Looking Ahead to Fintech in 2023

What fintech can learn from Southwest Airlines’ holiday nightmare

Haymaker Ventures
13 min readMar 1, 2023

If you experienced flight delays and cancellations during the holiday season, you are not alone. As reported, more than 90% of US flight cancellations during the December holidays were Southwest flights — with over 15,200 total flights canceled in a week. What happened?

Southwest relies on crew- assignment software called SkySolver, an off-the-shelf application that’s been customized and updated over the past several decades but is nearing the end of its life, according to the airline. SkySolver was unable to handle the large volume of crew schedule changes during the holidays after winter storms disrupted flight patterns across the country.

After this outage, GE conceded that its software isn’t an end-to-end solution. The company instead called it a backend algorithm that airlines can supplement with other software to manage scheduling as the algorithm gathers inputs from other systems to provide recommendations to resolve crew-related disruptions. However, the real driver of this issue is that the airline sector has been among the slowest to adopt cloud-based and analytics technologies to help solve complicated transportation network problems.

The consequence: Southwest Airlines faces $725 million to $825 million in losses from operational disruptions in December.

The experiences of Southwest can offer valuable insights for fintech companies because the operational differences between legacy financial systems and newer, open-sourced, and embedded fintech systems are substantial as well.

“We’re at a tipping point now where with this rush to the cloud and modern applications, it’s not just about the scale of the data. Tying them all together is what people are challenged with. As that is happening, the risk is getting higher and higher.”

— Ed Macosky, Chief Innovation Officer with Boomi

Legacy systems are challenging to optimize overtime because the technical stacks are not flexible and operate within limited parameters. Like in the case of SkySolver, a sudden change in the data load may lead legacy software to breakdown. The opportunity cost of mitigating operating disruptions in lieu of adopting new technology may become too great as the capacity fails to keep up the external demands placed on the system.

Despite significant growth in the fintech industry, including expansion in total addressable markets, increases in capital investment, and growth in company scale, there are still ample opportunities for growth in key verticals such as insurance, merchant acquiring, issuing, asset management, and real estate. In the coming decade, a key focus for the evolution of fintech will be the modernization of legacy financial systems, opening significant opportunities for fintech companies.

1) End-to-end integration still matters.

2) The aggregation of critical data facilitates a shift from siloed platforms to an integrated system that combines signals from various data sources. This promotes the development of an array of applications, including those that manage sales forecasting, lead generation, and retention. Financial services companies that adopt cloud-based systems will have a competitive edge because it will allow for analysis of transactional customer data and external signals in tandem. Migrating to cloud-based financial systems offers massive opportunities.

The delivery of financial services has already moved to digital channels through the rise of embedded fintech. Embedded fintech or banking solutions allow independent companies to offer financial services products through a series of third-party platforms and APIs. These companies were built on cloud-based solutions to maximize efficiency and provide better services to end-customers, but we believe this trend will continue to accelerate to other areas of financial services creating the largest vertical in the cloud.

3) Greater complexity and threat require better security and protection.

It is imperative for companies to take a proactive approach to mitigating data breaches or cyber-attacks as bad actors evolve in terms of sophistication. There are few industries with greater downside risk to a data breach than financial services due to the sensitive nature of customer data and regulatory concerns. Companies must prioritize the implementation of robust security measures to protect against such threats.

Fintech in 2023 — the year for FedNow

Following the 2008 financial crisis, we saw a proliferation in digital payments platforms with rise of Venmo, Cash App, Zelle, along with pioneers like PayPal, which had been streamlining the movement of money since 1998. These platforms introduced new and innovative ways to pay and get paid both as an individual or as a business. However, most of these platforms relied on existing rails (e.g., traditional credit or debit networks or ACH) with similar limitations in terms of cost and speed.

We expect the year 2023 to be another pivotal moment for fintech, particularly with the launch of the Federal Reserve’s instant payment service, FedNow. This initiative represents the government’s inaugural effort to facilitate real-time payments, allowing individuals and businesses to transmit funds instantly through the Fed’s depository institutions.

The advent of FedNow is expected to level the playing field for smaller banks and credit unions in the competitive payments landscape. While FedNow represents the first new payment infrastructure in the United States since the Automated Clearing House (ACH) in the 1970s, real-time payments have been a notable driver of innovation outside of the United States over the past several years.

Since India launched its real-time payment network, Universal Payment Interface (UPI), in 2016 its fintech industry has evolved significantly. One of the key benefits to UPI is that it enabled real-time, secure payments between bank accounts, eliminating the need for physical cash or check and costly settlement delays to avoid fraud. This is important because its interoperability and ease of use has democratized access to digital payments for millions of Indians that previously relied on cash. UPI has also increased competition among banks, fintech companies, and payment service providers, which has led to lower costs and better services for consumers. Additionally, new business models and revenue streams have developed for fintechs built on top of the UPI infrastructure. It has also enabled the government to launch several digital financial inclusion initiatives and subsidies, which have been instrumental in the government’s Digital India campaign.

In the last 6 years alone, UPI transactions have skyrocketed, now exceeding $100 billion per month. For over 150 million monthly users, these transactions occur largely via mobile wallets and payments applications.

The Reserve Bank of India expects UPI payments to comprise 8% of India’s total GDP in 2025. Further, banks and the National Payments Corporation of India (NPCI) together are in process of expanding the reach of UPI to allow consumers to link their credit cards to UPI transactions. Importantly, UPI is already used for remittances from abroad, undercutting traditional remittance payment rails that charge between 3% and 5% of the total transaction.

Like UPI, FedNow should accelerate innovation in markets that still largely rely on paper checks or clunky rails, such as B2B payments, or lead to further innovation in consumer finance, asset management, and fraud or transaction monitoring. Much like the innovation seen in Brazil, Mexico, the United Kingdom, and across Europe after the launch of real-time payment networks, we expect FedNow to be a crucial factor deciding the success of future payment infrastructure, business models, and economics going forward.

Areas of Focus in 2023

B2B fintech will outpace B2C fintech

In Europe, the investment shift from B2C to B2B has been more obvious with only $7.5bn invested in B2C companies as compared to $18.5bn in B2B last year. While macro-economic factors have led investors to focus on business models less impacted by hyperinflation, the regulatory regime in Europe supporting open-banking has also accelerated the number of companies operating in the B2B space, such as expense management solutions, compliance, and SMB lending.

In addition to these macro trends, notable B2C companies have expanding to the B2B market. For example, Klarna recently launched Klarna Kosma, a new B2B open banking software unit, and last October it partnered with its B2B counterpart Billie to provide merchants in its network with the ability to pay for goods later. One explanation for this shift is that digital advertising spend for financial services has nearly tripled to $24bn since 2016, as B2C fintechs struggle to scale in the face of growing customer acquisition costs. We expect this trend to continue as fintechs look to expand distribution channels and optimize for efficient customer acquisition.

Fintech orchestration

Over the past several years, payment orchestration has developed as a solution to help merchants manage global payment stacks from a single location. It provides a unified view of all transactions, conversions, settlements across payment service provides, but also allows merchants to ability to optimize across different providers. This capability is increasingly important in a global environment because the payment processing industry is highly fragmented, performs differently across regions, and difficult to manage due to complex technical stacks.

It is important to differentiate orchestration and aggregation in the context of these business models. Aggregation refers to the process of collecting and combining data from multiple sources into a single view or interface. An example of an aggregated service is an open banking platform, which allows customers to access multiple bank APIs through a single integration. Orchestration goes one step further. Orchestration manages and optimizes the follow of data and decision-making across the various provides. In the context of payment orchestration, it allows merchants to route transactions based on their own defined logic to maximize authorization rates, reducing complexity and cost of managing multiple PSPs and improving the efficiency of their payments infrastructure.

We believe orchestration is a powerful tool for global businesses that facilitate financial products and services because much of the underlying infrastructure is highly localized by either geography or use-case. We expect to see further development in orchestration platforms that tackle complex issues related to fraud, compliance, and other open-banking services that companies rely on to deploy new products in new markets.

Generative AI meets fintech

ChatGPT, a generate AI chat application, attracted one million users in the first week after its release — becoming the fastest-growing tech platform ever. ChatGPT is a variation of GPT-3 (Generative Pre-trained Transformer 3), a state-of-the-art language model developed by OpenAI. GPT-3 is trained on a massive amount of text data from the internet and can generate human-like text across a wide range of formats and styles, from writing essays to technical code or poetry. ChatGPT is specifically fine-tuned for conversational tasks, like answering questions and responding to prompts. It can understand and respond to natural language inputs in a way that mimics human conversation, rather than traditional search that returns a set of related outputs.

The technology behind ChatGPT, such as GPT-3, has the potential to disrupt the traditional business model of financial providers, particularly in the areas of trust and advisory services. The ability of language models like GPT-3 to understand and respond to natural language inputs in a way that mimics human conversation could make it easier for robo-advisory firms and other startups to provide personalized financial advice to a wider range of clients. Traditional financial providers may find it harder to compete based on trust and advisory services alone.

It is too soon to forecast the specific applications of fintech utilizing GPT-3 or GPT-4 technology. However, this technology will significantly reduce labor costs by a factor of ten compared to human labor. In the past, the most cost-efficient method of providing credit underwriting was to offset the cost of human labor through high fees or by offering a less personalized experience through an app.

In addition, as basic financial coaching can significantly enhance the credit files of many consumers, this technology could potentially counteract some of the adverse macroeconomic factors currently impacting consumer credit, such as inflation, unemployment, and depleted savings accounts.

Risk management in fintech — security, fraud, compliance

Security, compliance, fraud, and risk are going to be top of mind in fintech 2023 after a number of high-profile scandals. Perhaps the most notorious, the collapse of FTX cryptocurrency exchange will accelerate the number of investigations, indictments, and future scrutiny of the industry.

Crypto crime

Chainanalysis Crime Report 2022

According to the Chainanalysis Crime Report 2022, two major trends emerged from the 5-year crypto criminal balances. The first is a huge increase in criminal balances in 2021 — at year’s end, criminals held $11 billion worth of funds with known illicit sources, compared to just $3 billion at the end of 2020. The second is percentage of those balances coming from stolen funds. As of the end of 2021, stolen funds account for 93% of all criminal balances, at $9.8 billion.

During 2021, the average ransomware payment size increased 34% to $118,000 and 370% versus 2019. The average was dragged up by an increase in large payments, such as the record $40 million received by Phoenix Cryptolocker. The primary reason for the increase in size is that the attackers strategically moved to carry out highly targeted attacks against large organization. This “big game hunting” strategy became possible due to the development of tools by third-party providers that improve the efficacy of the ransomware.

To fight crypto crime, Mastercard launched a system that assesses the risk of criminal association with cryptocurrency exchanges on its payment network called Crypto Secure. The platform is powered by AI algorithms, harnessing on-chain data derived from blockchains and other third-party data sources.

Crypto Secure is powered by CipherTrace, which was acquired by MasterCard in October 2021. In the announcement, Mastercard said the deal allows it to offer a service that combines artificial intelligence with cyber and blockchain capabilities to provide businesses with greater transparency to help identify and understand their risks and manage regulatory and compliance obligations. The acquisition also advances Mastercard’s digital assets strategy and differentiates its real-time payments infrastructure.

Elliptic, a London-based blockchain analytics startup, is another example of a startup leveling the fight against crypto crime. Founded in 2013, Elliptic pioneered the use of blockchain analytics for financial crime compliance and has built the most accurate and trusted crypto identity dataset in the market. Two thirds of crypto volume worldwide is transacted on exchanges that use Elliptic; these businesses rely on Elliptic’s solutions to manage risk and generate insights by leveraging over 20 billion data points covering 98% of all crypto assets by market cap.

The company raised $60 million in Series C funding in October 2021. The financing round was led by Evolution Equity Partners, alongside new investment from SoftBank Vision Fund 2.

Perpetual KYC

KYC processes were born out of the need to onboard third parties and manage compliance processes related to anti-money laundering and sanctions regulations. Regulatory technology and data solutions available to support companies in achieving automated and digital-native KYC have rapidly become more sophisticated, but companies across all sectors struggle with manual and time-consuming processes for onboarding clients and underwriting risks.

A Moody’s Analytics survey found that 76% of organizations assess the digital sophistication of their own KYC approach as either poor (29%) or mediocre (47%).

Traditional banks and professional services firms made up a significant portion of the firms that rated themselves as poor. They reported being frustrated by manual processes, excess paperwork, and unintegrated legacy systems. The survey also found that these firms were uncertain whether improving KYC can solve their issues.

Moody’s report ‘Perpetual KYC, Transforming risk and compliance’ suggests that KYC should continue throughout the lifecycle of a customer, not just during the onboarding process — known as perpetual KYC or pKYC With traditional KYC, risk monitoring happens on a one-, three-, or five-year cycle, depending on the original risk score of the counterparty. In contrast, pKYC is an automated, event-based approach to risk monitoring that takes place in near real-time. When a threat is detected in the back end, it is flagged to the compliance team, and enhanced due diligence takes place without delay. This maintains an accurate picture of risk across a counterparty network on a perpetual basis. If nothing changes in the risk profile, no screening needs to take place. If a risk alert comes in driven by a behavior or circumstance, it can be actioned straight away.

Plaid, a fintech unicorn that connect consumer bank accounts to financial applications, acquired Cognito for $250 million in January 2022. Cognito offers services for ID verification, KYC rules, and anti–money laundering requirements. Through its acquisition of Cognito, Plaid is layering on additional services via developer hooks and expanding beyond its initial core offering. We expect this trend to continue as embedded fintech expands into additional service verticals and the need for regulatory compliance becomes more complex.

KYC is often perceived as a “necessary evil,” one that cannot translate directly into ROI. As result, most firms have a defense-based approach to KYC, and invest in tools that will mitigate risk, reputation, and keep them in compliance. However, we believe there will be a greater push to optimize KYC through integrated systems or algorithmic monitoring of performance as companies see a meaningful impact to performance (e.g. conversion, fraud, and other real costs of operating a fintech).

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