Advances in Financial Technology in 2024
Peter Johnson- Jan 3, 2024
- 5 min read
It's that time again to hear from Sean Kiernan, the founder and CEO of Greengage, and his views on the key tech trends which will be affecting the fiscal services industry in the years coming up to 2024 and beyond.
Despite some banks beginning to use Web3 technologies to create process improvements in areas such as cash management, custody and asset servicing, they face a serious challenge from non-bank disruptors like fintechs and tech-led platforms. This is especially concerning in relation to segments that have been historically underserved by banks, like SMEs, and de-banked or non-banked players such as numerous crypto-native firms which don't meet the risk criteria of traditional banking institutions. Consequently, these individuals and organisations are increasingly seeking the services of alternative financial service providers.
The main difficulty facing fledgling crypto companies striving to secure financial – or other – services is to surmount the barriers of conventional anti-money laundering and customer due-diligence (AML/KYC) methods. Web3 and decentralised technologies have the potential to reshape the process of individual authentication, creating identification which belongs to the individual and can be used in whatever application necessitates proof of identity.
Blockchain networks provide a heightened level of security which is essential for the growth of a secure, non-editable, and digital identity. This will ultimately replace the current, unshared document-based system, which requires various companies such as banks and utility providers to make potential customers jump through many hoops in order to prove their identity.
In the revised version, people will take possession of their own ID (guarded by technologies such as zero knowledge proofs) and have a lot more freedom to move around between service providers - this is when open banking will reach its full potential.
Stablecoins are viewed as a less hazardous way of entering cryptocurrency markets, usually seen as highly volatile. Unlike other digital assets, these coins are created on a blockchain, not ‘mined’. Stablecoins are backed by a conventional (or unique) asset, and are ‘minted’ in a 1:1 measure. Whoever receives a stablecoin on a transaction can ‘redeem’ it for the same amount of the underlying asset used to mint it. For instance, a £1 stablecoin can always be redeemed for £1 of the asset used to create it.
Apart from paper money, stablecoins can be supported by a range of ‘assets’, including additional digital coins, products and even algorithms (such as Frax and FEI). The potential danger attached with buying stablecoins can be reduced further by obtaining them at different blockchains.
The Bank of England has acknowledged the increasing significance of stablecoins in areas such as payments, both at the institutional and individual consumer level, and the requirement for them to be accounted for in regulations that safeguard the stability of financial markets and defend people’s rights.
The UK has recently implemented updates which deem stablecoins with sterling backings as 'digital settlement assets' in payment systems. To make the regulatory requirements for stablecoins and other similar money-based mechanisms, such as e-money, clearer, the FCA and PRA are carrying out work.
We anticipate stablecoins and associated instruments will continue to be adopted, especially as they enable T-0 (real-time) settlement. This is especially pertinent for international money transfers, for which conventional ways such as SWIFT can take up to several days to process.
Already some e-commerce business models (such as drop shipping) and traditional import/export enterprises with international elements have begun to switch to utilizing stablecoins due to their enhanced security and reduced foreign exchange, transaction and credit risks, due to the fact that the settling process is almost instantaneous compared to traditional methods.
Based on everything discussed, we forecast that new and unconventional financial assets will be introduced, including money-making components such as the two newly unveiled in America, known as Mountain Protocol and Midas, which utilize US Treasury investment yields. Accessible on numerous DeFi networks, Mountain Protocol in particular is designed to give international financiers access to US Treasury incomes.
Web3 and blockchain technologies further support the development of novel digital debt instruments that may be especially enticing for SMEs. Resembling traditional commercial papers in practice, digital debt products are devised and published with the aid of blockchains and smart contracts, and can be procured at much more competitive rates than conventional commercial paper.
The SME community, which has been receiving inadequate attention, is likely to be enthusiastic towards new sources of funding for them to expand their businesses, thus contesting the present state of corporate finance.
Fintech has already made it simpler for SMEs to take advantage of financial services (e.g., mobile phones), furthering financial inclusion by providing digital lending options and debt products that even the playing field. This encourages the transition of this group from traditional to new financial services pioneers.
Gamers who are passionate about their hobby are aware that the metaverse is a higher-level kind of virtual reality, making it possible to interact with both actual and computer-generated environments. Notably, the increasingly popular augmented-reality metaworlds of today are a result of the previous generations of immersive gaming systems like Fortnite and Roblox (which have caused a great deal of parental anxiety). In the near future, the metaverse will greatly impact how we go about our daily lives - through play, learning, work, and building relationships with companies.
Whether you choose to accept it or not, the distinction between the physical and digital realms is becoming more and more indistinct, necessitating financial service providers to pay attention to the extent of their involvement in this nearly one trillion dollar sector.
Some banks, eager to adopt early, have already started opening virtual branches in metaverses, aiming to capture the attention of the 'digital-native' gamers and to prevent — or at least postpone — being replaced by new decentralized financial services. Their challenge is to make sure that the virtual branches, where actual people can open bank accounts and access other services, are as secure, precise, and protective as their physical infrastructure and operations.
We anticipate that major financial services players will invest in the development and operation of financial ‘rails’ within metaverse infrastructure, going beyond the current concern for FOMO with virtual branches.
Simultaneously, new decentralized digital technologies and their related digital assets, extending from coins to tokens, are gaining exposure in the standard financial and wider commercial services industries, while the possibilities from AI and machine learning are also on the rise.
The interplay of blockchain enabling more clear and proficient information sharing and AI facilitating more precise prognostication of occurrences and relevant activity implementation makes for an exciting outlook on the financial market operations. Beyond the benefits AI provides to improve cryptocurrency and blockchain applications in regards to transaction speed and data security, there are broader prospects for financial services, for example, Numerai's imaginative AI-empowered product, which incorporates AI, blockchain technology, and crowd-sourced stock market predication models into a quant-based hedge fund.
It is expected that as these first trailblazing financial products become popular with investors experienced in digital technology, additional such products will emerge.
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