From A16Z by Marc Andrusko

We closed out 2023 by sharing some of the big ideas we’re looking out for in fintech this year, including the rise of the developer as buyer in financial services, how financial professional services will be supercharged by software, and why AI will push Latin American SMBs to go digital.

Things have moved fast since then. As 2024 kicks firmly into gear, we’re keeping our eyes on some interesting stats and observations that may yield bigger developments down the line. Here are 4 things that stood out to us this month:

AI in Personal Finance

As part of Plaid’s most recent Fintech Effect Report, released late last year, the financial technology platform released some interesting data around where consumers are most likely to adopt AI solutions in their financial lives.

The report found that:

While finding and managing new investment opportunities was notably absent from the response data, the above results start to sound awfully close to a world in which personal financial management runs on autopilot. The only caveat to this is that over 75% of certain populations surveyed by Plaid (notably Gen Xers) say they want to be able to review any AI-generated decisions around their finances. This suggests that at least in the near term, we’re likely to continue to see more copilots than fully autonomous agents serving consumer needs.

Improvements in the Macro Economy 

The January jobs report revealed a healthier labor market than many were expecting, with the U.S. economy adding 216k jobs (vs. an estimated 170k jobs). Unemployment held steady at 3.7% (vs. 3.8% consensus). Perhaps more notably, wage growth continued to outpace inflation, resulting in sustained “real” wage gains for 6 consecutive months, a trend that reversed 2+ years of the average consumer losing purchasing power.

The strength of the report has indicated to some that the economy may not be in need of stimulus in the way of rate cuts. In fact, the market is now pricing in the likelihood of cuts in March at only — at the time of this writing — 70% (which is down from 100% prior to the new employment data).

Regulatory Proposals 

The Consumer Financial Protection Bureau (CFPB) proposed a new rule this month that would limit the amount banks and credit unions can charge in overdraft fees, and mandate significantly more transparent disclosures around what they cost and under what circumstances they are incurred.

According to the CFPB, the rule “would close an outdated loophole that exempts overdraft lending services from longstanding provisions of the Truth in Lending Act and other consumer financial protection laws. For decades, very large financial institutions have been able to issue highly profitable overdraft loans, which have garnered them billions of dollars in revenue annually. Under the proposal, large banks would be free to extend overdraft loans if they complied with longstanding lending laws, including disclosing any applicable interest rate. Alternatively, banks could charge a fee to recoup their costs at an established benchmark — as low as $3, or at a cost they calculate, if they show their cost data.”

The proposal, which the CFPB hopes to enact by October 2025, would directly jeopardize the ~$9 billion in annual overdraft revenue earned by financial institutions each year. As such, financial services industry lobbyists and trade organizations are already scrambling to prevent its passage.

Incumbent Activity 

Q4 ‘23 bank earnings were fairly weak across the board. Several of the larger Wall Street banks owed substantial FDIC special assessment charges to fund the losses from the regional banking crisis last year, which complicated their earnings picture. Meanwhile, regional banks faced pressure to pay higher rates for deposits, with many of their customers abandoning them for the GSIBs (global systemically important banks) out of fear of further bank runs. (This is just one of many reasons we’re so excited to continue supporting ModernFi in their journey to build a radically better end-to-end deposit management platform for banks and credit unions!)

Going forward, banks cautioned against the potential for net interest margin contraction (i.e., lower lending revenues) if the Fed does go forward with an early 2024 rate cut.