The fintech industry has been at the forefront of technological advancements since its emergence, often leading the way in leveraging cutting-edge solutions to transform financial services. Artificial intelligence (AI) is no exception, the industry was one of the earliest adopters, and AI has been used extensively in finance over the last decade. In 2023, the expanding capability of "generative AI" pulled this technology into the spotlight again. The generative AI revolution has the potential to impact and mainstream the fintech market making it a likely leader in the innovation and adoption of the new technology. It will achieve this by enhancing operational efficiency, improving customer experiences, and enabling more accurate decision-making among other ways. Here we will explore the history, current state, and future prospects of AI-driven innovation in the fintech market, showcasing its immense potential for businesses, finance, and investors.
The integration of AI in the fintech industry has a rich history. In fact one study indicated that as of mid-2019, 90% of fintech firms were already using AI technology, suggesting that AI is already well-established in the sector. As financial institutions faced increasing challenges from fraudulent activities and the need for faster, more accurate transactions, they turned to AI as a solution. According to NVIDIA's 2022 State of AI in Financial Services survey, fraud detection emerged as the top AI use case, with 31% of financial services professionals implementing AI to protect customer payments and transactions. AI-powered fraud detection systems have proven instrumental in combating financial crimes, account takeovers, and identity theft.
In 2015 early AI use cases to enhance financial services included Wealthfront, a California-based robo-advisor incorporating AI capabilities to analyze account activity and customer spending patterns across its own platform and integrated services like Venmo. This allowed them to provide personalized advice to customers. Another example included Sentient Technologies using AI to continually analyze data and improve investment strategies. AI was also utilized early on in banking customer service, with many banks launching AI-powered technology to assist service agents in finding answers to customer queries and direct customer interaction through chatbots. AI also enabled fintechs to offer personalized financial advice to many investors who otherwise couldn't afford a human advisor.
Talk of robo-advisors was all the rage back in 2015, but now, this AI-based technology has become virtually commonplace. Other areas in which AI has already become a key piece of the fintech services puzzle are fraud detection, algorithmic trading, data analysis, and improved accuracy and productivity.
The current state of AI in the fintech market is marked by significant growth and adoption. The AI in Fintech Market Size is projected to surpass USD 43.6 billion by 2028, exhibiting a compound annual growth rate (CAGR) of 25.5%. Financial institutions are increasingly investing in AI technologies such as conversational AI and algorithmic trading. Conversational AI, which enables natural interactions between humans and machines, has gained traction, with 28% of respondents utilizing it in their operations.
This technology has the potential to further enhance customer experiences and streamline customer service through virtual assistants and chatbots. For example, some companies focus on Know Your Customer (KYC) and Anti-Money Laundering (AML) fraud detection, leveraging Natural Language Processing (NLP) algorithms to analyze customer data and reduce the risk of financial crimes. These startups are harnessing the power of AI to support consumers and businesses in various domains. Others are developing recommender systems that offer personalized, recommended offers and next-best actions to customers based on their individual data.
This phenomenon isn’t limited to Silicon Valley, but represents a global trend. In Europe, several AI-driven fintech firms are making waves. These AI-driven fintech startups are driving innovation and creating new opportunities in the European fintech landscape. Meanwhile, the Asia-Pacific region is home to the highest growing fintech industry in the world, with some of the biggest players globally based in the region and the largest potential customer base. The fintech industry in Asia-Pacific comprises massive mature markets like China and India as well as smaller emerging markets with high growth potential. The Asia-Pacific region has already secured some major investment deals this year, including a 28 billion U.S. dollar M&A of Afterpay. Africa, however is positioned as the fastest-growing fintech region, Projected to Reach $65 Billion in 2030. Neo-banks and B2B fintech segments will play essential roles in expanding financial access and inclusion on the continent.
The future of AI-driven innovation in the fintech market is looking even more promising as the technological capabilities continue to develop at an exponential rate. As AI technologies continue to advance, they will revolutionize various aspects of financial services. Machine learning and AI algorithms will enable more accurate credit assessments, fraud detection, and risk management. A good example is Resistant AI, a startup Fighting Fraud using AI. Resistant's cutting-edge technology has doubled its customer base and skyrocketed its ARR by 600% in 2023.
Conversational AI will transform customer service by providing seamless and personalized interactions, enhancing the overall customer experience. Additionally, AI-driven robo-advisors will offer sophisticated investment strategies tailored to individual investors' goals and risk profiles. There are likely many other areas for innovation in fintech that have barely been explored.
With the Generative AI revolution, many FinTech startups and incumbent institutions are now in the process of moving from mainly using AI to reduce costs to utilizing its capabilities for revenue generation. WEF data from 2020 showed that most incumbents primarily used AI to enhance existing products and services, whereas many FinTechs were using it to create new value propositions. This value creation strategy being pursued by the fintechs is abetted by selling AI as-a-service, with many FinTechs offering AI-based B2B solutions compared to incumbents. A good example is CapStack, by Pipe co-founder Michal Cieplinski, which raised $6M recently to build an integrated banking OS, facilitating portfolio visibility and investment amongst financial institutions with over 60 banks onboard even prior to product launch. In Europe Swedbank partnered with competitors to create a new payment method - Swish - that is now used by 91% of all adults in Sweden.
The combination of AI and other emerging technologies, such as blockchain and Internet of Things (IoT), will create a powerful ecosystem that enhances security, transparency, and efficiency in financial transactions. AI-powered chatbots and virtual assistants will become more sophisticated, capable of understanding complex queries and providing comprehensive financial advice. Moreover, AI's potential to analyze vast amounts of financial data will enable predictive analytics, empowering financial institutions to make data-driven decisions and identify market trends with greater accuracy.
The growth and potential of the fintech AI market has potential for even more explosive growth when combined with blockchain. The market size of the blockchain AI sector is projected to grow from USD 3.17 billion in 2023 to USD 21.67 billion by 2028, with a compound annual growth rate (CAGR) of 46.92% during the forecast period. Factors driving this growth include the increasing market cap of cryptocurrencies, rising demand for distributed ledger technology, and the adoption of blockchain solutions in financial institutions.
Fintech expert Jason Simon's latest analysis has delved into these transformative technologies he sees as redefining the financial industry in the future. Simon believes blockchain, AI, machine learning and big data analytics, offer innovative tools to drive efficiency, transparency, and security in financial operations. Simon highlights the potential of these technologies to streamline processes, enhance customer experiences, and revolutionize traditional financial services.
The digital transformation of the financial industry, including digital banking technologies and automated customer service, is already contributing massively to the market's expansion. The adoption of cryptocurrencies and digital tokens for payments, as well as the popularity of stablecoins and decentralized finance (DeFi) protocols, are expected to further fuel the market. The fintech blockchain market is anticipated to continue growing with the increasing use of artificial intelligence to aid blockchain-as-a-service (BaaS) and the integration of the Internet of Things (IoT). Major players in the market already include Accenture, Amazon, Dell, HPE, IBM who are also all exploring AI heavily.
AI-driven innovation has the potential to transform the fintech market, revolutionizing financial services and unlocking new opportunities for businesses, investors, and consumers. The integration of AI technologies such as fraud detection systems, conversational AI, and algorithmic trading is already reshaping the industry. Fintech startups leveraging AI are driving innovation in the US, and globally, offering enhanced customer experiences, improved security, and personalized financial services.
As we look ahead, the future of AI-driven innovation in the fintech market is bright. Advancements in AI, machine learning, and other complementary technologies like blockchain or IoT will enable financial institutions to offer more efficient and tailored services. The potential for AI-driven fintech solutions to optimize processes, mitigate risks, and provide personalized experiences makes it an exciting space for businesses, finance, and investment-savvy individuals to explore. We plan to continue watching this space closely and keeping you up to date with the latest opportunities to get exposure to this growth potential.