Global brands from Amazon to Mercedes to even Walmart and IKEA are walking away from the traditional financial middle person and plugging in software from fintech companies to offer customers everything from credit to insurance and banking (1).
As discussed in our previous story, Big Impact on Banks with Fintech Players Entering the AMC Space, these are flashing warning signs for established lenders.
While we are not sure when the term fintech was first coined, according to Chris Skinner, the fintech pundit worldwide, fintech was heralded with the launch of Zopa, a peer-to-peer lender based in the UK, in 2005 (2). Since then, we have witnessed a stable growth of the industry, which took a dramatic turn upwards in 2020 amid the pandemic (3).
For instance, most big brands like Amazon and Mercedes today use embedded finance, a recently emerged term for companies integrating software to provide financial services to their customers. It allows Amazon to offer “pay now pay later (4),” Mercedes to allow drivers to get their cars to pay for the fuel (5).
Of course, banks are still behind most of the transactions happening today; however, analysts believe that traditional financial institutes are at risk of being pushed behind from the front end of the finance chain.
And if banks move away from the pools of data, non-traditional entities are hoovering up about their customer behavior and preferences; fintech startups will gain an edge over banks when it comes to financial services.
The Fintech Space in 2021
For now, fintech companies are barely making any dent in the dominance of banks. While some startups have licenses to offer regulated services like lending, they still lack the biggest financial institutes’ deep funding pools and scale.
However, if financial technology companies match their success and grab a big chunk of digital payments from banks, they boost their valuation. And analysts suggest that it would also force lenders to respond.
So far in 2021, investors and venture capitals have poured over 4.25 billion USD in the embedded fintech startups, which is three times more than the amount in 2020, as per Reuters and PitchBook.
Even in India, fintech companies minted over 8 billion USD over 363 funding rounds this year compared to more than 2.83 billion USD over 296 funding rounds last year, a 183.39% increase (6). The year also witnessed at least 11 new unicorns with late-stage funding deals at two to five times more valuations.
“In 2019, Accenture had estimated that new entrants in the payments market had amassed 8% revenues worldwide. That share has risen significantly over the past two years, with the pandemic boosting digital payments taking a toll on traditional payments,” stated Alan McIntyre, Senior Director of the banking industry at Accenture (7).
According to Luca Bocchio, a Partner at Access, a VC firm (8), most customer-centric companies will launch financial products in the upcoming year. It will allow them to improve their customer experience significantly, and that’s why they are excited about this space.
And that’s why in this post, we will talk about some of the biggest trends in the fintech industry.
In addition, if financial technology players manage to play their cards right, we are not far from the future where we see them finally overpowering big banks and insurers.
Eight Trends to Look Out For in 2022
#1 Big Techs Moving into Finance
We have seen developments of Google Pay, Libra, and Apple Card, and it made us believe that big techs are slowly moving towards finance, and we may see, however unlikely, a big tech bank in the future.
In addition, big tech companies like Amazon and Meta are also in an excellent position to become banks, but not without challenges.
According to Perry Koorevaar, platforms head at ABN Amro (9); big techs won’t move in that direction because of the hassle involved. Instead, they are most likely to focus more on the most attractive services to position themselves in a way that will enable them to gain the most financial value without dealing with any regulatory and back-end requirements.
However, according to a report from WEF, World Economic Forum (10), big tech companies are biding their time before joining hands with the financial services industry.
After all, technology giants have far deeper experiences in all related areas than fintech startups, especially with AWS offering services to dozens of fintech players, including Nasdaq, Stripe, Capital One, and more. In addition, traditional financial institutes also reply to tech giants for their sensitive capabilities.
“Tech giants are in an excellent position to pick and choose their entry points into financial services; it would allow them to maximize their strengths like rich datasets and strong brand names, and take advantage of incumbent institutes’ dependency on them,” stated Jesse McWaters, the author of the WEF report (11).
On the other hand, tech giants may also become a platform that offers banking services. Now, this doesn’t sound very interesting, does it? Let’s move on.
#2 Banks Revamping Their Strategies
In June this year, many lenders, including Ally Bank and Chase Bank, announced that they would no longer charge customers an overdraft fee. And since then, several banks, including big ones, followed suit; no one wants to be the last financial institute to charge overdraft fees (12).
Banks took steps like PNC, adding a Low Cash Mode feature that allows customers to see how much they will have to pay if their account shortfalls and even changing the transaction order to avoid paying overdrafts.
Another example includes Bank of America that launched a service called Balance Connext that allows account holders to avoid overdraft fees by automatically transferring money from another user’s account with the bank for a 12 USD per transaction fee.
On the other hand, Capital One eliminated NSF, non-sufficient funds, and overdraft fees for all bank customers and forewent over 150 million USD in annual revenue.
While banks don’t have to remove the fee altogether, as per Terence Roche, a partner at Cornerstone Advisors (13), they can lower their fees and market it as a convenience fee, they can also allow people to choose whether they pay the check or debit with fee or return/decline it without any fee.
The upcoming overhaul will be a boon for tech players who will help traditional lenders with the analytics that can determine which customers should get which overdraft and offer them real-time notifications.
#3 Embedded Finance Will Continue to Be Hot in 2022
If you have paid attention to the fintech space this year, you know how hyped-up embedded finance was in 2021. And forecasts suggest that BaaS, banking as a service, and embedded finance will continue to succeed in 2022 (14).
However, next year’s big development will be in the BIPs, BaaS infrastructure providers like Unit, Moov, and others.
A recent survey of bank executives by Cornerstone Advisors found that one in ten banks is developing a BaaS strategy, and the other 20% are considering pursuing a BaaS strategy (15).
All in all, BIPs providers will be critical players for banks in their quest.
#4 Community-First Social Investing Platforms
There is one thing common in the GameStop frenzy and the ConstitutionDAO saga; if you haven’t guessed it already, yes, they both illustrate the desire of the internet community participant to direct their money towards a greater goal collectively. The goal could be running a distributed hedge fund or purchasing a copy of the constitution.
In the upcoming year, we will see multiplayer and community-driven social investing platforms that can tap into the internet culture of collective action (16).
Many fintech players are already building such products with features like asset pooling, coordination, and voting that allow collective investment, whether it is about distributed hedge funds, advancing environmental goals, or pooling money to buy collectively owned assets.
Fintech players in this space will have clear advantages, embedded distribution considering the higher engagement and multiplayer approach that can also be flat-out fun.
#5 Fintech Movement Towards Sustainability
The default setting in Google Maps directs us to the most fuel-efficient route. Have you noticed that? You will also find billers with the “paperless statement” checked now more than ever. Such environmentally-minded configurations are coming to fintech.
We can imagine a checkout experience toggling between UPI, debit card, credit card, PayPal, and every other payment method available to us and showing you the least harmful to the environment.
Improvements in emission data technology and infrastructure are making a move towards sustainability more possible and at a rapid pace.
With companies like Wren, Patch, and Capture making it easier for consumers and businesses to understand their climate footprint and act on it, payment providers, logistic companies, neobanks, and others are likely to embed carbon offsetting optionality in their products (17, 18).
#6 Fintechs Will Go Crypto
As crypto is taking more mindshare of consumers, more fintech companies are adding crypto products in their offerings to gain further wallet share.
For instance, Robinhood, which was started as a stock trading platform, also facilitates the trading of many crypto assets. Likewise, many neobanks allow people to earn higher yields via DeFi, and larger banks have also started to experiment with crypto offerings (19).
In 2022, we will likely see more crypto infrastructure built for wallets, transfers, and yields as custody, service, and more so people can continue managing and integrating their fiat and crypto money. We may also see a new wave of crypto companies powered by crypto infrastructure in the back-end, called DeFi mullets, fintech in the front, and DeFi in the back (20).
#7 Rising Security Threats and Solutions
Ransomware is sweeping the world like never before. In fact, cybersecurity experts indicate that the cost incurred from ransomware attacks will reach over 20 billion USD by the end of 2021 and swell to over 265 billion USD in the next decade (21, 22).
As per a report by CBS News (23), hacker groups like DarkSide even offer RaaS ransomware as a service. These cybercrime groups are sophisticated and run like a normal company, complete with marketing, customer service, and negotiators who also communicate with victims on behalf of their clients.
In such a case, banks and fintechs need to prepare for a ransomware attack by preparing backup solutions and ensuring that everything is tested (Suggested Reading: How to Build a Business with Ethical Hacking and Cybersecurity).
#8 Open Banking
Everyone wants banks to be more open, less cumbersome, and easy to navigate; in other words, open banking is an excellent term.
And we see several developments that will further elevate open banking among the top trends for 2022, like banks’ increased focus on APIs and the data aggregation battle between fintechs and traditional lenders.
It is worth noting that the total percentage of banks and credit unions investing in or developing APIs has increased from 35% in 2019 to over 47% in 2021. Another 25% are also planning on investing in or creating APIs in the upcoming year.
In October, Plaid announced a new payments partner ecosystem that will make the transfers of ACH bank more attractive than credit card transactions. Yes, it is not a bank-friendly move, and we may see more players leverage their consumer-friendly business models to escalate the open banking war.
But, a big elephant in the room that no one wants to remove is the unbalanced value equation in open banking. While fintech players will get the lion’s share of benefits, incumbent institutes will gain the short end of the stick.
Regardless, we will see open banking making headlines in 2022.
The developments in the fintech industry, like in any other fast-growing industry, present both opportunities and challenges. Yes, trends like open banking, new technology, bank partnerships, and digital assets will help drive fresh innovation in the sector. Simultaneously, there are also problems such as greater and more frequent security threats and the possibility of big tech entering the market, which will influence how the business develops.