Why US fintech and banking is at an inflection point

Editorial

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Reetika Grewal, head of digital, commercial bank and corporate and investment bank, Wells Fargo, and Sarah Lamont, investor, F-Prime Capital, joined Nikhil Lele, banking and capital markets, EY, to discuss the uptake of AI and progress in back office use cases, the importance of partnerships and user-centred design and the rebound of fintech valuations post-2022.

2025 Prediction: Community banks will remain the lifeblood of the economy

Lele kicked off the conversation by stating that traditional banks have “reached this inflection point, and [community banks] are in pretty good spots. These aren’t your name brand banks. You-don’t-know-who-they-are banks because they operate in very local communities, but they’re the lifeblood of the economy.”

He highlighted that while the financial services industry is “one of the few and only mission critical industries,” US traditional banks haven’t moved very fast because the focus has been on security, and less so on embracing innovation. However, the building blocks that have been established at a gradual pace will “pay themselves off on an iterative basis as banks build out their broader technology over a period of time,” Lele said.

In order to move beyond this stasis, the value of both sides of this market needs to be “squeezed” – grow while fees and net interest margin pressure is high. Lele went on to say that “now this requires some new thinking. Most [traditional] banks don’t have the capital to go and chase large scale growth initiatives and fund multi-year projects and do all this really cool innovation stuff.”

The way forward is for banks to partner with fintech firms and embed innovation into their ecosystem. On community banks and neobanks, Lele added that “small banks have more fintechs inside of their four walls than you would ever believe possible. There’s a ton of actual innovation potential that bank CEOs are now staring at saying, how do we do that?”

2025 Prediction: Fintech investment is actually on a rebound, not an anomaly like 2021

Lamont provided the macro, public markets perspective and explored the “three year story in fintech.” She continued: “2021 fintech was very much on fire and we tracked this with our F-Prime index, which reached 1.3 trillion. 2022 was the year of public markets reappraisal and our index plummeted to 400 billion. 2023 was the year of rebounding and steadying in the public markets.”

Lamont contextualised this with the example of SoFi: “their multiples back in 2021 were 13x their revenue multiples, they plummeted in 2022 and in 2023, they rebounded up by 4.4x.” She explained that this was because banking disruptors were reappraised quickly and in comparison, traditional banking multiples were growing 2.9x. Neobanks traded on a huge premium compared to their banking incumbent counterparts, but over the last couple of years, that gap has shrunk and valuations are proving to be fairer.

Speaking about the traditional banking landscape, Lamont also said in the US, it is the same seven banks that own the majority of deposits, around 7 trillion. Lamont agreed that there is a segment of banks with deposits of between 10 billion and 1 trillion that are growing healthily, but at the other end of the spectrum, fintech firms are in control. In the middle – the sub 10 billion deposit banks are getting “squeezed”, as Lele mentioned, and therefore, are the lowest growing segment. Lamont explained that this group still controls a “pretty sizeable amount of deposits, but growing a lot slower, and need to get a little creative with their growth strategies.”

2025 Prediction: It’s good to be excited about generative AI, but measured too

Grewal elucidated how Wells Fargo has spent a lot of time “thinking about [Generative AI], playing with it, playing around with it, across various different use cases. The customer success functions seem to be the natural place for some of those things to sit, but we’re also looking at it from a customer experience perspective.

“My team have been working on some experiences that are 100% driven by generative AI, as well as some of the back office functions, and we set up a centre of excellence at Wells Fargo to make sure we’re being really cautious and judicious about how we’re using it because some of the inherent risks in the technology are yet to be understood.

Lamont agreed and said that “true generative AI will be used in instances where generating a summary or generating text is useful.” She went on to say that there are many areas of banking and fintech where AI has been used for decades, and “true generative AI isn’t really relevant.”