2023 acted as a reset year in the venture capital (VC) ecosystem as investments witnessed their first significant drop since 2017. In 2024, investors anticipate a gradual growth in both the number and size of funding rounds compared to 2023, with massive opportunities for fintech startups in the areas of generative artificial intelligence (gen AI), sustainable finance, business-to-business (B2B) solutions and tokenization, a new report by American VC firm Plug and Play says.
The “Fintech Megatrends 2024” report, released in March 2024, shares the major fintech trends to look out for this year, drawing on market research and interviews with VCs and investors from Plug and Play, LBBW Venture Capital, BlackFin Tech, Elevator Ventures, Breega, Illuminate Financial, Auxxo, DB1, Fidelity International Strategic Ventures, HV Capital, and Dawn Capital.
Sustainable finance
Although significant efforts have been made to reduce greenhouse gases, global progress towards net-zero emissions is lagging, with CO2 emissions from energy and industry increasing by 60% since 1992.
In the financial sector, the Net-Zero Banking Alliance has been established, comprising 142 banks from 44 countries committed to reaching net-zero greenhouse gas emissions from their lending and investment activities by 2050. However, some European banks such as Deutsche Bank, HSBC, Barclays, and Crédit Agricole have been found to support fossil fuel companies by facilitating the raising of over EUR 1 trillion through global bond markets, according to an investigation by The Guardian.
These challenges are bringing about opportunities for sustainable finance startups to tap into, with Plug and Play emphasizing renewable energy, carbon capture and accounting technologies, circular economy solutions and precision agriculture technologies as promising verticals.
The VC firm also see significant opportunities in the voluntary carbon market (VCM). VCM, which allows entities to purchase carbon credits to offset greenhouse gas emissions, was valued at US$2 billion in 2021. By 2030, the market is projected to reach US$40 billion, with sectors including banking, oil and gas, and airlines expected to remain key adopters of VCM. In this area, technological solutions that are enhancing market transparency and efficiency through automated verification and predictive analytics are expected to gain momentum.
The firm also anticipates increased demand for transparent, standardized, and accurate ESG data, fueling the growth of startups in the sector. This will come amid stricter regulations on ESG standards and requirements.
Generative AI integration and RPA
Gen AI, a type of AI technology capable of producing various forms of content, including text, imagery, audio, and synthetic data, emerged prominently in 2023, driven by the excitement following the introduction of OpenAI’s ChatGPT in late 2022.
Despite the frenzy that ensued, enterprise adoption of AI systems lagged behind expectations in 2023, with a survey of approximately 600 enterprise executives from Coatue suggesting that while 60% of enterprises were planning to adopt AI in 2023, less than 10% had managed to do so.
This slow adoption is being attributed to challenges like the complexity of integrating AI with existing systems, the lack of accuracy and insufficient quality data. These obstacles present opportunities for fintech startups to help enterprises incorporate gen AI into their systems more effectively.
Plug and Play also anticipates an increase in demand for robotic process automation (RPA) this year as banks seek to cut costs and reduce their workforce. RPA involves the use of automated “bots” to handle high-volume, low-complexity, and repetitive tasks typically performed by employees, improving efficiencies, reducing overall costs, and allowing for continuous operation without errors. Over the past decade, RPA has emerged as a prominent technology in business-to-business (B2B) software tech. This growth is projected to carry on, with Forrester expecting the market size to reach US$22 billion in 2025.
CFO tech and B2B fintech
CFO tech, a fintech subsector dedicated to assisting CFOs and finance teams in managing their financial operations more efficiently, is another trend to look forward to this year onwards. The sector is expected to grow on the back of technological advancements, evolving business needs and increasingly complex regulatory environments.
Finance teams are grappling with significant challenges in managing and analyzing data due to their disparate nature and complex interconnections. The process involves collecting and cleaning data from various sources, such as enterprise resource planning (ERP) systems, human resources management systems, billing tools, customers, and suppliers, a tedious and time-consuming process that detracts from more strategic activities. Furthermore, normalizing and reconciling data across systems is time-consuming, and obtaining inputs for budgeting from numerous stakeholders leads to inefficiencies and errors.
CFO tech will emerge to address these challenges by providing a comprehensive suite of tools designed to improve accuracy, efficiency, compliance, and strategic decision-making within the finance function. They will enhance collaboration and empower finance teams to adopt a more proactive approach across the entire value chain. These tools will cover areas such as ERP, accounting, payroll, spend management, and compliance, Plug and Play says.
Tokenization, alternative assets among top wealthtech trends
In the wealthtech segment, asset tokenization is expected to gain traction this year owing to the technology’s potential to enhance liquidity, simplify trading, and open up new investment opportunities. This trend will be driven by increased adoption among banking incumbents like JP Morgan and ABN AMRO which are developing infrastructure to support the trend. Plutoneo, a German-based blockchain consulting firm, projects that the European security token market will grow 81% annually over the next five years and reach EUR 918 billion by 2026.
The democratization of alternative assets is another major trend to look out for in 2024 and beyond. These assets, which include private equity funds, luxury goods, art and real estate, offer diversification and new investment opportunities for both institutional and retail investors. Fintech companies are driving this trend by making private banking accessible to a broader audience.
Finally, indexing is poised to be a hot trend in fintech in 2024 driven by the rapid growth and needs of the exchange-traded fund (ETF) market. Many asset managers lack the sophisticated in-house capabilities required for index development and benchmarking, a gap which creates opportunities for innovative indexing fintech startups to provide the necessary infrastructure for designing and maintaining these custom indices. Their services will be particularly crucial for the growing segment of thematic ETFs, which require specialized and dynamic indexing solutions.
Next-generation compliance tools
Finally, next-generation compliance tools are expected to gain prominence and experience significant growth this year onwards as financial crimes and fraudulent transactions continue to pose threats to the financial system and global economies.
Plug and Play predicts that a new wave of regtech startups will emerge. These startups will spearhead the “compliance 2.0 wave”, leveraging technologies like gen AI models to discern intricate fraudulent schemes. They will focus on bringing know-your-customer (KYC), know-your-business (KYB), and anti-money laundering (AML) capabilities within one platform. This integration will facilitate continuous customer monitoring, streamline the onboarding process and ensure ongoing anti-fraud controls.
EY estimates that the annual cost of money laundering and associated crimes ranges from US$1.4 trillion to US$3.5 trillion.
featured image credit: edited from freepik
