Douglas Blakey and Eric Johansson speak with fintech industry experts to get their predictions on what to expect in 2022.
Fintech companies, who operate in the space between the financial and technology realms, have surged in the past six years. Data from GlobalData’s Technology Intelligence Centre highlights that there have been 2,202 deals worth a total of $81.02bn to date in 2021 in the financial services industry, up from 1,449 deals worth $17.85bn in 2015.
The coronavirus arguably accelerated the growth of the sector. There’s no secret to why that is. During the pandemic, the demand for digital payment solutions grew from both people and businesses. Fintech companies are simply supplying to this demand – and as the predictions below will outline, they are poised to do so in a big way.
The general public abandoning physical cash is a clear sign of the digitalisation of money. In Norway, only 4% of all transactions were cash-based in 2020. In the UK, that figure was 17%, down from 70% in 2010.
Some of the fintech experts offering their predictions to Verdict – such as Square’s Kaushalya Somasundaram – have not only seen this evolution first hand, but are confident that it will continue long into the next year and beyond.
Fintech predictions about more than cash
The move towards the cashless society is inimitably linked to shoppers migrating in droves to online stores. Ecommerce has grown extremely popular during the coronavirus crisis. Unsurprisingly, several fintech experts RBI has spoken with for these 2022 predictions believe this trend is only set to grow.
Other fintech predictions include the massive growth of the buy-now-pay-later (BNPL) sector. The BNPL industry has enjoyed explosive growth over the past few years. The global sector is expected to be worth $166bn by 2023, according to GlobalData’s thematic research.
Swedish Klarna provides the clearest example of the sector’s growth. In June 2021, it became Europe’s most valuable privately-owned tech company following a $639m funding round that took its valuation to $45.6bn. That was up from the $31bn valuation the fintech had achieved in March following a $1bn funding round.
A similar push towards more digital services can be seen in the world of banking. Open banking, the catch-all term for a way to share financial data between organisations, has also grown during Covid-19. Several of the experts offering their fintech predictions believe the industry is only set to grow from here.
Although, some fintech predictions, like those offered by Ivan Zhiznevskiy, CEO of 3S Money, include sentiments that the industry has lost its way in the pursuit of unsustainable unicorn valuations. Instead, he’s hoping that 2022 will be the year the industry focuses on getting back to basis. He has levied similar attacks in the past.
Whether or not you believe fintech deals have ballooned out of proportion, most predictions make it clear that this sector will continue to influence industries and the general public for years to come. Hopefully, these fintech predictions will help you stay abreast of what’s to come.
Kaushalya Somasundaram, head of UK payments partnerships and industry relations, Square
The fintech industry has continued to evolve this past year in both flexibility and inclusion, and even more so since the onset of the Covid-19 pandemic. In 2021, we found that the number of businesses accepting payments through cashless methods, such as online, nearly doubled from the year prior. Digital payment tools not only allowed an increase in scalability, but also facilitated financial inclusion by helping more businesses to continue playing an active role in the economy, even during the pandemic.
In 2022, businesses are set to continue the contactless trend, offering their customers safety, speed and convenience; whilst also finding new ways to grow and reach new audiences. We also expect businesses to pursue an accelerated drive towards digital fintech initiatives and tools in order to access new revenue streams. Our recent Future of Retail report uncovered that 71% of retailers are looking to inventory management technology to improve supply chain efficiency, demonstrating a continued investment on solutions through technology.
If the past few years have taught us anything, it is that an innovative and open mindset, coupled with the right digital tools can help businesses regardless of their size or industry to continue their growth, even in uncertain times.
Jaimini Pattani, senior analyst financial services division, GlobalData
In fintech, we have seen new trends conquer the financial services world, from AI to open banking and financial literacy to financial well-being. Financial services providers have been quick to adapt to the changes in consumer behaviour driven by lifestyle changes from the pandemic, and fintechs have managed to leverage technology to conduct banking activities. As a result, we will likely see some trends rapidly evolve further in 2022. Two trends on the rise are BNPL integration and enhanced personalisation through changes in open banking.
Let’s start with. BNPL integration. The BNPL market has boomed in the past year or so, with the likes of Klarna and Afterpay taking the markets by storm and launching super-app style services and banking products. Towards the end of 2021, UK banks such as Monzo and Virgin Money have been seen to incorporate such services into their retail banking offerings but through different business models. For example, the Monzo offering, unlike Klarna, can affect credit reports, thus making banking options less attractive to consumers.
However, it is apparent that regulation in the BNPL is tightening and the crackdown is likely to increase further in 2022. With regulation tightening, we will likely see other banks replicate BNPL concepts and enhance their services to meet consumer demand, especially in ecommerce.
So, in 2022, we expect to see banks take on more BNPL firms to increase revenues and adapt to customer preferences around fees and interest payments.
Personalisation through open banking is another important trend to keep an eye on. Open banking has been a much talked about topic with consumers across the globe using open banking products in their everyday lives. Open banking is how banks share financial data and services to get enhanced insights into customer behaviour to provide more personalised services and real-time insight to help people spend and save smarter.
The 2021 GlobalData Financial Consumer survey data shows that consumers are willing to share data if it holds out the possibility of better money management and better personalisation. Since the pandemic, consumers expect a certain level of personalisation from the services they use. F
rom Amazon to Netflix, and a vast number of other brands, they are all used to ‘because you watched/bought X, we thought you might like to watch/buy Y.’, and thus there is now the need for this to translate across to banking products and services. The next most significant trend we are likely to see is banks further leveraging open banking for a better real-time, personalised service to drive more competition in the market through collaboration between the larger legacy banks and fintech’s.
Francesco Simoneschi, CEO and co-founder, TrueLayer
2022 will see open banking continue its disruption of traditional payment methods. Amazon’s decision to stop accepting Visa credit cards in the UK is more than a negotiation tactic, it’s further evidence that in a world of instant payments and borderless commerce, cards have reached their expiry date. For years, they have been retrofitted into online checkouts, creating an invisible web of hidden costs and unwieldy payment structures.
The commercial impact of this inefficiency also cannot be overstated when it comes to the customer experience. How often have you tried to buy something only for the card to not be accepted – whether through mistyping details or a fraud block? The risk of customer drop-off at the checkout is high and impactful.
Ecommerce is creating huge demand for experiences that are quicker and more cost effective. Account to account payments through open banking are the necessary next step in that evolution, moving money at a fraction of the cost to the merchant and more securely and more conveniently for the customer. In 2022, more merchants will implement these payments into their checkouts, taking open banking out of the world of fintech and into the mainstream, replacing cards as the primary payment option.
Michael Vanaselja, founder and CEO, Keebo
One of the most important and valuable changes for fintech in 2022 will be personalisation. Across other industries we have seen personalisation becoming more widespread for consumers. However, I think it takes longer for fintech to get to the same place, e.g. because of the importance of customer protection and regulation. We’re at a stage now where real human experience will start to transform the industry. At Keebo, our focus is to make accessing credit and credit building personal, relevant and meaningful for people by using their unique open banking data to deliver it a better a more personalised experience.
Neha Mittal, interim CEO of Divido
In 2022, the big story for retail finance will continue to be the global regulatory reform of the BNPL space. Over the course of this year, the Financial Conduct Authority (FCA) has actively been driving its agenda through a series of announcements and proposals designed to shake up the unregulated BNPL market. Regulation is coming and it brings plans for ‘delivering better outcomes in consumer credit’.
The proposed changes mean that any BNPL finance product not currently within scope of the Consumer Credit Act (CCA), credit provided for a period of less than 12 months and with 0% APR, will be regulated. At Divido, we welcome these changes.
Straight up, companies will have to put the customer first, as requirements to increase focus on consumer outcomes and needs, especially those in vulnerable circumstances, becomes the order of the day, through the FCA’s proposed Consumer Duty.
Established lenders could take back the advantage from the unregulated fintechs, where they already have years of experience operating with high standards of consumer protection. This has the potential to change the game. Where new market entrants have forged ahead, taking advantage of a regulation-free market, they will now have to wrestle with regulatory reform, which could come as a major set-back – especially for the smaller firms.
Further, profitability will come under pressure – especially for business models based largely on affiliate marketing. At Divido we see large retailers seeking responsible lending, whilst maintaining control of customer data and brand experience. They care deeply about brand association.
The impact of regulatory change on the business models of the new market entrants in the BNPL space will be profound.
Maria Palmieri, head of public Policy, Yapily
The number of open banking adopters is set to increase. Covid made it abundantly clear that SMEs need real-time insight into their financial position to forecast cash flow and consumers need greater oversight of their personal finances to stay in good financial shape. It’s predicted that 71% of SMEs along with 64% of adults are expected to be open banking adopters by 2022, and by 2024 users worldwide will reach 63.8 million. But this is only the beginning. The true opportunity is open finance which we’ll slowly but surely see unfold next year.
I predict regulators will work more closely with national governments to come to a consolidated approach to implement open finance, so the ecosystem can deliver and capitalise on the opportunities it can bring. The CMA is also set to publish an update on the future framework for open finance at the start of the year. Hopefully, we will start to see more and more third-party providers educate consumers and businesses on the benefits it can bring and help abolish misconceptions behind too much data sharing. And we’ll see this unfold globally. Joe Biden’s 2021 Executive Order is a clear example of the industry moving in the right direction.
We’re also going to see an explosion of new payment use cases in 2022. New players are coming to the market at speed and competition is fierce. Europe must move fast and push forward quickly with initiatives, like the European Payments Initiative and the proposed digital wallet, to stay ahead of the game.
The use of open banking in lending decisions is another trend to watch out for next year. New lending providers are taking the industry by storm using the initiative to better their services – more than 17 million people have now used BNPL. Ease of access to credit means more affordability and creditworthiness checks which can be done seamlessly.
Ivan Zhiznevskiy, CEO, 3S Money
Investment in fintech was at an all-time high in 2021. We’ve witnessed frankly ridiculous figures – stand out examples include TrueLayer’s $1bn valuation and Varo Bank’s $510m Series E funding. Both are shocking. All this epic growth in investment has caused fintechs to lose focus, with many transfixed on bagging all the investor cash they can to achieve ‘unicorn status’. What I’d like to see in 2022 is fintech’s demonstrating business profitability by providing genuine value so that their customers start paying for their services. Not investors. They cannot continue to feed into start-ups forever.
The impact of COP26 will also play a huge role in the landscape next year. The UK government is demanding banks and financial institutions police customers, to ensure no one is servicing anyone involved in fossil fuels. While a great idea in theory, it means more compliance, more policing functions and, ultimately, customers will suffer. Instead of focusing on lobbying groups and fossil fuel companies directly, the government is outsourcing their pledges. And its banks and financial institutions who are going to pay the price. More questions mean less trust with customers.
Daniel Kjellén, CEO and founder, Tink
Open banking is at an exciting crossroads. We’re seeing the market go from building PSD2 compliant APIs to exploring the many use cases of open data. This means there is huge potential for innovation as previously closed data sets become available to be utilised for new purposes for the benefit of businesses and consumers.
One of the most interesting open banking use cases is the ability to enable lenders to get a fairer and more holistic understanding of an individual’s financial position. This will help them make more informed choices about credit decisions, opening up credit to more people, and enhancing risk management by making it easier to detect possible risk factors from data insights.
Finally, the green agenda is only going to become more important. I firmly believe consumers and businesses want to do more to meet their environmental and social obligations. The key question is how do we empower them to do that? The financial services industry does have a solution. It can build better products that offer everything from greener loans and mortgages to checking accounts with carbon-tracking features built into mobile apps. By harnessing data, banks and fintechs can become the agents of positive environmental change.
Rolands Mesters, co-founder and CEO, Nordigen
In the UK, open banking has reached four million users in the three years since its inception. In 2022, I predict the user count will double across all countries, and reach eight million in the UK. Open banking allows free movement of customer financial data, provides opportunities to financial service providers, and offers autonomy to end users.
The growth of open banking has been accelerated by a natural shift to digital, modernisation of the financial sector, and the pandemic. Customers are making more payments and purchases online rather than in person, making physical bank cards almost obsolete and solutions like BNPL are leading the way for open banking.
I believe open banking will continue to develop in 2022, and I believe someone will launch the first free open banking payments platform to facilitate the growth of open banking. The uptake of open banking will level the playing field for fintech startups and increase financial inclusion for users, resulting in a better overall experience for all participants of the fintech industry.
James Allum, VP and head of Europe, Payoneer
The battle lines are being drawn between open banking and cryptocurrencies – the debate is set to heat up further in 2022. More companies will turn to new compliance and regulation technologies to keep customers safe and improve their customer experience.
As they become more mature, fast-growing fintechs will shift from focusing on customer acquisition to improving their margins throughout their operations. The larger fintechs listed on public exchanges, e.g., Wise, Payoneer and PaySafe, will become more confident operating as a public company and more vocal about their ambitions.
Jed Rose, GM EMEA, Airwallex
Embedded finance is not a new concept, but the era of embedded finance has considerable momentum due to recent advances in the industry. This is being driven by many factors which will continue into 2022: changing consumer expectations as more people use online services, Covid-accelerated digital transformation, the rise of alternative financial services providers and more brands investing in their online presence due to tough market competition.
Like today’s consumers, businesses want and need a seamless payment experience. Embedded finance was designed to streamline the entire financial process for consumers, while also creating significant operational efficiency gains for businesses. With embedded finance, businesses can create a holistic experience for the end user and customers can easily send and receive money in near real-time while usually saving up to 80% in transfer costs versus fees charged by high street banks.
We’ll see more organisations switching to more efficient financial services in 2022, particularly as businesses prioritise customer experience and loyalty to maintain and grow market share.
Jamil Ahmed, director, Solace
As online shopping increases, so does payment processing volume. Consumer behaviour has already been changing over the past few years to more frequent use of payments cards, while the transaction amounts themselves be of smaller value. Covid only just accelerated that change further when physical stores also favoured cashless point of sale, adding to online shopping processing volume.
An identical impact to stock and order management is also being seen with shoppers checking out more frequently with shopping baskets containing less items, versus collecting up towards a single large checkout. All the intermediaries, from banks to e-commerce giants, that make a transaction possible need to meet these high demands of the modern hyper-consumer by upgrading systems to keep pace with the volume growth. In order to overcome a bombardment of online payments and orders, big retailers will have to enhance IT systems with event-driven architecture to ensure processing can be accurate and timely, to complete fulfilment that doesn’t disappoint consumers with errors or delays.
Ann Maya, general manager, Boomi
Taking the leap into mobile and remote friendly processes that impact employee and customer interactions will continue to make companies more competitive. Giving a better user experience is no longer a cosmetic benefit, it will make or break companies in every sector.
Dorel Blitz, VP Strategy & Business Development at Personetics
2021 has been defined by record-breaking growth. In the UK, investment into fintech hit £17.7bn in the first half of the year alone and globally, in the last three months, 33% of all total new unicorns have been fintech-focused. We’ve also seen a huge number of fintech IPOs as well as influential M&As. The growth opportunity for fintechs is greater than ever but has made market competition hotter, the challenge for fintechs this year has been standing out and prioritising customers.
I’ve long been a believer that fintech should make the world a better place but what’s been really unique about 2021 is the growth of ‘green fintechs’ or ‘fintechs for good’. Next year, I expect to see many more solutions that prioritise financial well-being and allow people to make more sustainable choices with their money, for example by showing the carbon footprint of their spending.
We’re going to see the fintech and banking world adopt the ‘Netflix effect in 2022’. Modern consumers want an experience where banks and fintechs can think on their behalf and like Netflix, provide automatic recommendations based on the individual. The burden of finance is increasingly moving away from the customer to the latest tech which can automate the ‘busy work’ of managing personal finances and actually help customers with their overall financial well-being. This development doesn’t hinge on a single technology but a combination of technologies together that use data to understand customers on a deeper scale.
I’m also excited to see how technology starts to democratise wealth management by helping people with their investments and trading. There are currently millions of underserved customers who don’t have the means for their own financial advisor who will benefit from a hybrid model where data is helping relationship managers make more informed decisions and open up wealth management to a larger audience – just like Robinhood has expanded retail investing.
Robert Hoffmann, CEO of Merchant Services at Nets
Three big trends to keep an eye on in 2022 are:
- Digital money for digital lives
Interest in Central Bank Digital Currencies (CBDCs) has been growing, fuelled by the rapid European-wide digitisation of payments during the pandemic, as well as growing interest and competition from cryptocurrencies (i.e. Bitcoin) and stablecoins (i.e. Tether).
Digital currencies issued by central and national banks are coming: it is only a matter of time. The underlying technology for digital currencies like the e-Euro or the e-Krona is the same as for cryptocurrencies – in other words, it already exists! We just need regulation to catch up and to ensure the supporting technology does not exclude anyone.
Each member of the value chain is looking to protect and optimise their own interests and presence, but be in no doubt, digital currencies will fundamentally change the global payments landscape. In 2022, expect more national pilots, rollouts and regulatory adjustments to prepare for the biggest shake-up to money in a generation.
- The time is now for Buy Now, Pay Later
Paying in digital instalments, often without added fees, is forecast to be worth $995bn in 2026. For merchants, the benefits are vast. It boosts sales and drives conversion rates by 20-30%, attracting consumers with more flexible payment options. It tends to increase basket value, trust and loyalty too.
Successful start-ups and incumbents are increasingly offering this solution to appeal to Millennials and Generation Z consumers, who are used to more flexible digital payment methods. The growing popularity of BNPL means that businesses that do not provide this option risk having a significant portion of their potential customers go elsewhere.
To gain an advantage in 2022, the entire purchase journey should be adapted to leverage the strengths of BNPL and the preferences of customers in different markets. For example, in the DACH region, open invoicing – where the consumer typically has 30 days to pay after receiving their purchase – is king. This has long been the preference of DACH consumers, and by offering multiple BNPL options, businesses can migrate such consumers to familiar – yet more digital – ways to pay.
In 2022, regulators in the EU and the UK are looking to further understand and balance the need for growth and innovation with protection for consumers who love the newer payment methods. Until this is in place, expect BNPL payments to continue their very rapid ascent.
- Waving goodbye to PINs
Consumers are increasingly becoming the main authenticator for payments. Biometrics are used to secure mobile wallets such as Apple Pay, and biometric payment card trials are taking place to bring the technology into traditional wallets. Such use will grow in 2022 as the technology scales and becomes more trusted and familiar to cardholders.
Largely this will be conducted with fingerprint technology, but ultimately we should expect payments to be authenticated automatically via facial recognition. This will remove friction from the transaction, enabling customers to pay for travel or groceries simply by walking through a terminal or shop, using infrastructure that links their purchases to their wallet.
In 2022, it will be essential to continue to test and evaluate new form factors to address market demands and understand how people perceive and react to non-traditional payment methods, particularly if they have to consider trading privacy for convenience.
Ryan Joyce, Head of Fintech UK&I, Salesforce
A new age of financial inclusion
The pandemic has illuminated inequalities across our societies, and the challenges of the past two years have brought an economic shock to the most vulnerable, including the Unbanked. More than a million UK adults were financially excluded pre-pandemic; with Covid-19 disruption set to continue into 2022, financial inclusion is imperative to help reduce this inequality gap.
Providing choice and innovation to help consumers and businesses secure finance at affordable rates has long been a major pillar of Fintech. Since 2009, when the alternative lending market was born, flexibility has been a cornerstone of the industry. The next decade is set to build on this foundation, enabling the hyper-personalisation of products or offerings to support every consumer and business. This will serve those that need financial support the most but are the hardest to underwrite.
The key to unlocking this progress must be centred on leveraging data to better cater for customer needs. Automation, including single platforms to streamline business processes at scale, is vital, as well as AI to build enriched customer profiles. API Management is the final piece of the jigsaw, combining existing data with Open Banking data to strengthen a fully customer-focused approach.”
More AI for more speed, but less risk
Next year, a new wave of AI innovation will grow across Fintech, unleashing deeper intelligence and speed and extending the competitive advantage of the industry. By driving more processes through machine learning and automation, we are set to see AI transform several business-crucial elements other than customisation alone.
Origination will be enhanced, for example, with real-time assessment of credit worthiness becoming smoother, protecting both consumers and financial institutions from debt or credit issues. Across service and operations, conversational bots are set to become mainstream, providing better aid to customers in need of support, along with automated collections and recoveries. Recommendation engines and personalised rewards will also boost overall customer lifetime value and encourage consumer engagement with finances.
The rise of embedded finance
The world’s biggest brands are rapidly fusing financial services – from e-wallets and cards to lending and insurance products – effortlessly within their customer journeys. And it’s not about to stop. In pursuit of increased loyalty and providing unique experiences for consumers who prioritise convenience, the world’s leading brands are set to launch a variety of new propositions. A ‘space race’ across brands is on its way to quickly launch personalised products, build partnerships and continuously iterate their propositions for greatest impact.
As with any growth market, scalability is imperative. Embedded finance will release an avalanche of new financial data – curated by Fintechs and shared with global brands to generate insights around spending patterns, behaviours and transactions. API management is crucial to enable real-time processing of data between two organisations – fast decisioning to open an account, originate a loan or underwrite a policy. This will help keep consumers ‘in-app’ for a seamless experience.
Matthijs Aler, CEO, Ohpen
More predictive analytics, fewer linear business models
With the pandemic’s impact set to keep rippling through consumers’ personal finances next year, advanced predictive analytics will be a crucial part of credit and arrears management strategies. Working on both macro and micro levels, AI will continue to find patterns in complex data and pick up trigger points across consumers’ financial behaviour – spotting credit problems before they arise.
With algorithmic trust growing across business, financial advisors will look to AI to predict exactly which accounts and clients may need monthly interest and loan repayment support. In fact, this trend will continue well beyond 2022, as digitising the credit space becomes increasingly important.
Data-driven tech will supersede traditional linear business models when it comes to supporting today’s growing gig economy. We are set to see financial institutions become one-to-one support networks, using data to build tailored experiences for every single customer.
DIY finance 2.0
This power of AI-led prediction will eventually be handed directly to the consumer, too. In fact, we are about to see unprecedented levels of data, information and guidance built into consumer omnichannel experiences. Financial institutions have already stepped up their digital offering for consumers – but 2022 will see heightened consumer autonomy across personal finance management. Recognising the benefits, for all parties, in a pandemic age of helping customers help themselves, the savviest banks and financial services providers will offer up more predictive analytics directly to consumers across front-end widgets on mobile apps and web-based functionalities. This will empower consumers to better control their bills, debts, cash and loans autonomously, lowering credit risks for the FS providers involved. Likewise as data becomes more structured, explainable and aggregated – financial institutions will finally have a 360-view of their customers, enabling them to open up a new world of tailored propositions.
The Human vs Machine paradox
This evolving tech saga will enter yet a new chapter in 2022. For certain financial processes such as insurance and some investment propositions, robo-advisers and background automation are set to become more prominent across the board. Across other complex products such as mortgages, robots are unlikely to replace humans any time soon – however, the hybrid balance is set to shift significantly.
Across origination and underwriting processes, robo-advisers will increasingly pull together the data across these functions at speed. This will certainly push human consultation further towards the end of processes, yet paradoxically get the customer to reach it much quicker, sparing them of dozens of online forms in the process.
Friendly, professional advice will forever remain the most vital link in the financial chain, yet this move from 50/50 robo-human to 75/25 will better leverage the power of human analysis, locking in consumer confidence from start to finish.
Steve Lemon of Currency Cloud
2022 will be a tipping point for embedded finance
2022 will be a big year for embedded finance. Why? Because of two convergent trends. Firstly, we’ve seen fintech companies increasingly focus on developing services that are made available through APIs.
An API is a code that lets two applications talk to one another, and in practice this allows businesses to easily integrate features like payments, credit, and insurance to existing applications or services their customers are already using – like making invoice payments through an accounting package for example, or trading stocks within your banking app.
The second is the unprecedented digitalisation we’ve seen over the past couple of years (perhaps to the extent that even acknowledging this has become clichéd). This means there are now many more companies with a strong digital platform to which they can bolt-on financial products or services. If you also factor in the need for companies to identify new revenue streams in the wake of economy-wide disruption, it’s easy to see why embedded finance is so attractive.
Companies offering niche Fintech services are beginning to broaden their proposition
Over the past few years, companies from fintech subsectors like insurtech and wealthtech burst out of the gate in what you might call the great unbundling –niche providers offering a single, specialist service in insurance or wealth management, and not doing a whole lot else.
Increasingly, we’re seeing that logic flipped. In effect, the great unbundling has become the great re-bundling. Now those same specialists are beginning to broaden their offering – like wealthtechs that have won customers with a core proposition now providing other banking services.
Many forward-thinking industry commentators believe the future of financial services lies with companies that are best able to curate a selection of very high-quality services and APIs and offer them to customers – not necessarily the businesses who develop proprietary propositions.
Many businesses that were once happy to sit alongside other niche providers are now vying for the same customers. Who wins 2022 will decide the future of the industry.
Decentralised finance (DeFi) has already had a big year in 2021, with cryptocurrencies becoming more widely accepted for payments. But cryptocurrency is just one application of this radical concept. By removing intermediaries and enabling finance to become an action taken up directly between two individuals, or indeed individual companies, DeFi could have massive implications for banks and other financial institutions, while potentially revolutionising everything from music royalties to contract law.
Scott Johnson, VP, Product Development, Western Union Business Solutions
The evolution of challengers
All eyes will be on the merger and acquisition space in 2022 and we can expect to see further consolidation of more established first-, and second-, generation challenger brands within the next year. But by no means is the FinTech space drying up. We’re heading into FinTech 3.0 – a continually regenerating industry where the desire and drive to solve new problems remains strong.
The financial services sector has always been a David and Goliath industry, with a healthy mix of established traditional banking giants and the more agile, innovative challenger brands, that customers are becoming increasingly comfortable with when it comes to investing their money. In 2022, the small handful of midsize profitable companies will be the ones to watch, and we can expect this mid-market space to grow. Players within this space are uniquely positioned because their operating profit means they can invest, manage a stable cashflow and have the profitability to be able to react to pricing compressions as needed. But, unlike small start-ups, they don’t need additional funding to grow and there is no need to dilute equity.
In the next year, we can expect to see headline acquisitions, mergers and investments. Some challengers will thrive, and some won’t, but that’s what makes this market agile and exciting.
The Crypto hammer is still seeking a nail
The cryptocurrency market is diverging. Volatile assets that were once considered challengers are now becoming investment opportunities as they are just too volatile for anything else – and this unpredictability will be a key theme in 2022.
Stable coins and digital currencies will be an interesting area to watch and play in. There are still big questions around interoperability and the potential for stable coin and CBDCs to iron out inefficiencies in crucial areas, and these questions are likely to remain unanswered in 2022.
Making money digital is going to create real value for stakeholders and the customers of these businesses so we can expect to see a continued focus here, but key players will remain cautious and the lack of consistency in approach will remain an issue – some are investing in creating wallets for consumers, whilst others are exploring creating efficiencies for real time gross settlement, for example.
Right now, the industry feels like a hammer looking for a nail. Cryptocurrency in its current state is not a suitable payment instrument – simply put, it is digital gold rather than digital dollar. For this reason, 2022 will not be the year where CBDCs become widely adopted. The central banks still need more reassurance and confidence before they will roll them out to the mass market. We are decades away from this becoming a reality globally, and for this to happen first, we need facilitators that are willing to enable these transactions.
Will it be the year of cross-border payment innovation?
The pandemic didn’t change the direction of the digital payments industry, it simply accelerated it. We will only see a true digital payments evolution when Request To Pay (RTP) becomes more mature and it becomes feasible to request payment through RTP services.
In 2022, the combination of RTP and the rich messaging capabilities of ISO 20022, which will take place next year, provides an opportunity for digitisation of receivables that will truly accelerate digital transformation. As a direct result of these innovations, we will see a lot of processes within the FS sector become fully automated and greater efficiency for customers.
Another focus area for 2022 is making payments as easy as clicking a button. For domestic payments, we are already there. But for cross-border payments, this will, and should, remain as a two-click process. Thanks to RTP networks between major payments providers, cross-border payments for customers will become easier but due to their complex nature it would be unethical and a disservice for it to be any less than a two-click process: given the volatility of FX rates, it’s important for customers to have a chance to review costs before committing to a transaction. In 2022, we can expect to see facilitators making improvements so it is an understandable and consultative process – an improved experience for all.
Alexandre Duret, Product Director, Wealth, Temenos
2022 looks promising. Firstly, the global HNWI population keeps growing, in line with bullish equity markets. Secondly, the margins in retail banking, crushed by several years of low interest rates and economic uncertainty, are prompting banks to consider the mass affluent and high net worth segments with renewed attention. Finally, several trends are gaining traction, which firms can convert into opportunities to retain their customers and attract more assets. Let’s take a look at some of these trends.
The advent of hybrid-advisory to empower a new generation of clients
First and foremost, digitisation underwent a considerable push since the first times of the pandemic, when a traditionally high-touch industry had to cope with 100% remote client interactions. While most firms now provide omnichannel capabilities to their clients, the next step will be to combine the best of both worlds into a hybrid advisory approach that enables clients to balance automated self-service and human interactions. Whereas the rise of robo-advisors may have been overstated in recent years, the advent of hybrid-advisory could be the industry’s response to empower a new generation. A cohort of clients who expect the same level of experience they get from Big Tech, together with an exclusive relationship with their financial institution.
Hyper-personalised services powered by AI
To maintain such an exclusive relationship, firms now seek to offer tailored, “hyper personalised” services based on their deep knowledge of clients. Such services may include bespoke investment strategies built from the ground up for the client or next-best-product recommendations based on their situation, preferences, past choices, or peer group comparison. Invariably hyper-personalisation requires a lot of data but can also consume a lot of time, which is why the leading firms are investing in analytics platforms and AI technologies to augment their advisors and get an edge on the competition.
Opening up to opportunities with digital assets
Another way to differentiate is to offer investment opportunities that others don’t. In this respect, digital assets have been receiving much attention lately, including the most traditional private banks. On the one hand, regulators worldwide are progressively setting up frameworks to overcome legal uncertainties.
On the other hand, overpriced stocks and low-rate bonds prompt investors to diversify their assets. Opportunities (and risks) abound with digital assets, which extend far beyond the well-known Bitcoin. There are hundreds of cryptocurrencies to choose from, such as tokenised securities and now non-fungible tokens (NFTs) that enable investors to own a fraction of real-world assets like art or vintage cars. The good news for private banks is that there is an ecosystem of fintechs they can leverage to build their own offering.
Tapping demand for ESG investing to retain and attract customers
In contrast with the volatility and speculative nature of certain cryptocurrencies, sustainable investing or ESG investing represents another prominent trend in the industry. It started as a European regulation
but is now seen across the world as a great opportunity to retain and attract customers because it reconciles the client’s financial interest with the values they believe in. By screening the companies they invest in based on ethical, social and governance criteria, firms help protect their clients’ investment from future adverse events such as tougher regulations or fines on these companies. Furthermore, by selecting investment instruments according to their sustainability goals, clients are empowered to place their assets where they can make a difference. This is why we believe that 2022 will see the concepts of value-based investing and impact reporting spread across the industry.
Cloud and Software-as-a-Service will level the playing field
Finally, Cloud adoption will undoubtedly continue to grow in the coming year, as it is the obvious path for firms of all sizes to adapt their IT costs and protect their margins. While regulatory barriers are falling in many geographies, the Cloud also provides many competitive advantages, from quicker time to market to better scalability and higher security. Building upon these cloud technologies, Software as a Service (SaaS) is a business model which will continue to attract more firms in 2022, levelling the playing field between them and the new entrants, and between the private wealth industry as a whole and the rest of financial services.
Mark Gazit, CEO of ThetaRay
As we continue to emerge from the shadow of Covid-19, we will see more payments companies and fintechs launching, and more money flowing.
Cryptocurrency will become more and more of a reality.
Financial institutions have slowly been increasing their exposure for cryptocurrency, and this will continue.
The cyber threat is coming closer to the user and will continue to do so. Until recently, the easiest way for criminals to make money was by robbing banks. However, now that it’s so easy to conduct criminal activities automatically and digitally, their victims have become corporations and enterprises. These organisations will continue to be hit by escalating amounts of ransomware, internal fraud, vendor fraud, and other types of attacks.
Because of the surging volatility in the world and tension between nations, we will see increased money laundering and funding of terrorist organisations. Iran is becoming more aggressive, Afghanistan is again under the Taliban, and global banks want nothing to do with this amplified money laundering risk.
The ability to move money between countries is very important for terrorist funding and other criminal activities, but by shutting down cross-border transactions entirely, banks are also hurting innocent people in these regions. We need to find a middle ground.
Two years ago, I predicted ever-rising numbers of automated attacks. As I said at the time, “Nobody sits at a computer and attacks thousands of computers. It’s software doing it. They have programmed AI to systematically scan and attack organisations.” This is continuing. Everyone today understands that they can’t say, “We are a small company. Nobody will attack us,” because everybody is being targeted. The same goes for the world of financial crime; the perpetrators are using AI and have been doing so for quite some time. As such, we have an obligation to create even stronger AI-based systems to protect ourselves. It is the only way to remain effective.
Remittances are increasing.
This trend began before Covid-19, but the pandemic accelerated it. The global Covid-19 recovery is K-shaped; wealthy countries are doing better, but emerging economies are still being hit hard, so more and more money needs to be sent into these regions.
Unfortunately, this also provides a good way for criminals to transfer illegal monies for human trafficking, terrorist funding and other nefarious activities. This in turn interferes with legitimate remittances and makes it harder and more expensive for poor people to receive money from abroad.
As I and others predicted, AI has become much more mainstream recently. A few years ago, people thought nobody would be able to develop machines that could mimic human intuition. Now it’s clear to everybody that it’s possible; in fact, it’s become an everyday technology! Financial institutions that didn’t jump on the AI bandwagon from the start are now finding themselves in a difficult situation. Back then, AI was just an interesting new tool, but now the largest organisations in the world understand that the only way to conduct business, boost revenues and provide stellar customer service is by using more AI, more often.
Benoit Grangé OneSpan’s Chief Technology Evangelist,
Digital identity initiatives will increase for governments, states and private sectors
Governments around the globe are launching digital identity initiatives that enable users to access a range of services via online or mobile applications. Singapore, UAE and Australia have already issued a digital identity scheme, and the EU is moving in that direction too with the revision of eIDAS and the announcement of the European Digital Identity.
The availability of digital identities on mobile devices will facilitate the onboarding and authentication to digital applications.
Once a consumer is verified, they can use their digital identity anywhere at any time online to onboard or authenticate to any application. The consumer has full control of the information they are sharing online. Example sectors include energy suppliers, banks, postal services and telco providers. Any application dealing with digital identities will need to adapt and support the new governmental digital identity schemes in order to be relevant in the market. Furthermore, the usage of qualified electronic signatures will become more relevant: citizens can use their digital identities to legally sign contracts online.
Security top concern for embedded finance offerings
Non-financial enterprises are able to offer tailored financial products to their community, such as payday loans that employees can benefit from to get easy and reliable access to credit, or specialized digital platforms for example targeting truckers that offer credit they can use for fuel financing or vehicle insurance. Analyst firm Juniper Research expects that the value of the embedded finance market will exceed $138bn in 2026, from just $43bn in 2021. Both consumers and organisations have become more open to working with non-financial institutions.
These companies have better access to consumer data, which helps in providing an optimal user experience, leading to a increased brand loyalty. Since those apps are being used more often and very often include payment transactions, they will become even more interesting for hackers. Only the players that combine a frictionless user journey and accommodating offerings like “buy now, pay later” with a secure environment, will stand out in the crowd. Organisations that fail to protect their websites and mobile apps, will quickly lose their brand reputation, and hence their customer base.
Privacy by design becomes imperative for organisations to remain competitive
Privacy by design refers to the idea that the future of privacy cannot be assured solely by compliance with regulatory frameworks. Rather, privacy assurance must ideally become an organisation’s default mode of operation and personal information should be protected from the start, at the design phase. Although this concept was put in the spotlight when the GDPR regulation was released, it has already existed since the 90’s. At that time, Ann Cavoukian, former Canadian Information & Privacy Commissioner, defined seven principles that are considered the foundation of privacy by design — from enabling privacy settings by default and being proactive to being transparent about the motives for data collection.
Those principles still remain valid today. In today’s age of constant data breaches, companies will revisit how they approach privacy. Privacy will be used to differentiate from the competition and create a business advantage. It will be critical for companies to demonstrate they understand the principles and integrate them at all levels of their organisation to offer their employees, partners and customers the warranty they are taking privacy seriously.
Companies that are not able to demonstrate that they apply security by design will lose market share. According to Cognizant, 57% of consumers will stop doing business with a company that has broken their trust because of a lack of transparency or a breach with their personal data. Consumers are becoming more privacy-conscious. They request to have a clear understanding about security and privacy of their personal data. If not, they will move to a solution that does offer such transparency. Recently, even Google has started to offer more transparency about the way data is being used.
Cryptocurrency fraud will skyrocket
Crypto exchange platforms have been developed very rapidly from open source without taking security seriously. Since the platforms are unregulated and not secure, there’s no guarantee that customers get their money back after a hack. At least 32 incidents of hacks and fraud have already taken place in 2021, for a total value of almost $3 billion. Without a doubt, the number of cryptocurrency hack incidents will break records in 2022.
The most common types of crypto hacking are phishing and social engineering attacks, even though the technology to protect customers against those attacks has already existed for years and has been in use by traditional banks. Push notifications instead of one-time passwords sent via SMS can prevent SIM Swap attacks.
Also, application shielding can protect wallet applications from cloning and secret extraction. The only way to mitigate these attacks is to bring in more regulation and rules, like PSD2 and the requirement for Strong Customer Authentication. For customers, on the other hand, it is critical to select a stock exchange platform that is offering premium security capabilities.
Artificial Intelligence will lead the regulatory agenda in 2022
The use of artificial intelligence in finance has expanded massively in 2021, and it will only increase in the coming years. According to a recent OneSpan survey, 32% of FIs are already putting AI in place to comply with regulations. Jurisdictions across the world are eagerly looking to develop AI-based solutions, while also considering the ethical implications of its use such as addressing racial bias that creeps into facial recognition algorithms.
Policies and legislation pertaining to the use of artificial intelligence will lead to regulations in 2022 and beyond. In March, US Financial Regulators issued a Request for Information to get input from financial institutions on their use of AI.
The regulators wanted to understand how AI is used in their provision of services to customers and for other business and operational purposes. These insights will likely lead to a Notice of Proposed Rulemaking, a precursor to a regulation. We expect these to be published in 2022. Federal regulatory action should not surprise financial institutions based on our recent research conducted by Arizent: 43% of US FIs noted that anticipated federal AI regulations are a top concern.
The European Commission’s proposed Artificial Intelligence Regulation seeks to encourage the development of AI, while classifying and regulating AI solutions according to risk. The regulation is currently progressing through the legislative process. If the legislation passes, it won’t occur until late 2022 or 2023. We expect the first regulations to be published in 2023, so it can go into effect in 2024.
Nigel Bolton, Co-Chief Investment Officer of BlackRock Fundamental Equities
Consumer-powered economic growth and negative real interest rates will help deliver positive gains for equities in 2022, yet the journey for stocks may be more volatile in 2022, as inflation concerns gain traction.
The Covid-19 crisis has jolted the world from persistent deflation to persistent inflation, in our view. Demand for goods is surging, and supply is struggling to keep up. We believe interest rates may rise only gradually now that global government debt has soared to more than 100% of global gross domestic product.
This means we could see negative real interest rates and bond yields in developed markets for several years — or even decades. Investors may switch into equities for growth and income to help protect their savings from inflation.
Stocks, not sectors
Equities have an edge over other asset classes in such an environment. Yet we don’t think it’s simply a case of allocating to cyclical sectors. We expect to see winners and losers within themes and sectors.
Covid-19 has accelerated trends that are disrupting traditional industries. For example, energy companies have to wrestle with the costs of the carbon transition. Banks face competition from digital rivals and the ability of central banks to raise rates is limited by the level of outstanding government debt.
Other cyclical sectors are being disrupted by technology, as can be seen with the auto sector and electric vehicle start-ups.
Selectivity matters more
To find those companies that can continue to beat earnings expectations even as their costs rise, here are some characteristics we look for:
- The ability to pass costs on to customers is crucial if companies are to maintain profit margins.
- Pricing power often comes with a strong brand.
- Some European luxury and beauty names should continue to prosper, especially those that invested in e-commerce.
- Companies that have embraced digitalisation to lower the levels of assets they own can mitigate the impact of supply disruption.
- We focus on companies with unique intellectual property and strong market share. Some of the big tech and software companies remain compelling amid accelerating digitalisation across sectors, and as part-time work-from-home becomes the norm.
- We are going to see heavy capital expenditure in the US and Europe as governments pass infrastructure spending bills. There is an emphasis on “green” spending, so we look for those companies — such as insulation providers and heat pump manufacturers — that can play a part in reducing carbon emissions.
- We also like companies linked to the surging demand for EVs such as semiconductor makers and some of the EV start-ups themselves.
- Tackling food emissions with innovation is a big investment theme and we are exploring companies that can reduce greenhouse gas emissions in the food sector, a critical part of the transition to a green economy.
Steve Brice, Chief Investment Officer, Standard Chartered
Equities and gold are preferred – Equities are expected to outperform bonds and cash, albeit at a more modest pace than 2020-2021 and with somewhat higher volatility. Equity earnings growth is likely to be the main driver of returns. Given strong growth and supportive policy levels, US and Euro area equities are preferred. The preference for gold is driven by the ability to mitigate inflation, USD weakness and equity volatility risks.
Minimising rate sensitivity and FX risks are key for bonds – Bonds are expected to largely deliver returns in line with the yield on offer in 2022. The first preference is for Asia USD bonds due to its attractive value with relatively high credit quality and low interest rate sensitivity, while the second preference are US and Euro area high-yield bonds, which typically outperform when the Fed kicks off a rate hike. The USD is also likely to drift lower in the 12 months after its initial surge.
Tailor opportunistic allocations around sectors and themes
In the US, the technology sector is preferred on the belief that the positive earnings growth outlook will likely more than offset the headwinds that rising bond yields can pose to the sector.
In Europe, the technology, consumer discretionary, industrials and financial sectors are preferred. European financials are likely to benefit from deep value and easy ECB policy delaying a flattening of the European yield curve.
Other longer-term themes include climate change (water scarcity, electric vehicles), a digital future (5G./Internet of Things, fintech, blockchain) and China’s “Common Prosperity” (high-tech manufacturing, green energy, internet companies).
A significant upside inflation surprise, a policy over-tightening error, a significant geopolitical event, or a vaccine-evading Covid-19 variant are key risks to this base scenario.
The emergence of another variant has yet again raised uncertainty on how it will spread and its impact on the global economy. Regardless of market sentiment in the year ahead – which has so far swung between pessimistic and optimistic extremes – the two key lessons for investors are to stay invested and stay diversified.
Having a diversified foundation portfolio helps investors to start on firm ground, from which they can then build on opportunistic ideas to take advantage of the current investment trends and themes.
Angus Ross, Chief Revenue Officer, Banking as a Service at Finastra
BaaS and contextual finance on the rise
Activity around Banking as a Service (BaaS), embedded and contextual finance is set to grow significantly in the year ahead.
Open Banking has been a vital first step. It’s been the impetus behind making banks’ products and services consumable and accessible through open APIs – allowing trusted third parties to offer new, value-added services to customers in real time. Building on this, BaaS is about providing relevant, valuable financial services to retail, business and corporate customers, and embedding these in context at the point of consumption.
A huge opportunity ahead
Just counting the ‘cannibalisation’ of payments, lending and insurance from traditional to embedded channels, Bain has valued the transition to BaaS at $3.6 trillion by 2030. This figure doesn’t account for the transition of wholesale banking to embedded finance – delivered as a service – in areas like cash and treasury management, trade finance and FX.
When you add in net new market opportunities and the emergence of new finance offerings that BaaS enables, Finastra estimates the total market opportunity will exceed $7trn by the end of the decade.
Over the last several years, banks have become accustomed to hearing about the potential threat and opportunity that fintech and big tech poses to their business. But it’s been difficult to predict the impact of this at scale. Areas of payments and lending have certainly been disrupted, but other areas of banking have been largely untouched.
With embedded finance, it’s much easier to identify the scale of the opportunity and the threat – and it’s huge. Put simply: customers that access financial services through banks’ proprietary channels today, will start to consume financial services through third-party interfaces that are more convenient and relevant to them, tomorrow. As financial transactions increasingly start to happen across channels and in contexts that banks don’t own, banks will no longer own the customer journey. They will need to partner to succeed.
All players must work collectively
It’s imperative that banks start to take action today. The winners in BaaS will be the pioneers and early adopters that are embedding their products and services into other platforms, either exclusively or with priority placement. BaaS gives them an opportunity to reach a greater number of customers at a lower cost.
Relevant points of context will include retailers, telcos, travel firms, car dealers, estate agents and any other service provider that understands the value in providing financial services directly to customers at the point of consumption. In business and corporate banking, ERP and treasury platforms will also be key. To stay relevant, banks must embed their services into these touchpoints.
Banks that are building partnerships with technology enablers and distributors will be in the best position. Early movers – and those most willing to collaborate – will be rewarded. Late adopters will find it very hard to succeed.
Roy Ng CEO of Bond.
Crypto is Out, Blockchain is In
As crypto euphoria continues to drop and the number of crypto scams rises, blockchain’s usefulness will be appreciated while crypto will be seen as too risky. With the oldest millennials turning 41 in 2022 and nearly half of all crypto owned by millennials (Yahoo! citing a study by Pipslay), this important cohort already knows the limitations of crypto and the benefits of blockchain. As they begin to get mortgages, buy NFTs, and interact with other items that can be placed on the blockchain, the more mainstream blockchain will become. Meanwhile, the fluctuating value of crypto will spur many of those entering mid-life to move their assets somewhere more stable, likely powered by blockchain technology.
Startups Bake in Finance
In 2022, at least 50% of newly-funded SaaS startups will have native fintech capabilities baked in. As companies gain traction by hyper-serving specific industries, such as barbershops or auto body shops, new entrants into software for businesses will embed financial services from the jump. Bank accounts, insurance, lending, and more will be woven directly into these apps, allowing their customers to seamlessly use financial products without interrupting their everyday activities.
Financial Brands Echo Lifestyle Brands
Just as consumer companies with a ‘story’ are gaining an outside influence, so too will financial brands. The eco-friendly shoe company All Birds recently saw a massive surge in its stock price after its IPO and now the financial company Aspiration seeks to go public based on its ability to prioritize sustainability in consumers’ spending habits. As people become comfortable buying physical goods that support their beliefs and causes, the more they will seek out mission-driven finance companies to align with their ethics. With bank branches becoming a thing of the past, what will separate financial institutions is their alignment with their target customers’ values.
The End of “Fintech”
The delineation between tech and fintech will vanish. As consumers get more accustomed to financial transactions being woven into their interactions with apps and technology, there will soon come a point where all companies will become fintechs, and finances are baked into all user experiences. No longer will finances be seen in narrow use cases or a few brands – literally every technology company will offer a full suite of financial services.
With 34% of consumers admitting to making late payments, 2022 will be the year of BNPL reckoning and growing defaults. The credit scores for these consumers will take a hit, putting added pressure on the underbanked and limiting credit and borrowing options such as obtaining a car loan or mortgage.
The rise of Buy Now Default Later (BNDL) will trigger fintech companies to start adopting better consumer guardrails on BNPL, like spending limits based on a more holistic view of a consumer’s finances. We also expect to see brands start to offer more savings and investing features for their customers and communities so BNPL defaults are mitigated.
2022 is the year brands wake up to the power of their customer’ financial data and start to introduce their first embedded financial products. Traditionally, banks and credit card companies have had unbridled access to their customers’ spending habits and patterns, while a store manager may only know what their customers are purchasing at their own company. Embedded finance products like Apple Card mean Apple knows not only which Apple products a given customer purchases but also what other non-Apple products and services are being consumed. The power of this data is why embedded finance is expected to reach $7trn by 2030 as more companies offer financial services as part of their core offerings.
Increased Financial Inclusion
Traditional banking and financial services do not meet the needs of all communities. Currently, nearly 25% of the US population is underbanked and 10 percent are unbanked (Morning Consult). According to Fair Isaac Corp., another 53 million people do not have the FICO score required to get affordable terms on auto or home loans.
Neobanks and modern fintech solutions have radically disrupted old models and paradigms and are providing long-overdue access to core banking services to underserved communities such as creators, LGBT, Black and Hispanic communities.
Bond is partnering with companies to provide financial services to disenfranchised communities, such as our work with Squire Technologies to bring banking services to barbers, one of the most underbanked professions (hear more from Squire’s founders). We’ll see this trend continuing into 2022 and beyond, and Bond is motivated to do our part to help increase financial inclusion and parity for all.
The fintech boom is making the war for talent more fierce, a trend that will continue throughout 2022. In 2021, we saw an increasing talent shift from Wall Street to VC-backed tech companies and this will accelerate over the next 12 months. Software engineers will continue to be in demand, but they will be joined by product managers, talent recruiters, and data scientists.
Those workers will still be mission-driven but will also value geographic flexibility after having worked from anywhere over the past two years of lockdown. As lock-up periods end after IPOs of companies like SoFi and Marqeta, an exodus from those fintechs will lead to the foundation of even more fintechs, drawing the entrepreneurial-spirited to fresher territory and exacerbating the talent wars.
Steve Morgan, global banking industry lead, Pegasystems
Five Short Lessons for How Banking and Banking Tech will change in 2022
Being ruthless about banking technology ROI
Notwithstanding how interest rates may nudge up in some markets, banks will continue to have high pressure on margins that otherwise could be used to invest in new technology. That doesn’t mean banking technology investment will dry up but it will be more ruthlessly focused on where the needs and returns are greatest. This could be on using technology to be more agile in the sales and marketing around quick wins around unsecured credit purchases especially as customers return to their foreign holiday making habits.
Killing the Friction
Without talking about a ‘new normal’, banks will need to re-adjust to the patterns of remote, digital and face to face interactions with customers and among teams. This is a positive trend that nonetheless comes with tensions because of how impatience has intensified.
Everyone is super-sensitised to the slightest delay and buffering in a process given we are all remote and online so much. Slightest slip ups in design and functionality are micro-aggressions that customers will not accept anymore. Banks will be scrutinising all processes for friction, whether it’s a self-service ID process that clunks out when you wear glasses or a sluggish unintelligent chatbot, because the sales and service experience is the new battleground.
Smarter Automation with a Human Face
The pandemic revealed banks were good at automating processes, which is a good thing. There may have been a few bodge jobs where new digital apps were thrown up too quick and now some remedial work needs to be done (a bit like how you see scaffolding erected on a newly built house a few months after it was finished).
Yet the great focus will be on how automation can enable personalised interactions that are very human. This is not just about empathetic AI but how AI and intelligent automation can spot markers that allow the bank to make a meaningful interaction with a customer.
For example, a customer is coming up for a date when they could refinance their mortgage, the system is automated to get the colleague who sold the mortgage originally to call up the customer with a new best offer and not just send out an automated email.
Technology is key to this, because the volume of data analytics is so overwhelming that there needs to be an investment in intelligent automation. So to be successful in 2022, banks can do more to use AI to marshal better human, personalised interactions. They will also need some fundamental changes to processes, steps and improvements in team cross-skilling.
Moving on from Access to Cash
2022 will see even more pruning of branch networks. Access to cash has muddied what’s happening with the bank branch which is more fundamental and linked just as much to our online activity, our spend and travel habits.
Consumers are walking away from cash in their transactions. The old model of how physical cash was delivered and collected within our communities is redundant.
Yet, the branch has a place in banking because of how it facilitates face to face meetings that can secure valuable business like mortgages. So, expect to see more examples of some branches re-modelled into providing mortgage or wealth management services.
There’s also a lesson that banks must learn from how toxic the branch closures have been felt. New data is suggesting that one in five customers who go into branch started in another channel. Many are being forced to go into a branch that in some cases may not exist much longer.
What this tells me is how the omnichannel term is so wrong for banking. Customers want choice not channels. When they go into branch it should be their choice and not something forced on them because of a broken digital process.
And okay, if the bank has chosen to not feature providing that service in branch, don’t just point to a phone on the wall, help out once and say we don’t normally do this as a pointer for next time. Provide an online follow up with video instructions on how to perform the task online next time.
New regulations mean opportunities not pain in 2022
Yes the Basel capital requirements are going to pinch for some in terms of capital requirements, but the impact of some regulations may be more positive in 2022 and actually create new opportunities. Take ISO20022 adoption. This standardisation of payment fields is going to simplify international payments and allow more straight through transactions.
The other regulatory development of 2022 is how banks positively embrace net-zero banking. Both reporting standards and expectations are increasing, and I think there’s a genuine desire on the bank side to do more. This year for the first time a major bank called us and 20 others to set out concrete ways in which their partners could help the bank be more sustainable.
Following COP 26 there is natural pressure on businesses to make concrete steps towards net zero targets and banks can play a pivotal role here. There are obvious areas around supply chain and lending, but there will be other areas where a bank has an indirect influence on spend habit such as providing information on carbon footprint spend, raising awareness of leading ESG partners to do business with and so much more.
Kevin Levitt, Director of Industry and Business Development for Financial Services, NVIDIA
Your Voice Is Your ID: Financial institutions will invest heavily in AI to fight fraud and adhere to compliance regulations such as KYC (Know Your Customer) and AML (Anti-Money Laundering). Some are using a customer’s unique voice to authenticate online transactions, while others are turning to eye biometrics for authentication.
Graph neural networks are at the forefront of the new techniques AI researchers and practitioners at financial institutions are using to understand relationships across entities and data points. They’ll become critical to enhancing fraud prevention and to mapping relationships to fight fraud more effectively.
AI for ESG: Consumers and government entities increasingly will hold enterprises accountable for environmental impacts, social and corporate governance (ESG). Companies will invest in significant computational power to run AI models, including deep learning and natural language processing models, that analyse all the data necessary to track company performance relative to ESG. It also will be needed to analyse the available data externally to measure which companies are excelling or failing relative to ESG benchmarks.
Andy Orrock, COO, OLS Payments
- A battle will emerge between simplified payments and payments diversity – IT groups are looking to simplify their connection scheme by consolidating all their traffic to their payment processor. At the same time, merchants are fighting for more payment diversity and more data per transaction.
- Merchants will need to meet encryption requirements– The upcoming deadline of the PCI PIN Security Requirement 18-3 (Key Block) mandate will trigger merchants to update their encryption processes in 2022. If they haven’t already, businesses will be assessing their systems for risk and compliance, and taking steps to ensure they are meeting today’s standards.
- IT teams will look for more modern interfaces –The “Great Reshuffle” is going to lead to younger support teams with less legacy experience – and less patience for outdated user interface standards. This will speed merchants’ desire to update these interfaces where possible to appeal to the emerging workforce.
- QR codes will continue to gain traction – Merchants will continue to implement QR code capabilities in the new year as they understand the different approaches for QR code acceptance and how to integrate QR codes into their current ecosystems.
- Contactless capabilities will become even more popular– Contactless capabilities will show up in more places in the US, such as at the pump.
Alastair Launder, managing consultant at P2 Fincrime
Financial Crime Regulatory Complexity Due to Rocket in 2022
Regulatory complexity and reporting to combat financial crime is due to soar in 2022.
This increase is down to a number of factors. One is the fact that while the UK is no longer bound by EU directives – it opted out of 6AMLD, the sixth iteration of European-wide anti money laundering legislation – there are rumours the parameters of the Financial Services Bill is being expanded instead to cover fraud, false accounting and insider dealing, in addition to money laundering.
This will mean a significant uptick in regulatory adherence for financial services firms.
Other key predictions for 2022
Dear CEO – the saga continues: this autumn the FCA wrote to the CEOs of all the UK’s top banks to warn them that weaknesses in their financial controls could lead to fines and penalties. Now they have identified flaws in their risk and control measures, they are under pressure to solve these weaknesses asap. This will be a focus for banks at the start of 2022.
Burgeoning financial crime: £12bn of criminal cash is estimated to be generated annually in the UK. £3bn of fraud is impacting individuals and businesses annually. Fraud now constitutes over 30% of all illegal activity in the UK – fraud and cybercrime combined is over 50%. Organised criminals are realising the pickings are far greater in financial crime than they are in drugs and burglaries, so we expect these figures to creep up in 2022.
Escalation of digital payment risk: the pandemic has heralded in a greater reliance on digital technologies, which gives opportunities to fraudsters for their phishing scams, ID theft, e-payments etc. The use of cash is rapidly dwindling and any technology touchpoint is a potential area of risk for banks and consumers alike.
The uptick in SARs: the 2020 Suspicious Activity Reports (SARs) annual report saw a 116% increase in submissions from the previous year. This is partly down to the sheer volume of transactions within the UK. But although most of these SARs will be genuine, some will be submitted defensively i.e. employees who think it’s better to report than to be exposed. If UK legislation goes the way of ‘failure to prevent’, then this is likely to increase even more. Ageing, legacy technology is also a factor in the overproduction of alerts.
ISA fraud crackdown: HMRC is planning a review of ISA processes and controls to ensure there is no fraudulent activity in Q1 2022. This is something that financial institutions need to be aware of. Customers might unknowingly have multiple ISAs with multiple providers but individual allowance is £20,000 – customers with more than this allocated to ISAs are breaching tax legislation.
The rise of money mules: this is a trend that has escalated during the pandemic and we think it will continue. A money mule is a person who often unwittingly allows criminals to use their bank accounts to transfer money to another bank account and so facilitates money laundering. The criminals might pay a small fee – for example, students who are facing financial hardship – or often simply exploit elderly people getting to grips with technology.
The rise of DAML requests: £172m has been denied to suspected criminals as a result of DAML (Defence Against Money Laundering) requests, a 31% increase on the previous year’s £132m and over three times the £52m from 2017/18. This will continue its positive trajectory in 2022.
It’s always difficult to make predictions in the financial crime arena as trends are continually emerging – as soon as the industry catches up, criminals evolve their ways of generating and laundering stolen money. We really welcome increases in regulation to help financial institutions fight financial crime and we urge them to examine their technology, processes and data quality so they can deal with it in the best way.
Gary Allinson, Product GTM Lead at Cashflows
Open banking will help to accelerate financial inclusion by giving consumers more access into the banking system with greater choices to banking services such as loans, approvals, and other financing instruments.
The future of B2B BNPL innovation will rely on data. Access to financial company data and a clear regulatory landscape will be key to solving the BNPL roadmap.
Tools embedded with AI are going to define the future of payments. They will analyse a customer’s operations history, including their spending habits, to predict their future activity so that businesses can create an experience catered to individual buyers.
Marketplaces are here to stay in B2B. But the marketplace future is still in its infancy and could take radically different forms. B2B marketplaces offer businesses the advantage of an increased number of potential customers and the ability to offer online services without needing to create an e-commerce site.
Mona Shah, Head of Sustainable Investments at Stonehage Fleming
Sustainable Investments – Opportunity for 2022
For investors with a long-term horizon, we believe this is an excellent entry point for climate solutions or environmental strategies. It seems to us that the market is being myopic around the momentum surrounding decarbonisation, as with the oil price remaining at c. $80 per barrel the energy sector has been re-rated, whilst renewable energy remains in negative territory year to date.
COP26 was a decent, albeit not impressive, step forwards; 90% of the world is now committed to net zero, even if progress lagged on 1.5 degrees Celsius of warming. Although a global carbon tax was not agreed on, the private sector is hyperactive on carbon neutrality, and it needs to be, as the consumer is demanding it. But there is also a financial consideration as higher emitting companies will be penalised with a high cost of debt going forwards.
It strikes us that many global large cap companies in core portfolios today will become clients of climate impact enablers if they need to reduce carbon, water and waste, particularly as emitters are fined or taxed.
We believe a real and interesting opportunity exists today to access an interesting underrepresented structural growth area at cheaper valuations than many other growth themes. An experienced specialist environmental active manager would be our preferred way to play this theme.
Krik Gunning, Co-Founder and CEO, Fourthline
The growing importance of identity monitoring for banks and fintechs
Social engineering and account takeover fraud will become even more prevalent next year. To combat this, financial institutions not only need to conduct holistic data checking beyond document verification at account opening, but also to monitor customer identities throughout the customer lifecycle.
Money mules, for example, appear to be perfectly legitimate people at onboarding, but transfer access to the account to money launderers after the account is opened. Banks and other financial institutions must adopt technology that can confirm the account user is the account holder throughout various points in the customer lifecycle.”
Why more sensitive data is becoming less attractive
GDPR is quickly becoming the global privacy standard. Companies that are not set up to handle the most sensitive data (e.g., biometrics) at the very highest standards will have two choices – (i) delete the data, as we have seen Facebook do with biometric data on over 1 billion users; or (ii) find a partner that does meet the bar.
As banks are required by law to store sensitive data, it implies that (i) is not an option and we have already seen the first banks concluding that (ii) is a more attractive option than upgrading internal systems and procedures.”
How – as the market continues to mature – crypto will remain very much in the regulator’s crosshairs
“The sheer size of the crypto industry will force regulators to closely monitor the sector. This is expected to lead to stricter compliance regulation in some markets. We expect to see a continued trend where some players embrace regulation while others will fight or evade it.
Why ethical AI will increasingly have license to operate freely
Society at large has become increasingly interested in and vocal about how personal data is used by technology companies. This will lead to more tough questions asked, with answers therefore needing to meet a high ethical bar.
Banks will have to be able to explain how AI is applied to compliance and fraud. This also impacts vendor onboarding as it requires an understanding of whether their partners and vendors have full control over the technology they offer. Every bank will need to be able to explain both to regulators, and the general public, how and why a decision was taken.
John Rayment, CEO of Identiti
ISO 20022 migration challenges
SWIFT’s ISO 20022 coexistence period starts in November 2022 and financial institutions are beginning to prepare.
The migration promises a lot of benefits for payments, including richer data, more harmonisation between domestic and cross border payment systems, enhanced screening, increased innovation, and better analytics.
But ISO 20022 is no longer just a payments issue. It’s a chance for banks to fundamentally transform their data, systems and services and to look for opportunities for innovation and growth. It is also opening the door to interoperability without the SWIFT network and as banking becomes more globalised, with access to more dynamic payment systems, as well as local clearing, banks will be far better placed if the entire business can adapt to the ISO 20022 standard.
In 2022, we expect to see more financial services businesses recognising this and instead of treating ISO 20022 as a one-off fix, using the migration as a catalyst for data transformation and innovation across the bank and its partner ecosystems.
While ISO 20022 solves a lot of messaging transfer issues, you still don’t have interoperability globally. While there will be one standard for ISO 20022, domestic rails outside the SWIFT network could be slightly different. Regional dialects of ISO 20022 are a likely outcome of the change as domestic rails add their own flavour and requirements to the standard.
It will be interesting to see how companies handle these hurdles next year and who resists this change until the last moment.
Regulatory fines will increase
Over $10b in fines were handed down globally in 2020, due to breaches of AML/CTF regulatory obligations, and we expect more fines to come in 2022 and beyond. Regulators around the world are increasingly vocal about ensuring financial institutions have the right people, technology and processes in place to combat financial crime and budgets are being realigned accordingly, with compliance playing a bigger role across the board.
Compliance will be complicated next year as AML/CTF regulators also look at how to accept ISO 20022 payments and adjust their own systems and processes accordingly, and as we see an increasingly changed payments landscape due to CBDCs and other alternative real-time payment schemes.
Because of this, banks will need to decide whether they wait to see exactly what changes the regulators make and then look at how to adopt them into their systems, keeping in mind every regulator around the world will want something slightly different, or if they get ahead of the curve and make decisions on their own technology stacks before waiting for the final word. It’s a great business case for a modular, as-a-service approach to technology that gives them more flexibility to change and adapt as the world around them changes.
Joe Higginson, CCO of Identitii
Technology will begin to decouple
Globally we are experiencing wider adoption of alternative real-time payment schemes and Central Bank Digital Currencies (CDBCs), as well as upgrades to other current payment schemes, with SWIFT losing some of its crown as the go to payment rails for high-value cross-border payments.
We’ve seen an increase in new technology systems that not only connect to SWIFT, but also to alternative payment gateways, like Mastercard Send, Visa B2B and Currency Cloud as well as Companies like Ripple, who are unlocking treasury payments by offering tokenised cryptography coins.
I think what also we’ll start to see is more work around how to regulate non-central bank digital currencies so these cryptocurrencies that have a foothold can be regulated in some way.
Demand for a more complete payment experience with BaaS and BNPL will increase
Customers are more concerned about making frictionless transactions than banking with a specific institution and that demand for seamless experience will continue to increase. BaaS and BNPL services are crucial to making that a reality and I think the discussion around those models will dominate.
We will see an acceleration towards BaaS and BNPL where non-banks start to flirt with the idea of offering BaaS to their customers for a more full-suite experience and banks take aim to compete with BNPL services already in the market.
It exists on some scale already—Google, Amazon, and even Shopify offer basic banking services to their customers, and Monzo bank recently started offering BNPL services, for example—but I think the trend will increase at a more rapid pace.
Luke Massie, CEO, VibePay
The super app race in Europe will heat up
As fintechs look at the success WeChat and CashApp have had in Asia and the US, we can expect to see more businesses enter the European super app race in 2022 as they look to capitalise on this enormous opportunity.
The super app race is crucial as we currently have fragmented services across the spectrum which are leading to a painful user experience. In 2022 we will see major progress to solve this issue by bringing together social media, social commerce, banking, payments and more.
This will be a mammoth task, but the opportunity is there thanks to Open Banking and PSD2, which have given European fintech founders a platform to build big. We’re looking forward to being part of this race next year and seeing what the European fintech industry can deliver.
From Open Banking to embedded finance
Having built upon Open Banking, fintechs will no longer have to focus on the foundations. Instead, 2022 will be the year of solutions and experience; the elements which will really move the needle for consumers.
We will see embedded finance move to the forefront, adding a huge amount of value in the financial ecosystem, such as the post transaction experience in payments, where sellers can interact with customers, fans, or subscribers in the same place real time payment was made.
For end consumers it can mean being able to do more with their transactions, whether that’s sharing with friends, splitting payments or unlocking responsible consumer lending opportunities. This is what the impact of embedded finance can have, opening up a whole new dimension for payments and the possibilities within it.
New business models, new audiences
To date, fintechs have followed relatively traditional growth strategies, however we will start to see new models emerge in 2022. This includes developing new ownership structures that enable influencers to play a major role for fintechs – not just from an awareness perspective but their ability to build brands and design products.They are fundamentally the best placed individuals and experts in terms of insight across online communities and what the entrepreneurs of tomorrow need. They also wield the trust of consumers, meaning higher engagement and take up of services. Just as importantly, partnering with influencers also presents an opportunity to reach a new, hyper-targeted audience, which could transform the growth of a fintech brand. I believe this strategy will be the business model of the future.
The rapid rise of the creator economy in the UK
Over recent years we have seen the rapid rise of the creator economy in the US and we are now starting to see significant growth in the UK, triggered by the pandemic. We now have millions of digital-first social entrepreneurs, such as those selling on the likes of Depop and Etsy, gamers streaming on Twitch and creators on TikTok or Patreon.
These online entrepreneurs aren’t typically just earning a bit of extra cash on the side, they are running businesses with significant customer bases or connecting with thousands of loyal followers in their fanbase.
In 2022 we will see significant investment across the creator economy as fintechs build new solutions to offer these digital-first entrepreneurs value-add, personalised experiences where they can interact with their audiences in new ways to really capitalise on the market and opportunity they have in front of them.