Advances in the fields of finance and technology have drastically altered the world’s approach to business and banking over the past two decades, but experts say these developments have only just kicked into high gear.
With the pandemic accelerating digitization and more players entering the market, financial tech companies (“fintechs”) are getting more creative and taking bolder steps to increase their market share.
The growth is exponential, and what’s hot today may be considered industry standard tomorrow. Here are some trends experts predict will shape the financial services industry in the next few years.
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1. Contactless Payments
A considerably simple process compared to using cash, contactless payment is a way to make purchases through cards, mobile apps, or digital wallets. As the name suggests, this method of payment removes the need for physical contact between the buyer’s card or device and the point of sale system (POS).
You might be thinking, isn’t that the same as using my credit card to buy something online? Not at all. Contactless payment uses near-field communication (NFC) or radio-frequency identification (RFID) technology to communicate with POS readers. This “communication” can only take place at a distance of about two to four inches, ensuring payments are intentional.
Considering this, contactless payments are far more secure than entering a credit card number online.
In one Mastercard study, 79 percent of respondents worldwide said they use “tap to pay” technologies, but not just for their convenience. Paying via NFC or RFID is a lot more secure than old-school magnetic-stripe cards. As opposed to the information on a Magstripe card which is easy to clone, the data associated with your contactless payment method is encrypted and constantly changing.
The trend does not end at cards and e-wallets. Gadget makers are integrating contactless payment technology into their wearables, allowing people to make purchases faster than ever via items like watches, bracelets, rings, and more.
It started with Apple Pay via NFC technology in the iPhone and the popular Apple Watch. Now, more than 2 billion NFC-enabled devices are integrated with contactless payment, and adoption is expected to increase as these wearables become more affordable. Total NFC market value is predicted to reach $47 billion by 2024 as its card-emulation functionality grows.
2. Embedded Finance
An app today doesn’t stand a chance against its competitors if it does just one thing. With convenience increasingly driving consumer habits, platforms like Instagram and Uber are incorporating financial tools and services that allow sellers to meet their customers in the moment.
This builds on the success of integrated payments, where customers “window shop” on the app and are then directed to a separate payment platform to complete the purchase. However, as seamless as the transaction may be, separating the two actions leads to customer churn.
Embedded payments provide a solution by merging these two points of the customer journey into one move — a customer decides on and buys a product with one click or tap of the finger.
To do this, non-fintech companies are embedding payment or banking capabilities into their platforms, allowing customers to keep and spend their money in the company’s payment ecosystem.
Solutions like Meta Pay (formerly Facebook Pay) are at the forefront of this trend, allowing users to checkout directly on Facebook, Instagram, WhatsApp, and Messenger. The company recently announced the capability to pay directly in chats on Instagram, whereby customers can ask questions about a product, buy it, and track their order right within the chat thread.
This trend is only expected to grow as consumer trust increases and more online marketplaces and retailers seek to increase their conversion rates. The International Data Corporation (IDC) forecasts that by 2030, 74% of global digital consumer payments will be conducted via platforms owned by non-financial institutions.
3. Buy Now, Pay Later
Also known as “point of sale installment loans’, buy now, pay later (BNPL) is a short-time financing service that allows consumers to buy a product immediately and pay for it down the road in interest-free installments.
This model is not new. BNPL services first entered the market in 2012, particularly as a solution for high-value items. They were soon integrated into online marketplaces through players like Klarna and Block (formerly Square), targeting Gen Z and Millennial shoppers. Since then, BNPL has gained ground over other methods of payment like credit cards due to better accessibility and a more seamless customer experience.
However, it is not until the last few years that it experienced exponential growth. According to Deloitte, 2018–2021 saw major growth in BNPL market share, and it is forecast to gobble even more from other digital payments. Companies have seen benefits of BNPL such as increased buying and customer loyalty, and are offering it to more customers. At the same time, embedded finance has made it possible for them to reap its benefits while maximizing profit.
Though concerns have been raised about BNPL contributing to youth consumer debt, this trend shows no signs of slowing in the coming years. In 2022 alone, Block acquired the Australian BNPL platform, Afterpay, for a whopping $29 billion. Likewise, its European counterpart, Klarna, raised $800 million in venture capital. Klarna also launched a physical credit card in January 2022 that lets customers pay in installments at brick-and-mortar stores as well as online, and for services beyond shopping like doctor visits.
4. Alternative Financing
Traditional financing products have long been restrictive and inflexible, spurring innovative fintech products that address these gaps. Alternative financing is one category that has arisen as part of this financial inclusion movement.
An umbrella term that refers to any funding that’s available outside of traditional lending options, the alternative financing market is expected to thrive as new solutions come up. Some popular digital lending products expected to grow in 2023 and beyond include:
● Peer to Peer (P2P) Lending
Also known as social lending, P2P is the lending or borrowing of money from other people rather than credit institutions through online applications or websites. Benefits paving way for the expansion of this model include reduced fees, adoption of digitalization, and short approval periods. P2P lending is forecasted to reach a market size of $705 billion by 2030.
● Equity Crowdfunding
This unique method of raising capital involves exchanging a company’s securities — whether in the form of equity in the company, debt, revenue share, and more — for capital from a crowd online.
Traditional methods of attracting sizable investments from avenues like venture capital firms are out of reach for many startups and small businesses, but equity crowdfunding sites like WeFunder and Fundable help remove this hurdle. Potential investors can contribute as little as $100 for a stake in the company, allowing anyone to participate.
To prove its traction, equity crowdfunding held the largest revenue share of the $18.56 billion total crowdfunding market in 2021, a figure projected to reach $44.2 billion by 2028.
● Revenue-Based Financing (RBF) and More
Though not a new concept, this alternative financing model has been perpetuated by the recent e-commerce and startup boom. The fintech industry has responded in kind with more SME digital financing platforms providing options like RBF, invoice factoring, trade financing, and more through a simpler and fully-online process. The global digital banking platform market size was valued at $20.8 billion in 2021 and demand is increasing exponentially.
5. Cryptocurrency Transactions
While 2022 may have been a bad year for cryptocurrency, blockchain technology is no stranger to boom and bust cycles, and experts believe the fall is short-lived.
This is primarily because blockchain technologies are being adopted at scale across economies worldwide. There has been increasing involvement of institutional investors who are seeking to diversify their portfolios while taking advantage of the high returns it offers. Major players in the banking industry, hedge funds, manufacturing, and other sectors have entered the market and are making use of its broader applications. For example, Fidelity Bank and Bank of America have created platforms that allow users to invest and trade in crypto.
Likewise, some governments have issued their own versions of digital currency, with China’s digital yuan, the Bahamas’ sand dollar, and recently Nigeria’s eNaira, being some of the most prominent examples.
This extensive adoption has buoyed the confidence of mainstream businesses that are beginning to accept cryptocurrency payments.
According to a study by Visa, over 6,000 small businesses in the U.S. accepted crypto payments, not forgetting major companies like AT&T and Microsoft view cryptocurrency as a valid form of payment.
Statista’s Global Consumer Survey also shows an increase in the use of Bitcoin and other cryptocurrencies as a payment method worldwide, with consumers from 56 countries either owning or using a digital coin.
The adoption of crypto payments will create a positive feedback loop: more businesses will accept it because their customers are using it, and more consumers will start using it because more businesses accept it.
6. Artificial Intelligence
More processes in financial services are being successfully automated as fintechs learn about customer behavior.
In the banking sector alone, the average customer acquisition cost (CAC) is more than $300. Considering these figures are only predicted to rise due to increased competition among digital channels, it’s no surprise that banks are one of the first to embrace automation through AI.
Some of the AI strategies being deployed in the fintech sector include:
● Customer Verification
The traditional Know Your Customer (KYC) process relies on multiple manual steps to verify customers and do background checks. These processes are not only painfully slow, but they are also prone to loopholes.
AI verification tools are helping financial service providers perform KYC checks faster and more efficiently. Solutions like Regula conduct robust online verification by matching customer information against what they claim to be the world’s largest database of over 12,000 document templates from 248 countries and territories.
SmartKYC, another AI tool, takes customer verification to the next level by matching identities against the internet, news archives, watch lists, and corporate databases.
● Streamlined Onboarding
Slow and confusing onboarding processes are one of the biggest causes of customer churn. And the banking industry was notorious for negative onboarding experiences, with multiple checks and unending paperwork that customers had to sign and send back.
Now, banks can embed eSignature APIs into their paperwork, allowing customers to fill in forms and sign documents directly on their website or app. These embedded signatures have provided a fast and secure solution for banks and other institutions to convert and retain customers.
● Customer Support
Chatbots on digital channels are nothing new, but in the fintech industry, they have had a big impact. Reliance on them is projected to increase. In fact, consumers and businesses are projected to save over 2.5 billion customer service hours by 2023 with the adoption of chatbots.
The same report by Juniper Research estimates that this will realize business cost savings of $11 billion annually across the retail, banking, and healthcare sectors.
7. Increased Accessibility
As seen in the trends above, Fintech has allowed financial service providers to service more customers faster, reduce customer acquisition costs, cut down on human resources, minimize overhead charges and overall make banking more accessible for everyone.
Making formal financial services affordable to people and businesses is critical to economic development. For example, affordable payment processing systems ensure small business owners don’t miss out on potential customers. In the same breath, access to cheaper and more flexible finance encourages business growth and entrepreneurship.
Fintechs have taken great strides toward financial inclusion around the world. And being a target in eight of the seventeen 2030 Sustainable Development Goals (SDGs), the push to make banking accessible is only going to grow.
The rise in digital products means there is an increased risk of data breaches, cyber hacks, and money laundering, necessitating the need for increased regulations in the landscape. And that’s where Regtech comes in.
Regtech is a group of organizations that solve challenges arising from a technology-driven automated economy by providing advanced tech solutions to compliance issues that arise in the Fintech sector.
The Regtech industry is expected to disrupt the regulatory landscape, but the term, which was coined in 2008, refers to much more than a group of Robin Hood organizations.
Governments and other authorities have for a long time been pushing for increased regulation of financial technology. One successful example is the GDPR initiative that was created to protect data privacy among various industries, with finance being of bigger concern.
In the UK in 2022, talk of BNPL being more regulated has begun as the government works to bring legislation requirements for lenders to carry out affordability checks before approving loans. Legislators have also advocated making sure advertisements are not misleading consumers in promotions for BNPL apps.
Crypto is another sector where heavy regulation is already in place and is likely to increase. The U.S. recently announced a new framework in 2022 that opened the door to further regulation. The new directive has handed power to existing market regulators such as the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC).
These trends are not exhaustive. As new challenges arise, the fintech industry will need to come up to address them. We will see technology applied differently. What we can anticipate is that fintech will continue to evolve.