Looking back and moving forward: How fintechs will beat back the dark clouds of 2024, capitalize on trends like AI, and build resilient firms in 2025

From ‘BaaS is dead’ to discussing how Gen AI and Open Banking could significantly change how fintechs connect to banks, serve customers, and help push the industry forward, 2024 has been a really happening year for fintechs. 

In this new year we look at how fintechs fared in 2024 and explore what shifts we can expect from these companies in this new year. 

Victoria Zuo, Principal at QED investors, says after a few years of headwinds she expects 2025 to be a year of recovery. 

The turnaround for fintechs was most evident in the uptick in public markets. It restored confidence in fintech companies following successful IPOs, according to Zuo. On the other hand, the private market continued to cherry-pick fintechs that exhibited they had what it takes to reach profitability, she added. 

Most importantly, in this year of many changes, fintechs had to find a way to pivot away from ‘growth at all costs’ and towards efficient scaling and operational discipline. 

“The year showcased the resilience of the sector as it adapted to macroeconomic challenges and recalibrated for long-term success,” Zuo added. 

Looking back: The trials of 2024 

Last year came with challenges that destabilized assumptions about what it takes to build fintechs, run them, drive them to success:

a) The interest rates paradox: At the start of 2024, interest rates remained high and the uncertainty surrounding cuts continued to challenge fintech leaders to think on their feet about how their firms will make money. “Rising rates squeezed margins for lending-focused fintechs, forcing them to diversify revenue streams and focus on underwriting excellence,” said Zuo. 

Research by SVB backs this up, showing that fintechs have had to focus on acquiring high quality borrowers instead of extending credit to borrowers that may carry revolving balances. But as a result of this strategy, fintechs have had to reap their profits from interchange fees.

Elusive funding: Fintech leaders had a hard time chasing VC dollars in 2024, pushing them to focus on their business models. “Access to venture capital remained limited, prompting startups to extend their runways through cost optimization and prioritizing monetization over growth,” she said.

The looming regulator: In 2024, regulators started to contract the freedom the industry had available to innovate and pushed its leaders towards building more safeguards and guardrails. This was most evident in how fintech-bank partnerships became strained due to a towering amount of consent orders for bank partners. “The regulatory landscape, especially in areas like BNPL and crypto, grew more stringent, pushing fintechs to invest in compliance and risk management,” Zuo added. 

Capitol Hill in flux: 2024 was an election year and the fintech industry was no stranger to this. FIntech leaders were caught in between red and blue, as questions about the Biden administration taking a more pro-regulation stance through government bodies like the CFPB clashed with ideas how a Trump administration could shift this focus. 

“A new administration could bring a more business-friendly approach, particularly in areas like crypto, financial inclusion, and open banking,” said Zuo. 

The regulatory push didn’t just impact how fintechs chose partners and structured products but also impacted their bottom lines. 

“Compliance costs have risen due to rising regulatory pressure, especially regarding BaaS partnerships. Fintechs are now responsible for more compliance requirements, leading to higher operational costs and a greater focus on regulatory diligence,” said SVB’s Head of National Fintech and Specialty Finance, Nick Christian.

But Zuo feels that moving ahead, this focus on building a strong compliance-forward foundation could be beneficial for the sector, saying that the stricter regulatory environment served as a “forcing function for fintechs to strengthen compliance” and will help in building consumer trust and robustness in the system in the long term. 

The making of a hero: The fintechs that rose up from these challenges were focused on improving cash flows, lengthening their runways, and had an eye on customer pain points, as well as regulation shifts. “Companies that proactively engaged with regulators and invested in compliance infrastructure navigated regulatory changes more effectively,” said Zuo. 

Moving forward: 2025 and fintech, the comeback kid

1. Global tensions will motivate local innovation: Given the geopolitical tensions of last year, fintechs that helped people connect and run businesses across geographies fared well, like those focused on cross border transactions. These tensions birthed a demand for tools that helped with things like risk management, and the expectation is that the impetus for 2025 will be AI – helping with automation in supply chain tasks and also powering productivity gains across the industry. 

2. B2C is still cool: While VC interest in B2C fintechs has generally cooled, Zuo believes that fintechs have made enough of a case in capturing the interest of and serving niche consumer segments that their momentum will likely continue. “Neobanking products tailored to niche demographics – such as gig workers, SMB owners, and specific cultural groups – will stand out by offering hyper-personalized experiences,” she said. 

3. VC dollars will quit playing hard to get (maybe):  The change in administration may have an impact on how strict the regulatory environment is for fintechs in the coming year making this year a “turning point” for the industry.  “Next year may bring a thaw, driven by pent-up demand and the possibility of more favorable regulatory and monetary policies,” she said. 

But the VC dollars are still likely to give precedent to those that can hit the golden trio: strong strategy for achieving profitability, capital efficiency, and clear differentiation in market positioning. 

4. The new kid on the block – Chief Compliance Officer:  To stay ahead of the regulators many fintechs have already started to build compliance programs that can stand comparisons with those by traditional FIs. One role that has emerged from this shift is the Chief Compliance Officer. “Many of these companies have appointed Chief Compliance Officers earlier in their lifecycle to handle the increasing complexity of compliance,” said SVB’s Christian.

As execs in these roles gain more experience, we may start to see a shift in how fintechs partner and position in the market.

5. Do you have what it takes? Asks the bank: The BaaS honeymoon period is decidedly over and bank partners are becoming more discerning in their partnership behavior. Recently, we heard from Newline by Fifth Third’s Director of Revenue Strategy, Dan Dall’Asta about how the bank prioritizes partnering for the long term.

“As clients are coming to us now, the first thing I tell them is, if you want to get to market fast, go elsewhere. We’re looking to build 10 to 20 year partnerships, and that has to be driven by oversight,” said Dall’Asta. 

This cherry-picking combined with the precedent set by 2024’s regulatory heat may motivate some bank partners to pull away from BaaS partnerships. “We may see fewer partner banks as fintech companies become more discerning, opting to collaborate with institutions with more robust compliance programs,” said Christian. 

Sidebar: ‘Tis the year for Gen AI and Open Banking?

Two technologies have dominated the conversations in this industry for the last year: Open Banking and AI. Open Banking, because the 1033 rulemaking started a discussion on who owns the customers and their data, and AI, because, well, Gen AI

Here is what you can expect from Gen AI in 2025: 

i) Change management initiatives: Along with initiatives to augment employees’  workflows with Gen AI, firms will also have to ensure that their workforce has a clear understanding of the tech they are interacting with and that they can do so safely. This change in process and the newness of the tech may spur the launch of data literacy and change management campaigns.

ii) Better investment in infrastructure: For FIs to fully lean into Gen AI, they will have to invest into doing away with legacy technology. 

Here is what is in store for Open Banking in 2025: 

Slim pickings: “With the final passage of the 1033 rule and revised timelines, industry participants now know they need to prioritize this broad implementation and there may well be excessive demand on the few vendors who are active in Open Banking,” said Ulrike Guigui, Managing Director at Deloitte

Operational efficiency: Banks might be able to utilize the increased availability of data to improve anti-fraud measures. There will be opportunities for banks to leverage data to improve fraud and related back-office activities.