The global market landscape was thoroughly altered by the COVID-19 pandemic, which ushered in a state of distress across many industries. Amongst the several areas of impact, quarantine measures upended the way financial institutions—like banks and insurance companies—do business, forcing fintech institutions to embrace innovative business models to avoid being left behind or even having to shut down operations.
Despite the hurdles the global pandemic erected, it also facilitated a faster technological growth of the financial industry, fintech software, and digital services. For example, since the start of the pandemic, 42% of Americans report using at least one fintech platform. And Accenture predicts that market players that have already turned to invest in digital platforms are on the right path to becoming market leaders—because they have the requisite tools and have begun fostering reliable partnerships.
Moreover, according to Venture Scanner, fintech investments grew by 144% in 2021 compared to 2020. And research institutions like Research and Markets predict that the fintech market will grow globally to $31.5 billion in the next four years.
With this backdrop in mind, this article lays out a summary of the top five key trends expected to impact the fintech ecosystem in the remainder of 2022 and beyond.
1. Open API Transforms Markets
Open API, or open banking, operates on the basis of providing client data of banks to third parties with the owner's consent. McKinsey assesses the current potential of open banking to be a mere 10% of its fullest, yet this innovative approach carries many benefits. Furthermore, users themselves are gradually becoming more cognizant of these benefits — open data usage fosters scientific research, financial services improvement, as well as the development of fintech software.
By bridging the gap between financial data and analytical tools—for example, to monitor consumer habits—an open API could allow a bank to "open its doors" to third-party service providers with the requisite analysis tools. Thanks to open banking principles, the bank client benefits from innovative solutions, while the bank retains its customers through engaging the right fintech company.
In addition, by connecting with the bank client's data via an open API, other financial institutions, like insurance companies, could quickly and securely verify how solvent an individual is. By enabling paying for goods online in a few steps or receiving a loan in minutes, open banking could completely transfigure the market. Statistical analysis companies predict just as much — according to Statista, over 63 million people will be benefiting from open banking structures by 2024.
2. Regtech on the Rise
Given the intricate and complex legislative framework(s) that financial institutions have to face on a daily basis, following the many acts, laws, and regulations is not easy. Indeed, simply keeping track of accounting reports, income, taxation, and customers is a difficult and onerous endeavor. The requisite documents that fintechs submit to regulatory authorities are numerous and often follow specific schedules.
Regulatory technology — regtech — comes to assist.
A regtech platform is, essentially, an organizational aid for a company. Regulatory technology solutions are used to highlight non-compliant parts of corporate operations and to, in turn, help with achieving high levels of regulatory fintech compliance. For example, had Bank of America had a regtech software in place to explain to its clients how share orders were processed, it might not have had to pay a $42 million fine to the State of New York for breaching compliance.
Automation software that performs such repetitive tasks warns employees about potential fraud and monitors data integrity and security are but a small component of the potential embodied by regtechs. Indeed, Grand View Research predicts a 52% growth of the regtech market by 2025.
3. Artificial Intelligence and Machine Learning
Fintech is a particularly fertile field for the growth of Big Data, given the enormous amounts of data that the financial industry generates. In order to efficiently collate, sort, and preserve such information, companies would have to employ powerful tools. The best approach is to use artificial intelligence (AI).
According to McKinsey, AI produces up to $1 trillion in added value for the global banking industry. AI improves a wide plethora of financial institution processes by, for example:
- Analyzing typical consumer behavior within a banking application and spotting potential fraud;
- Creating virtual assistants that quickly tend to customer needs;
- Studying consumer habits and offering personalized financial advice to the clients;
- Predicting business outcomes and providing advice to corporate managers to adjust their strategies.
Mordor Intelligence predicts that AI will become a "defining technology for the industry" and that the market will triple in size by 2026.
Neobanks, or digital-only banks, are a unique new addition to the fintech industry. These companies simplify the usage of financial services to such a point that fewer bank branches are needed — effectively embodying a model where physical presence gives way to virtual connections.
Neobanks offer a wide array of financial services, primarily targeting tech-savvy customers of newer generations. These fintech firms provide mobile-first, completely digital services like virtual debit cards, lending services, innovative payments, money transfers, and much more. Furthermore, Neobanks close the gap between traditional banking services and the ever-evolving needs of the younger generation of customers.
Based on the way Neobanks leverage their digital platforms-driven advantage to analyze customer data and make data-led decisions, traditional banks might soon find themselves facing a formidable adversary.
5. Innovations in Payments
Innovations in performing payments are numerous and focus on increasing the speed of completing the payment and reducing the number of steps to do it, removing intermediary steps and manual touch.
Virtual cards provide an excellent illustration of this trend, as they are slowly becoming a staple in online payments for goods and services. These cards enable their users to pay for goods and services without sharing or indicating any information about their bank or personal data. Furthermore, virtual cards ensure safety — they can be easily blocked in case of losing access to their physical counterpart and cannot work without two-factor authentication, frequently requiring a code to work. Based on Juniper Research’s analysis indicating that the global value of digital transactions will reach $6.8 trillion by 2026, virtual cards are sure to represent a significant portion of it.
Another example of payment innovation importance is voice payments. With Statista predicting that there will be more voice assistants than people by 2025 — some 8.4 billion — it is likely that it is only a matter of time before paying for goods and services with one's voice becomes a reality. Indeed, voice biometrics could become dependable protection of user data. Digital assistants could expand into the financial sector by allowing users to pay for goods and check their balances, all the while doing other tasks. Capgemini Digital Transformation Institute researchers found that 44% of users are likely to do banking with voice assistants, indicating that this trend will only develop further.
To stay ahead of the curve in the post-Covid era and beyond, fintech businesses will need to focus heavily on the other side of the innovation coin — compliance. With all the transformational capacity and potential fintech solutions have, maintaining high levels of regulatory compliance will be an equally important priority to stay in business.
Businesses will have to adequately manage risk and compliance efforts to optimally engage in innovation and manage the key fintech trends we analyzed.
Navigating such a complex and ever-evolving regulatory environment is best performed by engaging experienced external advisors, like InnReg. At InnReg, we resolve a myriad of complex fintech compliance issues for cutting-edge clients in highly regulated industries — reach out to our team today and learn more!