
They say that because they have no clue that marketing is using Gen AI tools to write marketing copy or that legal is using it to construct and review contracts. You know that really eloquent blog post the 22 year-old intern wrote? ChatGPT.
On the flip side of the equation, there will be (and are) bankers who think they’re institution is experimenting with Generative AI when what they’re really using is conversational AI and machine learning.
Bonus prediction: Confusion surrounding the various types of AI technologies won’t clear up in 2024.
Are You Ready For a “Down in the Dumps” Year?
I didn’t set out to write a bummer of a blog post. Looking back at the predictions, however, they all point to the struggles and shortcomings of BaaS, RTP, BNPL, and Generative AI in 2024.
Add to that banks’ deposit gathering challenges, rising fraud and cybersecurity breaches, staffing challenges…and it’s hard to conclude that it’s going to be anything but a tough year for the banking industry.
Ironically, this might add up to a good year for fintechs, particularly those that sell to (and support) banks. According to Cornerstone’s forthcoming WGOIB study, two-thirds of banks expect their IT spending to increase in 2024, with just 9% expecting a decline. That money has to go somewhere.
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