The Future of the Financial System: Trends and Predictions

Recent innovations like generative AI, open banking, and decentralised finance will be critical to the financial industry's future, stability, and growth. The list of trends and developments includes some transformative solutions that are here to stay. 

Disruptive innovations keep changing financial services' structure, delivery, and consumption. Although economic outlooks for 2024 are relatively low, we can foresee a mild slowdown in economic growth in a cautious, optimistic way.  

The following year also poses other challenges; even though inflation will likely slow down, consumer demand changes and a downward trend in housing prices will continue. However, armed with solid technological breakthroughs, the financial services sector is ready to respond to these requirements and challenges appropriately.  

This article discusses critical technological trends and developments in the financial services industry. Comprehending and integrating these developments will give your organisation a competitive advantage and improve its operational performance.   

Key Pillars of the Future of Global Financial Systems

Recent technological developments, such as generative AI, open banking, and decentralised finance, will be critical to the financial industry's future, stability, and growth. Below, we will discuss each of them. 

Stability, Innovation, and Growth of the Economy

This pillar explores the impact of industry transformation on the financial system’s dual objectives: capital allocation promoting economic growth and financial stability that would assure continuous confidence in the system. 

Focus areas include:

• The fast technological development in the financial system and the resulting public policy issues.  
   
• The transformative impacts of regulatory policies on financial systems.  
   
• Effect of alternative credit strategies on different economic sectors.  

Promoting Financial Inclusion Globally

Building a framework for inclusive economic growth is a big challenge for the financial sector. Despite the apparent demand for financial services at all income levels, supply has been insufficient. Thus, many people are driven towards risky, costly savings, borrowing, and asset security alternatives.  

A portfolio of “impact” projects seeks to recognise and seize the best opportunities to improve access to affordable and high-quality financial services for the unserved and underserved. Current initiatives include digital Inclusion, which involves seeking to facilitate the incorporation of large traditional retail markets into the financial mainstream with a focus on Indonesia, India, and Mexico.  

Generative AI in Finance

The latest developments in generative AI have reshaped many financial offerings, including personalised customer experiences and improved operational efficiency, data analysis, customisation of financial products, and more.  

The market is expected to grow to $118 billion by 2032, providing custom investment strategies and financial advice according to individual customer behaviours and preferences. The innovation already saves billions for banks and will grow as market values are estimated to skyrocket.  

Improved Open Banking

The open banking market is projected to surge, possibly reaching $164 billion by 2032. Powered by API technology, open banking changes the traditional process of sharing and using financial data, creating a customer-oriented, secure, and innovative financial environment. Customer demands are set to drive open banking innovations more and more, with users wanting faster, more comfortable, and more personalised banking services.  

A report by PwC expects that around 71% of small and medium-sized enterprises (SMEs) will adopt open banking by 2024 to improve their service offerings, including real-time payments and advanced financial management tools, competitive lending rates, and bespoke insurance products, among other benefits. The success of open banking depends on a solid regulatory framework, robust security measures, consumer protection, and the industry's ability to innovate and meet customers' needs.  

Decentralised Finance and Distributed Ledger Technology (DLT)

Decentralised Finance (DeFi) and Distributed Ledger Technology (DLT) will be used in the future of the financial system as they seek to decentralise and revolutionise global financial markets. According to Statista, DeFi is expected to grow at a compound annual growth rate (CAGR) of 42. 6% and the market for DLT is expected to grow to $140 billion by 2030.  

Recommended Read: How Does DeFi Work?

Source: Freepik

DeFi, building upon DLT, such as blockchain, enables various financial applications and services—lending and borrowing, asset trading, and risk management—on a decentralised platform. A report from Deloitte points to the transformative potential of DeFi to create an ecosystem of open, inclusive, and fairer financial markets available to anyone with an internet connection.  

Worldwide, the growth of DeFi and DLT is increasingly coming under regulatory attention. The European Union’s DLT Pilot Regime is seeking to establish a sound platform for trading and settling transactions in financial instruments on DLT platforms, providing legal certainty and regulatory clarity. This initiative is critical to the adoption and development of DeFi and DLT.  

Similarly, the UK’s Digital Securities Sandbox allows companies to experiment and develop digital securities trading in a safe and protected environment, meeting compliance and consumer protection. 

Buy Now Pay Later (BNPL) Model to Keep Growing

Buy Now, Pay Later (BNPL) is a new model in financial services that has changed how traditional credit is obtained. It is more prevalent among low-credit consumers because it offers interest-free, fixed instalments that are due in a shorter period, such as three months.  

This model is less risky than credit cards, and companies like Apple already use it. Juniper Research predicts that BNPL will represent 1/4 of all e-commerce transactions by 2026, more than triple the 2021 figure, illustrating the innovation’s massive potential.  

Gamification in Financial Services

Financial gamification is a concept that uses gaming components such as graphics, point systems, challenges, and rewards to improve customer engagement and knowledge of financial services. 

Source: Freepik

This approach makes financial topics impersonal and informative, providing people with the knowledge to make informed decisions.

Related: Game Finance (GameFi): What's So Attractive About It?

Financial institutions are set to introduce even more gamified elements in their offerings to make the segment more aware and involved. 

Integrating Robotics for a Personalised User Experience

A recent trend in robotics is its integration into fintech. This enables higher automation, improves service delivery, data processing, and fraud detection, and provides faster and more accurate operational flow.  

To illustrate, robotic process automation (RPA) focuses on simplifying rule-based tasks, which allows financial institutions to allocate resources to service areas that require more complexity. In addition, robo-advisors are becoming increasingly popular as they provide users with automated, algorithmic investment methods.  

Thinking Sustainably in Financial Services Offerings

Sustainability in the financial services industry is becoming increasingly important as organisations and consumers focus on socially and environmentally responsible behaviour.  

FinTech companies are embracing green initiatives through paperless transactions and investments in sustainable technologies, which aligns the financial services industry with the global move to address climate change and achieve a sustainable future. Hence, many fintech platforms are expected to incorporate ESG criteria in their approaches to promote responsible and ethical investment.  

Bottom line

The future of financial services lies in between–the progress that is too fast for some and too slow for others. The combination of radical transformations in financial services and innovative technologies will shape the future of financial services firms. 

These technologies include generative AI, blockchain, VR/AR, and environmental-conscious innovation, among others, and will tend to make the industry more personalised, efficient, and sustainable.