Thursday, 25 April 2024

AI, regulatory shifts, and digital bank expansion to define fintech in 2024

5 min read

By Czeriza Vigilia

Generative AI revolutionises banking operations, regulatory frameworks adapt to innovation, and digital banks expand in global markets, marking significant shifts in the financial services sector set to define its trajectory in 2024.

  • Generative AI reshapes banking with improved customer interaction and risk management
  • Regulatory changes promote digital banking growth, enhancing financial inclusion
  • Fintech firms focus on embedded finance and partnerships for resilience, expansion

The fintech industry has experienced significant growth and challenges since mainstream adoption began during the peak of the pandemic in 2020 and 2021. Apps that provide streamlined, end-to-end services have disrupted traditional banking and changed consumer expectations. As fintech permeates daily life, some trends have longer legs than others and have the potential to define the future of the industry. 

Generative AI holds its ground

Artificial intelligence (AI) has been used in banking for decades, but applications have been limited to data management and process automation. Banks and other financial institutions (FI) are taking it a step further, incorporating advanced generative AI (GenAI) technology into their operations. 

This new wave of AI that mimics human cognition, has numerous applications in customer engagement, marketing, risk management, and even fraud prevention. By providing new capabilities, it can boost employee productivity while also making operations more effective and profitable.   

One of the most powerful applications of GenAI is the creation of content based on vast volumes of data. For example, virtual assistants trained on large language models (LLM) can converse with customers in ‘natural’ language to answer questions and handle complaints. LLM also enables banks to create personalised marketing content and tailor product recommendations by analysing individual customer data. 

In 2023, Mashang, a Chinese consumer finance company, successfully integrated its open-source LLM called Tianjing into customer service, marketing, and risk management, yielding concrete results.

Compared to machine learning (ML)-trained counterparts, the LLM-trained virtual assistants were more accurate in discerning customer intention. This was reflected in the increase in accuracy from 68% to 91%. The conversations yielded data that was used in the development of personalised marketing content and product suggestions, resulting in a 25% increase in conversion rate. 

Mashang also used the LLM to analyse unstructured data such as customer feedback, social media posts, and news articles to better assess credit risk. This, in turn, resulted in a 15% reduction in default rates and delinquencies in its loan portfolio, which improved asset quality and profitability. 

Banks tend to incorporate GenAI gradually, and for specific uses, as integration presents issues in data security and regulatory compliance. Sun Lei, deputy general manager of Mashang, acknowledged that as LLM use cases increase, optimisation costs and data privacy issues rise alongside.

Digital banks grow around evolving regulatory frameworks 

Regulatory frameworks, especially in Asia, are evolving to keep up with innovation. To balance the need for transformation while safeguarding financial stability, governments are enacting new regulations for fintech. In some cases, regulatory sandboxes are established to test new financial services in a controlled environment. 

On 4 March, The Bank of Thailand (BoT) published its rules, procedures and conditions for submitting an application for a virtual bank licence. It will accept applications from 20 March until 19 September. In a statement, BoT stated that it will hold an information session for prospective applicants to provide additional information. Successful applicants will be announced in the first half of 2025. 

Thailand’s central bank intends to award three digital banking licences this year in an effort to enhance financial inclusion by widening access to financial products and services at reduced cost to those who need it most. 

As regulatory environments mature, digital banking is likely to flourish, particularly in Asia. Unburdened by legacy systems, digital banks are more agile and customer-focused. Their services are convenient and accessible, making them ideal for markets with large unbanked or underbanked populations. 

Banking for the underbanked

UNO Digital Bank in the Philippines provides easy-to-use services targeted at underserved individuals and small businesses. The bank provides a single platform that encompasses all aspects of a person’s financial life from savings and borrowing to investment and protection. 

“Even after COVID, around 40% [of Filipinos] are unbanked; 90% to 95% are not happy with their financial services,” said UNO Digital Bank CEO Manish Bhai. 

To instil discipline in its customers, UNO combines financing initiatives with financial literacy. For this, it teamed up with Proxtera, an institution backed by the Monetary Authority of Singapore (MAS) and Temasek to provide financial education and certification to micro, small and medium-sized enterprises (SMEs). 

The bank has more than 750,000 customers as of 2023, having launched in the Philippines only in 2022. UNO chairman Kalidas Ghose believes, however, that the Philippines is “very fertile ground” for expansion as there are between 45 to 50 million individuals underserved or unserved by traditional financial institutions for personal banking or business financing. 

He said: “Our platform is suited to cater to their needs, bringing them into mobile banking, reducing their costs, making it more transparent, flexible, and convenient.”

Even in developed markets, digital banks are also gaining momentum due to their high deposit interest rates and delivery of a wide range of products for consumers and small businesses. 

Singapore-based GXS Bank, for example, offers a deposit product with attractive rates and daily interest crediting. For a maximum deposit of SGD 75,000 ($56,000), the bank pays an interest of SGD 7 ($5.26) per day. Group CEO Muthukrishnan Ramaswami said: “We call it a free lunch every day. Only in very few banks will you see your interest credited to you every day and at an interest quantum that can be meaningful.” 

GXS Bank addresses the pain points of credit access in banking by providing a speedy and efficient credit approval process. Using alternate data, the bank can approve credit in minutes. To date, up to 30% of its clients are either new to credit or have weak credit bureau files. 

 “Access to great financial services is key to enabling financial and social mobility, and that’s one of our motivations for doing this. We will harness the power of modern technology and data science to provide easy-to-use financial services,” said Ramaswami. 

MAS has allowed GXS Bank, which is backed by a consortium of Grab Holdings and Singtel, to operate as a full digital bank. Its Malaysian affiliate GXBank, is backed by a consortium of Malaysian investors, including Kuok Group, and operates under a similar licence. 

Partnerships key to funding, growth

Funding for fintech was slashed by 42% in in 2023 due to economic and geopolitical challenges. However, several firms like US-based payments processor Stripe and Indonesian peer-to-peer lending platform Investree still secured substantial funding of $6.5 billion and $231 million, respectively. 

This indicates that investors are now becoming more selective, preferring to invest in rising companies that offer innovation, regional or global scalability and market leadership. They are also looking into firms with robust business models and clear paths to profitability. 

Fintechs themselves acknowledge the importance of resilience and adaptability in the face of economic uncertainty and market volatility. 

For instance, Stripe has formed a partnership with OpenAI to incorporate the natural language GPT-4 technology into its offerings and commercialise the ChatGPT generative AI technology via subscription. 

Investree, meanwhile, has partnered with Qatar’s JTA International to expand its operations in the Middle East, providing AI-powered lending services to SMEs. 

Platforms, embedded finance brings sticky customers

Embedded finance integrates financial services into non-financial platforms like those for shopping, food delivery, and ride-hailing. Customers enjoy the convenience of purchasing an item online while being provided a variety of payment options without leaving platforms. In addition to payments, platforms may offer loans, insurance, or investments. 

Intertwining the offerings with customers’ daily needs and wants increases engagement and loyalty, and gives businesses traction for expansion.

The BCG research for Embedded Finance, commissioned by major payments processor Visa in November 2022, showed that embedded finance can unlock more than $242 billion in market opportunity for financial services providers across Asia Pacific by 2025, with SMEs benefiting from it the most. 

Decentralised finance as a tool for financial inclusion

Decentralised finance (DeFi) is now envisioned as a tool for financial inclusion across economies, lowering the cost of cross-border transfers and cutting the settlement time. Close engagement with regulators is required, however, to overcome adoption barriers.

Yam Ki Chan, vice president of strategy and policy at USDC stablecoin issuer Circle, stated that using stablecoins in cross-border transactions can help alleviate poverty, especially in Asia Pacific, by lowering the cost of remittances, transaction time and costs for businesses dealing with multiple currencies. 

He said: “Here in Asia, you may be sitting in Singapore, your customer in Japan, and your vendor in Vietnam or Thailand. And that small microbusiness is dealing with all sorts of currencies, collecting in Yen, paying in Dong, holding whatever they have in working capital in US dollar or Singapore dollar or something else. This is a real challenge where stablecoin can help in terms of lowering the foreign exchange costs and shrinking the settlement time.” 

In order to offer a faster and more affordable remittance option, Circle has partnered with, a cryptocurrency exchange based in the Philippines, to convert user funds to USDC which has a 1:1 value to US dollar and can then be sent to a crypto wallet. 

According to World Bank estimates, sending $200 worth of remittances to Asia would cost around $12, roughly 5.7% of the total. “This is cost that really impacts the most vulnerable in our society here,” said Chan.

The fintech industry is proactively tackling those pain points, driven by generative AI, regulatory evolution, and the rapid ascent of digital banks. These trends not only redefine consumer banking but also pave the way for a more inclusive, efficient, and secure financial landscape. The synergy between technological innovation and regulatory support will be crucial in realising the full potential of fintech, ultimately leading to broader financial inclusion and a more dynamic global economy. – Additional research by Hugh Zeng and Jeff Villapando, TABInsights

Keywords: AI, Digital Bank Expansion, Customer Interaction, Apps, Consumer Expectations, Data Management, Accuracy, Conversion Rate, Credit Risk, Default Rates, Delinquencies, Asset Quality, Data Security, Customer Needs, Deposit Interest Rates, Credit Access, Adaptability, Chatgpt, Embedded Finance, Bcg Research
Institution: Mashang, Bank Of Thailand, UNO Digital Bank, Proxtera, GXS Bank, Stripe, Investree, OpenAI, JTA International, Monetary Authority Of Singapore, Grab Holdings, Singtel, GXBank, Kuok Group, Circle,, World Bank, Visa
Country: China, Thailand, Philippines, Singapore, Malaysia, Vietnam, Japan, USA
People: Sun Lei, Manish Bhai, Kalidas Ghose, Muthukrishnan Ramaswami, Ki Chan
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