The Future of Banking: Key Technologies Redefining Financial Services

Financial technology (or fintech) is changing the future of banking by the storm. McKinsey’s research shows that revenues in the fintech industry are expected to grow almost three times faster than those in the traditional banking sector between 2023 and 2028. 

What’s driving this blazing-fast growth and adoption?

Fintech companies are addressing gaps and targeting areas within banking that traditional banks have overlooked, offering consumers easier access and better control and management of their finances. Powered by emerging technologies, namely GenAI and predictive analytics, fintech seamlessly integrates into everyday life through mobile apps and digital platforms, greatly enhancing convenience and accessibility.

So, what steps should traditional banks take to remain competitive?

In this article, we’ll explore the technologies that will shape the future of banking and fintech, providing real-life examples of how they’re transforming the financial landscape.

But before we proceed, let’s examine the current state of banking technology.

Banks face mounting pressure from various sources, including shifting consumer preferences, regulatory complexities, competition from fintech firms, and escalating capital and liquidity expenses. The rapid pace of digitization has profoundly reshaped the banking landscape, compelling financial organizations to swiftly embrace new banking technology innovations across their operations, services, and product offerings to stay competitive.

At the same time, regulators are intensifying their focus on banks’ technological capabilities, providing clearer guidance and expectations. Deloitte states that the key areas of regulatory emphasis include enhancing data capabilities and integrating innovative financial technology applications into banks’ strategic planning and governance frameworks.

In this context, we’ve compiled a comprehensive overview of the main trends, technologies, associated challenges, and opportunities shaping the future of banking and fintech organizations.

Digital-only banks, also known as neobanks, operate exclusively through online platforms, bypassing the need for physical branch networks. They use mobile and web apps to provide a seamless customer experience with features such as online account opening, mobile deposits, competitive interest rates, and lower fees.

The demand for digital banking services continues to grow, driven by consumers seeking efficient and accessible banking solutions. According to the American Bankers Association, 71% of consumers prefer managing their bank accounts digitally, with millennials (60%), Gen Z (57%) and Gen X (52%) leading the charge. Concurrently, traditional banking is witnessing a decline, with over 2,555 branches closed only in the US in 2023.

In 2023, mobile banking emerged as the primary method of account access for 48% of U.S. consumers, marking it the most popular banking option. Furthermore, a 2023 Digital Banking Survey conducted in Canada and the US found that 45% of millennials and Gen Z only bank digitally. This means that traditional banks must offer user-friendly mobile banking applications to remain competitive and stay afloat.

Digital payments have become an integral part of the modern consumer economy, witnessing a significant surge in adoption since the pandemic lockdowns. According to McKinsey’s 2023 Digital Payments Consumer Survey, over 90% of consumers used some form of digital payment in 2023. 

The same survey states that consumers are increasingly open to new technologies, prioritizing convenience and user-friendly design. Cost considerations also come into play, with nearly three in five respondents citing lower financing fees and higher deposit rates as critical considerations in choosing financial services providers.

When it comes to features, BMO’s 2023 Digital Banking Survey revealed that 87% of users prioritize ease of use and security. Following closely behind are digital identification verification and credit score monitoring. As for the age groups, McKinsey states that Gen Zers show a particular interest in in-app savings features such as store coupons and retailer deals. 

As user expectations evolve, fintech providers have numerous opportunities to improve payment features and integration to align with consumer preferences.

For many years, fintech companies and startups operated with fewer regulatory constraints than traditional banks and financial institutions. However, as fintech companies start to provide critical financial services and take on more risk, they also become subject to regulations to ensure the stability and integrity of the financial system.

Fintech regulations vary widely across jurisdictions and products, adding complexity for companies and startups operating in multiple regions. To help navigate these regulations, the World Bank has compiled a database covering nearly 200 jurisdictions worldwide. Yet, understanding regulations and guaranteeing compliance may be more challenging than it seems.

According to a recent Deloitte’s 2024 banking regulatory outlook, this year is anticipated to witness heightened regulatory activity, with a notable emphasis on enhanced data reporting and granularity requirements. Additionally, regulatory bodies are expected to intensify their oversight of financial technology applications, particularly those involving AI, digital assets, and distributed ledger technology.

The good news is that partnering with an experienced fintech development company like Leobit can ease this regulatory burden. We have 8+ years of experience in fintech software development and know how to make software compliant with GDPR, CCPA, OWASP, and other essential regulations, allowing you to focus on business logic.

McKinsey estimates the potential of Generative AI to add annual value ranging from $200 billion to $340 billion to the banking industry. This value mainly stems from enhancing operational efficiency, as GenAI can automate tasks like data entry, report generation, and compliance checks.

Embracing GenAI offers several more benefits for banking institutions:

• Dynamic fraud prevention. By analyzing patterns and behaviors in real-time, GenAI can swiftly detect potential fraudulent activities, thereby reducing the risk of financial crimes.
• Improved credit assessment. By processing large volumes of data, GenAI can provide more accurate credit scores and risk assessments, allowing banks and fintechs to assess creditworthiness and loan risks better.
• Enhanced customer service. GenAI-driven chatbots can comprehend complex queries and deliver personalized responses, offering immediate 24/7 assistance to customers and boosting engagement and satisfaction.
• Tailored financial advice. AI algorithms can analyze individual financial histories and goals to offer customized investment strategies and savings plans. This service is gaining traction, with over a third of McKinsey’s 2023 Digital Payments Consumer Survey respondents considering GenAI for financial advice and planning.

Despite its benefits, GenAI also presents risks and concerns related to false information, intellectual property infringement, bias, security, and transparency. To maintain trust and compliance within the banking sector, fintech companies must ensure the responsible and ethical use of GenAI.

Blockchain technology offers a decentralized ledger system that records transactions across a network of computers. In financial services, blockchain is gaining traction because of its capabilities to establish a safe and immutable record of customers’ identities, streamline identity verification processes, and mitigate identity theft risk.

However, blockchain’s applications extend beyond payments, with various use cases emerging in banking and fintech, including:

• Trade finance. Blockchain can facilitate secure and efficient trade finance operations by providing transparent, traceable, and tamper-proof documentation for international transactions.
• Cross-border payments. By eliminating intermediaries and reducing settlement times, blockchain allows for faster, cheaper, and more transparent cross-border payments.
• Smart contracts. Blockchain-based smart contracts automate contract execution and enforcement, enabling secure and transparent agreements without intermediaries.
• Know Your Customer (KYC) compliance. Creating a decentralized, immutable record of customer identities can streamline KYC processes, enhancing compliance and reducing administrative overhead.
• Supply chain finance. Blockchain can provide transparent, auditable records of product movements, enabling more efficient financing solutions for suppliers and buyers.

Also, quite a few countries are actively pursuing the development of central bank digital currencies (CBDCs), digital representations of traditional fiat currencies, to enhance cross-border transactions. However, as of the end of 2023, only a handful of them, including Nigeria, the Bahamas, Jamaica, and the Eastern Caribbean Currency Union, had implemented “live” CBDCs, according to Statista’s data. However, the EU, the UK, and the US are also exploring the potential of CBDCs.

The real-time payments market is rapidly expanding, fueled by the growing demand for immediate payment settlements, widespread smartphone usage, and the adoption of cloud-based solutions for faster transactions. Valued at USD 17.57 billion in 2022, the global real-time payments market is projected to grow at 35.5% yearly from 2023 to 2030.

But what’s driving the increased adoption of RTP?

According to FiS Global research, technological advancements and competitive pressure are the main factors pushing companies to change and embed RTPs.

FiS Global research also suggests that the US market is reaching a tipping point. Over 65% of U.S. bank accounts already use the RTP network, which surpassed 500 million total transactions on July 22, 2023. This means that banking and fintech organizations overlooking RTP risk falling behind.

The primary challenges in transitioning to real-time payments are fragmentation and legacy infrastructure issues, cited by 30% of banking organizations in the US and EU. The shortage of tech talent for legacy system modernization is prompting organizations to seek assistance with implementation: 77% of financial companies would consider outsourcing at least part of the work to develop real-time payment capabilities.

Personal finance apps have seen a significant uptick in popularity, offering users robust tools to manage their finances more efficiently. The global personal finance app market was valued at $1,024.35 million in 2021, with projections indicating a rise to $1.57 billion by 2025.

The rise is driven by a growing demand for personal finance apps beyond basic budgeting and expense tracking and exploring investment opportunities. Users increasingly seek platforms that offer insights into stocks, mutual funds, and other investment avenues.

With an average of 2.5 personal finance mobile apps installed on smartphones, users share tons of their personal data, including spending habits and patterns. Fintech organizations can use this data to analyze consumer behavior and cater to users’ needs for personalized financial advice and insights.

BNPL is a modern form of credit that offers users short-term, interest-free loans. McKinsey’s 2023 Digital Payments Consumer Survey reveals that 29% of respondents used BNPL in the past year, with an additional 15% expressing interest in its usage. This trend spans various age groups and income levels, with millennials and bridge millennials emerging as the most frequent users. While younger demographics exhibit higher adoption rates (over 60% for those under 45), Accenture states that 40% of consumers aged 55+ have also embraced BNPL.

McKinsey also reveals that 80% of BNPL users initiate their shopping journey on the provider’s website rather than the retailer’s site. This indicates a substantial opportunity for banks and fintechs in the BNPL space, with projected transaction volumes expected to soar to $680 billion worldwide by 2025. By integrating BNPL strategies into their operations, financial institutions can effectively cater to the growing user demand.

However, fintech companies should note that certain European Union member states, like Ireland, are expanding financial regulation to cover buy-now-pay-later providers. In parallel, the US Consumer Financial Protection Bureau plans to propose a rule on open banking, mandating financial institutions to share consumer data upon request. To comply with these impending regulations, fintech companies should equip themselves with the necessary resources and capabilities.

As we discover the dynamic evolution of the banking sector, it becomes evident that rapid technological advancements also foster deepening collaboration between fintech companies and traditional banking institutions. So, let’s discover how fintechs can build partnerships and synergies and what may stand in their way.

The rising trend of strategic partnerships between banks and fintech startups often involves platform-based collaborations, allowing for integration without hefty financial commitments. It’s constantly growing since banks can bring fintechs established client bases, credibility, and capital investment, while fintechs contribute technological innovation and seamless digital experiences. 

This synergy has fueled the growth of the Banking-as-a-Service (BaaS) market, enabling third parties to connect directly to the banks’ infrastructure. Regulatory frameworks like Payment Services Directive and Revised Directive on Payment Services (PSD2) further facilitate direct integration between fintechs and banks, fostering mutual growth and enhancing customer experiences.

However, collaboration isn’t without its challenges. Banks sometimes aim to bolster their digital offerings instead of collaborating with fintechs to thrive in an increasingly digital financial landscape. However, at the same time they face significant pressures from nonbank competitors and often grapple with legacy IT systems that require updates to meet regulatory standards and support growth initiatives. 

Adapting to agile business models and integrating emerging technologies at scale demands a shift in IT spending from maintaining legacy systems to modernizing and integrating emerging technologies. Outdated systems and processes make it challenging for banks to launch new products and engage in novel financial services.

A recent Deloitte’s 2024 banking regulatory outlook states that these challenges are not limited to outdated technologies and growing competition but regulatory perimeter and foundational aspects of banking. As of now, partnering with fintech companies can give banks a leg up and help meet the competition.

For the last eight years, Leobit has been building financial software applications for:

• Fintech product companies
• Accounting and bookkeeping organizations
• Mortgage lending and loan companies
• Investment management companies
• Banks and financial institutions

Our proficiency extends to cutting-edge technologies such as blockchain, artificial intelligence, and predictive analytics, allowing us to develop innovative fintech applications. 

Here are a few real-life examples showcasing our experience and the use of technology in financial services.

A US-based fintech corporation specializing in enterprise management automation and revenue management SaaS solutions approached us to develop a white-label SaaS application for electronic payments. We began with an MVP version, gradually enhancing functionality with each subsequent release. 

Secure data handling is a must for any fintech application. In this case, we addressed it by implementing the Secure File Transfer Protocol (SFTP) to let SaaS platform clients safely access, transfer, and manage sensitive files. We also implemented frictionless three-level account verification, API whitelisting, encryption, and tokenization to ensure the financial data is safe at every stage.

This ongoing solution development has already enabled our client to reduce processing costs for financial transactions and explore new revenue streams. Check out our Alternative Electronic Payment SaaS Solution case study for more insights.

A fast-growing fintech company in the US sought our expertise to develop multiple modules for a security-focused integrated payment processing solution tailored to vertical-specific industries like accounts receivable management (ARM), eCommerce, education, and healthcare.

We started with automating existing business processes and developing a web portal for analyzing and scoring risks associated with potential business partnerships based on credit history. Using iOS SDK, Swift, Ingenico RUA SDK, Swift Package Manager, and embedded development best practices, we engineered an SDK and tools for building and configuring mobile software for payment-related devices like terminals.

Next, using Angular and .NET technologies, we developed interconnected cloud-based modules to manage lead and merchant accounts, support contract lifecycles for agents, ensure secure merchant authentication, and enable agents and merchants to report and reconcile various issues with customer support teams.

All modules were developed using cloud-native development principles, facilitating seamless scalability and upgrades and ensuring optimal system performance and reliability.

The solution we developed helped the customer eliminate human errors, reduce manual labor costs, and fivefold accelerate deal processing times. For further insights, check out our multi-module payment processing ecosystem case study.

Our customer, a P2P invoice financing provider, approached us with an existing product to automate their business processes, redesign the project architecture for better scalability and easier maintenance, and ensure a high level of security for transactions and data.

Given the sensitive nature of the user data involved, our senior back-end developer proposed enhancing data security through Guardtime KSI Blockchain integration. KSI Blockchain is trusted by governments and leading organizations like NATO and the U.S. Department of Defense. It helped us ensure data integrity, verify the correctness of processes, and provide top-level protection for the customer’s clients.

Additionally, integrating Veriff, an AI-powered identity verification tool, helped our customer seamlessly verify business partners’ and clients’ identities, backgrounds, sanctions, and credentials to prevent fraud and ensure compliance and customer security.

Following our successful partnership, the platform quickly became one of the leading supply chain finance providers on the EU market, boasting over 100 legal entities. For more details, check our Blockchain-Based Supply Chain Financing Solution case study.

Traditional banking is becoming increasingly intertwined with fintech. While traditional banks may face challenges in innovation due to their legacy systems, fintech companies are more agile in using technology-driven approaches and rapidly developing and deploying new services. This symbiotic relationship between banking and fintech is expected to continue, with fintech companies playing a key role in fostering innovation, enhancing financial inclusion, and capturing a greater market share in the financial services sector.

Nevertheless, as regulations expand to encompass fintech, and consumer needs continue to evolve, financial companies will need to address these challenges along with the growing demand for tech talent. Partnering with an experienced software development company like Leobit, can help you get expertise in fintech development, accelerate digital transformation initiatives, and stay ahead of the competition in an increasingly dynamic market. Contact us, and we’ll gladly consult you deeper on the topic.