Financial Services Market: The Rise Of Fintech And Digital Banking

Digitalization is affecting every industry and activity today — the way we communicate, plan our trips, shop for goods, and, consequently, pay for them. In banking and fintech, the change is more profound, of course. The emergence of digital banks, or neobanks, has made it possible to offer clients advanced platforms for a wide range of financial solutions, from managing debit and credit accounts to investing in a variety of products — straight from a mobile app. 

Clearly, traditional banks should also embrace this change if they want to stay competitive. Today, clients already expect the same level of accessible convenience they can get from newly emerged digital banking platforms. So, investing in digital transformation is no longer a matter of preference — it's about staying competitive in the ever-changing tech landscape. Fortunately, modern tech offers many opportunities for relatively quick digitalization — even though the transformation is not without its challenges. 

Below, we will discuss the key drivers and opportunities in fintech, as well as potential stumbling blocks of digitalization in fintech, trying to assess the industry's growth possibilities in the foreseeable future. 

Digitalization Opportunities for FinTech 

Customer Base Retention & Increase 

In the case of traditional banks that have not fully embraced digitalization, investing in all-in-one platforms is the surest way to retain existing clients. Today, users demand the convenience of a full-scale payment platform in their smartphone — the trend is gradually turning into norm. For neobanks, offering user-friendly customer services is a way to attract more clients than the competition, which is steadily growing. 

Cost Reduction & Improved Asset Management

By offering customers a well-tuned app (and a greater degree of control over their transactions), banks get a chance to reduce their expenses — starting with employing less staff and ending with office space reduction. As a result, banks get a chance to provide better rates, increase payouts, and reduce some of their fees. All of that combined also translates into an increased database of satisfied customers. 

Enhanced integration with third-party services 

In most countries, online payment systems comply perfectly with legal regulations, which was a major stumbling block for many banks only a few years ago. Today, e-wallets aren't just completely legal—they also have large client databases, which is why banks can seamlessly integrate third-party apps in their partner chains. Again, this usually results in an increased customer database – and that, without spending too much effort or money on new client acquisition. 

Key Drivers Pushing Digitalization Further

The obvious benefits described above are no longer tough to attain because finance digitalization is facilitated by many drivers, where the massive spread of smartphones is only the obvious start. In turn, increased use of mobile payments and digitalization of financial services facilitates data collection and customer service, which enhances the fintech digitalization process further and accelerates its speed. 

Some of the key drivers of such major paradigm shift banking include:

• Fast and accurate data collection, with quick and convenient access to customer data enhances user experience and allows for more personalized offers and promotions;
• The spread of generative AI allows banks to analyze large amounts of unstructured data, while AI-powered predictions result in continuous improvement of customer service;
• Advances in data science give banks an opportunity to better leverage customer data and automate routine processes, which, on top of enhancing client experience, eventually leads to cost reduction;
• Modernizing existing infrastructures to meet the growing demand for fully digital banking services implies upgrading software and hardware, which often results in more robust security measures and protocols. 

All in all, digital transformation is a self-sustaining process that keeps accelerating with every new tech advance. Ultimately, the majority of changes result in a more customer-centric approach and higher accessibility of traditional banking services for the end user. 

Limitations Slowing Down FinTech Digitalization

Despite the clear benefits of fintech digitalization and the ever-present drivers pushing the transformation further, banks still need to overcome a few challenges on their path to creating high-quality, customer-centric fintech platforms. The most common examples include:

• Regulatory uncertainties: even though governments worldwide are actively introducing regulations to support digital payment platforms, the shift is still slow and is often associated with a series of uncertainties — especially when international payments, governed by different national regulations, are concerned. 
• Data privacy and cybersecurity: the number of cybersecurity breaches remains a massive problem, which poses risks for a fully digital payment platform. Also, the introduction of new laws regulating how customer data is handled also imposes a series of limitations on how client data is stored and managed. The regulations are subject to change, too, which creates new challenges for fintech institutions.
• Implementation and maintenance cost: in the long run, embracing digital transformation can lead to an increase in customer numbers and operational cost reduction, but the early stages of transformation call for a major investment. In addition, fully digital platforms require constant maintenance, especially when data science and cybersecurity are concerned. These recurring costs need to be considered as well. 

Industry Future & Investment Potential 

Despite the potential challenges slowing down the digital transformation of the traditional banking system, the industry is growing at a steady rate. Earlier this year, SignalHire, a database used primarily by recruiters and business developers, carried out an internal study on market segments. Their research on the fastest growing industries was based on the monthly number of searches made by recruiters in the US in early 2023-early 2024. Accounting and finance scored fourth on this list, overtaken only by IT, healthcare and manufacturing. 

On a global scale, fintech industry growth ranks in the top twenty, which is no small fit for a market segment that has never been too eager to embrace innovation. But the times are clearly changing, and the international investment portfolio keeps growing. CB Insights reports 904 deals with a total worth of over $7 billion made in the first quarter of 2024 alone. The US is leading the way here, with 393 fintech investment deals worth $3.3 billion, followed by Western Europe ( $2.2 billion from 203 deals) and Asia, with over a billion worth of investment across 210 deals. 

According to the KPMG report, fintech funding figures in 2023 were lower than investment portfolios in the preceding years, which may indicate a certain slowdown — at least, as far as funding is concerned. The industry itself, however, keeps developing — Fortune Business Insights forecast a 16.5% growth rate over the next eight years. Still, one should keep in mind that fintech growth is directly related to tech and IT industry growth — especially when data analysis and security measures are concerned. So, the actual digitalization pace may develop faster — the global data science market growth is expected to grow up to 16,2% from 2023 to 2032. 

Takeaway: The Change is Already Here

The industry renowned for its conservatism is already embracing innovation, and even though it is hard to give accurate estimates of future growth, the change is clearly happening right now. Financial institutions that embrace innovation can reap many benefits of digitalization, where retaining existing customers and attracting new clients is only the tip of the iceberg. Advanced tech may eventually lead to better asset management and cost reduction; in turn, overcoming the common stumbling blocks, such as security concerns and legal challenges, is a certain path to steady financial growth.

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This post was authored by an external contributor and does not represent Benzinga’s opinions and has not been edited for content. The information contained above is provided for informational and educational purposes only, and nothing contained herein should be construed as investment advice. Benzinga does not make any recommendation to buy or sell any security or any representation about the financial condition of any company.