In the ever-evolving realm of financial technology, innovation remains the driving force behind seismic shifts in how we manage, invest, and leverage our financial resources. As we navigate the path ahead in 2023 and slowly move towards the first half of 2024, VCs are at the front of this narrative, where the convergence of finance and technology results in many novel solutions that are changing the financial sector.
The fintech landscape, once characterized by exciting startups and trailblazing concepts, is now maturing into a linchpin of global economies. For this article, The Recursive reached out to several VCs to hear their thoughts on the imminent fintech trends that are going to shake up the industry in the upcoming period.
DeFi, APIs, and AI-powered risk management
The emergence of Decentralized Finance (DeFi) has captured the imagination of investors, offering novel avenues for lending, yield generation, and financial innovation. As Dora Trachana from Uni.Fund highlights, DeFi presents a radical shift in the way traditional financial services are accessed and utilized.
With platforms like lending protocols, decentralized exchanges, and yield farming, DeFi is not only reshaping the lending landscape but also providing opportunities for individuals to participate in previously exclusive markets.
“The evolution of decentralized finance (DeFi) is capturing our attention, offering new avenues for lending and yield generation. The exploration of Central Bank Digital Currencies (CBDCs) and the integration of financial services into non-financial products through APIs are intriguing trends,” Trachana tells The Recursive.
APIs are bridging the gap between finance and non-financial products – and this is revolutionizing how we experience transactions. Then, there is also the potential of AI-powered risk management as a noteworthy focal point for venture capitalists. As Trachana suggests, the marriage of AI and finance promises enhanced risk assessment and fraud detection.
“Personally, I’m excited about the potential of AI-powered risk management and the emergence of sustainable finance solutions. As we navigate this dynamic environment, I’m confident that innovative startups addressing these trends will shape the future of finance,” she points out.
Borderless payments and gig economy synergies
The infusion of gig economy dynamics and borderless payment solutions is a cornerstone of fintech evolution, according to Veronica Korzh from SID Venture Partners.
Digital currencies and blockchain technology are poised to revolutionize cross-border transactions, empowering individuals to seize global opportunities without geographical limitations.
“It allows people to be agile, finding opportunities worldwide without being tied to one place and overcoming challenges. Take a look at CBDCs that are rising all over the globe; China has already launched its CBDC with more than 260 million users already, and the next ones should be European representatives – the UK and Sweden are getting closer to finalizing the CBDC this year,” Korzh explains.
Data sharing for enhanced security
The battle against cyber threats and financial fraud has ignited a new trend in data sharing among financial institutions. This approach, as investment analyst Nazar Halychanskyi from Kyiv-based VC Flyer One Ventures points out, allows banks to swiftly respond to emerging threats.
With the financial crime compliance costs reaching staggering figures, data sharing can be a game-changer in minimizing fraud instances and fortifying the financial ecosystem.
“It’s a big problem. In 2021, the total cost of financial crime compliance across financial institutions worldwide was $274 billion, an increase from $214 billion in 2020. Beginning in 2024, the UK will mandate banks to fully reimburse customers who fall victim to APP fraud. I imagine banks will strive to minimize instances of fraud as much as possible,” Halychanskyi says.
Tokenization and crypto-traditional finance convergence
Tokenization has been enabling financial institutions to offer crypto-backed products and services, facilitating a much-needed connection between traditional finance and the crypto ecosystem. With DeFi’s persistent growth, this trend underscores the transformation of financial systems towards a more decentralized model, investors point out.
Furthermore, when it comes to the crypto realm, the next period will see trends ranging from blockchain evolution and institutional adoption to regulatory coordination – all of which are reflecting ongoing innovations.
“Technologies are expected to undergo significant advancements in the coming months and years, especially energy-efficient blockchain networks. The drive towards proof-of-stake consensus mechanisms and Layer 2 solutions is likely to accelerate, addressing concerns related to energy consumption,” Mykhailo Romanenko, investment activities expert and co-founder of global crypto exchange Kyrrex, explains.
The crypto space is no stranger to regulatory scrutiny, but as Romanenko says, governments are moving toward clearer guidelines. Legal challenges and disputes are expected to drive the establishment of legal precedents in the crypto realm.
To encourage broader adoption, educational resources and user-friendly interfaces will play a pivotal role in demystifying cryptocurrencies, attracting investment from both individual and institutional players.
“User-friendly interfaces, simplified explanations, and enhanced educational resources are expected to drive broader adoption among individuals and businesses. Such actions could attract further investment and participation from both retail and institutional players. This could include advancements in zero-knowledge proofs, secure multi-party computation, and improved wallet security protocols,” Romanenko concludes.