The fintech revolution has become a linchpin in helping financial institutions drive innovation, as both continue to coexist in a competitive landscape. The industry has moved beyond speculative theory of the impact of fintechs to practical application of fintech solutions to modernize and grow. Fintechs have disrupted the value chain from payment innovation to establishing digital currencies and even helping to democratize finance. Shaping fintech strategy and integration remains top of mind for financial institutions as they contend with shifting demands from digitally savvy customers and evolving compliance and regulatory laws.

On the road ahead, fintechs may decide to further move the needle from industry competitors to industry collaborators to drive innovation but not introduce systemic risk. This is where established technology partners can help bring significant value as fintechs navigate and operate in this highly regulated space in 2023. 

We have seen both fintechs and banks focus their initiatives on solving front-end and customer-facing issues. This comes as no surprise as customers demand faster, more seamless digital banking experiences. For example, embedded finance allows organizations to partner with fintechs to offer buy now, pay later (BNPL) services so customers that meet certain financial crtieria can better fund large purchases. Embedded finance requires the use of APIs and enables organizations to open up their applications’ data to third-party developers and partners who offer BNPL. Since this allows services and products to leverage each other’s data, maintaining trust and privacy remains paramount for all players involved – financial institutions, fintechs and even the retailer. This is where the value of a shift in focus from front end solutions to making improvements on the middle and back office functions cannot be understated – requiring a holistic approach to cloud technology to help deliver both the security and scalability needed for fintechs and their clients.

Fintechs will continue to leverage the flexibility of hybrid cloud to securely manage their mission critical workloads across multiple environments, allowing enhanced levels of speed and security to accelerate time to market for digital financial services. However, data resiliency, privacy, and information safety will always need to remain at the forefront of their decision-making and IT strategy in today’s complex digital world. 

Like other industries, fintechs are facing an evolving regulatory landscape. We see fintech leaders heavily seeking technology partners with deep experience who are not only building for the regulations already in place, but for future ones that could impact business. Regulators in the EU and the US are seeking to offer legal guardrails while allowing for information sharing. For example, the EU’s upcoming Digital Operational Resilience Act (DORA) is aimed at the evolving nature of risk and resilience in an increasingly digitalized landcape of EU financial services. In the US, a recent Treasury Department report states that fintechs are contributing to competitive pressure within financial services as their business models and new capabilities are creating additional risks to consumer protection and market integrity. Furthermore, the US Securities and Exchange Commisson (SEC) has also proposed amendments to rules on ESG reporting and disclosures. Fintechs are potentially approaching the point where informal ESG strategies may no longer keep pace with regulatory changes in this space.  

In 2023, business leaders should continue to place a focus on ESG ranging from reducing carbon footprint to improving energy efficiency. Some fintechs have already built into their business model and strategy avenues to help banking clients evaluate and reduce their environmental impact and channel operations to other sustainable assets. Yayzy, a UK-based fintech, delivers API driven technology for banks to integrate within their mobile apps, to enable carbon footprint tracking for customers based on their spending, alongside sustainable alternative suggestions for footprint reduction, and carbon offsetting. Yayzy is leveraging IBM Cloud to modernize its footprint calculator as high levels of security are required by financial insitutions to comply with stringent industry regulations.  

The breadth of solutions provided by fintechs is already being shown in the global financial system as they continue to partner with financial institutions. This currently ranges from helping to modernize core banking infrastructure to accelerating the use of embedded banking and other digital financial services products. However, fintechs will need to choose the appropriate technology partners to sustain trust and confidence in the digital transformation journey amid increasing regulatory scrutiny.