From the explosion of generative AI (GenAI) to Open Banking payments reaching record highs, 2023 was a busy and exciting year for innovation and technology in financial services. To assess the impact of these changes, FStech asked a range of experts from across the industry for their reflections on the past year and thoughts on what’s to come in the next 12 months.

Fighting fraud and cybercrime with AI

After the GenAI boom of 2023, it can be no surprise that financial services providers are set to continue exploring the technology throughout next year.

One of the use cases likely on the agenda for many financial institutions over the coming 12 months is addressing the challenge of growing fraud and cybercrime.

“The increasing popularity of AI is driving numerous innovations across various sectors of the economy,” says Suki Dhuphar, head of international business at data management software company Tamr. “In 2024, financial services will continue to take significant steps forward in AI-enabled fraud detection, utilising disruptive technologies such as data products to combat cybercrime.”

AI can provide comprehensive, clean, curated, and continuously updated data sets that can help identify and track irregular patterns or anomalies in transactions, flagging potentially fraudulent activities, enhancing the accuracy of risk assessment, and bolstering overall security measures, he says.

Dhuphar says that the best technology is able to combine AI with the human factor to constantly evolve in response to the ever-changing cybercrime landscape and enhance data quality on a large scale.

AI-driven scam technology

Conversely, Dr Hassaan Khan, head of the school of digital finance at Arden University, says that with AI being a defining factor throughout the year, while he expects the use of the technology and machine learning to become even more popular, he also thinks it will be “strongly watched” by the regulators.

“It’s a double-edged sword – AI and machine learning can enhance fraud detection, risk assessment, and provide better personalised financial advice, but at the same time, can allow fraudsters to scam people in savvier ways,” he explains. “2024 will certainly be a defining year, and it will allow us to see whether the AI boom will change industries as we know them, or whether it’s a temporary buzzword that will lose traction over coming months.”

Ben Travers, partner in intellectual property, AI and tech at legal and professional services firm Knights agrees that both businesses and consumers will increasingly on the security issues associated with emerging technologies in 2024.

“Whilst technology such as AI can be used in ways which benefit society, it can also be used for nefarious purposes,” warns Travers. “For example, AI could be used to explore ways to defeat traditional security measures, to run convincing scams and more.”
But he says, as ever, the greatest risk remains how people interact with the technology. He predicts an increasing rollout of training and support for teams to help them spot tech-enabled risks.

“Businesses will need to check their insurance policies to ensure they are covered, including where there may be an element of human error in any loss,” he continues. “Those in the financial sector who use technology for helping to inform decisions, from which individuals and business to finance through to where to place investments, will also likely come under more scrutiny.”

The rise of quantum technologies

In 2023, UK Finance called for the creation of a quantum taskforce to help firms in the financial sector take advantage of the “multibillion-pound opportunities” the technology can bring whilst guarding against the risks. The trade association, which represents over 300 UK financial services institutions, said that a taskforce would help to develop and implement quantum transformation strategies which represent all parts of the financial services ecosystem as well as national critical infrastructure.

Some experts are predicting that we could start to see the technology making some waves in the industry as early as next year.

“From a technology perspective, 2024 marks the year when quantum becomes real,” posits Krista Griggs, head of banking, financial services and insurance at multinational information and communications tech company Fujitsu. “The quantum space has witnessed significant advances of late, propelling innovative players to experiment with quantum-like technologies such as annealing.”

She says that these pioneers are positioning themselves ahead of the game, pushing the boundaries of what’s possible.

“But it’s not just about experimentation; it’s about practical applications for the coming year,” adds Griggs.

A continued shift in the VC-backed FinTech market

The FinTech boom took a huge hit this year, with research by FT Partners suggesting that global FinTech funding dropped by around 60 per cent in the second quarter of 2023 compared to the previous year. And, according to the Wall Street Journal, 75 per cent of venture capital (VC) backed FinTechs eventually fail.

“It seems the competition is high, and the sector is moving quickly,” says Arden University’s Dr Hassaan Khan, head of the school of digital finance. “Because of this, we may see FinTech companies forging more partnerships with traditional financial institutions to create integrated solutions – not just for their own survival in a changing market, but also to cater for more diverse consumer needs.”

He says that as a by-result, FinTech will continue to play a crucial role in expanding personal financial control, allowing developments in mobile banking and microfinance to aid greater financial inclusion globally.

Oli Cook, chief executive and co-founder of ekko, a sustainability platform for payment interactions, agrees that the business landscape in 2024 will continue to see a significant shift.

“As the era of cheap capital has ended, venture capitalists and companies are now focusing on more financially sustainable models,” he says. “The spotlight is now on scale-ups that can deliver concrete, profitable returns.”

Cook continues: “This shift signifies a move towards businesses addressing real customers’ needs on a global scale with financially sustainable solutions. Companies demonstrating a clear roadmap to profitability are positioned to see significant backing and growth.”

Mikael Johnsson, general partner at Oxx, which provides venture capital for B2B SaaS, agrees that the venture slowdown has been more protracted than expected, meaning that VCs will be looking for profitability over growth in 2024.

He explains that during the global financial crisis, banks lowered interest rates to stimulate growth, without introducing a massive upward pressure on inflation. This allowed the economy to recover relatively quickly, which led to a healthy environment for venture funding and deal activity.

“Yet in this zero-interest rate world, yields from traditional asset classes dropped dramatically, forcing investors into riskier asset classes, tripling the amount of money going into venture capital in 2022 compared to the 10-year median,” says Johnsson. “With a limited number of great companies to invest in, valuations grew by a factor of three to four times.”

He explains that it is this combination of high economic growth and loose monetary policy that has driven a massive increase in inflation and in interest rates, sending venture funding and deal activity back to 2017-2018 levels, while forcing a reset in terms of growth expectations and capital efficiency for venture backed companies.

“There is simply no free money available to fuel the growth-at-all-costs model anymore,” he concludes.

Digitisation of cards and digital wallet innovation

Some experts are predicting the digitisation of cards will continue growing and evolving next year.

Andy Davies, senior global payments specialist at Endava, says that in 2024 there will be more mobile payments, more tokens, more merchant-initiated transactions, and on the acceptance side, more SoftPOS.

“This offers opportunities for businesses to attract customers from competitors and boost revenue but will also bring with it unique challenges,” continues Davies. “The societal shift to digital channels requires the payments industry to deliver more convenient solutions for consumers while maintaining security and accessibility.”

The payments specialist points to solutions including mobile wallets, Buy Now, Pay later (BNPL), and the expansion of account-to-account payments like Open Banking in the UK or Paze in the US, as some of the technologies and strategies he expects to see in the coming 12 months.

“If businesses want to capitalise on the new ways of making a sale, they will need to carefully balance friction, usability and consent in the payment experience,” Davies continues. “Not only does the payment method need to be the right one for the consumer but the business processes need to streamline the settlement and management of the payments.”

Paul Staples, head of embedded banking at ClearBank says that the opportunities for the coming year lie in joining up previously disparate processes, functions and technologies in the payments value chain, enabling them to be orchestrated from a single set of tools or as a single process.

“Right now, the number of options to make payments can cause confusion and frustration for consumers,” he says. “The opportunity is to simplify.”

Specifically, Staples predicts that there will be further innovation in digital wallets, particularly user-friendly digital wallets for convenient in-store and online payments, as well as easier peer-to-peer transfers.

“Peer-to-peer payments and closed ecosystem payment systems will keep money off conventional rails and reduce costs,” he adds. “Point-of-sale solutions will be more integrated into the payment flow presenting more embedded fintech opportunities.
“Subscription and recurring payments have largely been untouched in the past 10 years, so this is an area ripe for innovation. We may also see increasing use of NFC technologies for payment convenience particularly for physical ‘checkoutless’ stores.”

Open Banking: UK vs EU

Hans Tesselaar, executive director at BIAN says that for the UK to grow its financial services sector in 2024, it must not risk reducing its position on the global stage and look beyond its borders.

The UK has set out its intention to remain a leader in Open Banking, which now has seven million users, by establishing a long-term regulatory framework led by the Joint Regulatory Oversight Committee.

But the EU has recently set out similar intentions, with the update to its Payment Services Directive aiming to standardise payments across the EU and drive Open Banking adoption.

“The European market is predicted to be the largest Open Banking market by 2024, and with Brexit, the UK has siloed itself from this market,” warns Tesselaar. “While both are taking a regulatory approach to Open Banking, the UK government would do well to collaborate with industry players, to ensure that it doesn’t cut itself off.”

Instead, he says, it should look to those larger banks headquartered locally – HSBC, NatWest, Lloyds, and Barclays, to name just a few – with influence and international exposure.

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