As fintech nearly doubled the amount of investment received in 2020 and produced 42 new unicorns, 2021 was undoubtedly a landmark year for the financial technology industry.
Its reach and range of innovative solutions revolutionized finance in ways previously thought inconceivable, while also paving the path for the development of trends in the coming year. What are going to be key tech trends in the financial sector this year?
A 2021 recap
It might be said that fintech had everything it had needed to excel in 2021 – making last year’s trend predictions on point.
While digital transformation and proliferation of cutting-edge technologies preceded the coronavirus outbreak, there is no denying that the pandemic was the extra fuel fintech needed to live up to its potential.
The ways in which fintech has done so in 2021 are numerous. Let’s have a look at some key examples.
- The fast expansion of mobile-only challenger banks such as Revolut, Monzo and HelloBank, among others, who have continued to revolutionize both the banking experience and customer experience.
- Embracing a customer-centric approach and leveraging AI, data analytics and automation, fintech shook up customer experience to appeal to what Forrester calls the “new type of customer,” spawned by the pandemic.
- Buy-now-pay-later becomes 2021’s hottest trend amid a push for greater flexibility around payment options.
- The ensuing success of Finance-as-a-Service (FaaS) solutions and booming adoption of embedded banking APIs.
- Blockchain demonstrated its potential in relation to cryptocurrency and the exploding NFTs, while also pointing at a multitude of other use cases. As a result, a whopping $6.6bn USD was spent on blockchain solutions in 2021.
Most importantly, 2021 was a year when a great deal of money changed hands in fintech in pursuit of the next big thing. As a result, $210 billion was invested into fintech products, across 5,684 deals, according to Pulse of Fintech.
2022 fintech trends to look out for
With 2021 being a watershed year for fintech, 2022 is likely to go even further. Let’s take a look at some of the 2022 trends that are likely to take the sector by storm over the next year.
Sustainability is the new black
As sustainability is becoming a universal concern for today’s consumers and regulators, the whole finance industry will find itself under increasing pressure to follow suit. At the end of last year, during COP26, world leaders and scientists concluded that the overlap between finance and sustainability couldn’t be ignored. In the meantime, the European Commission’s Corporate Sustainability Reporting directive has called on finance and insurance institutions to reveal how they’re handling environmental concerns.
Even incumbents such as HSBC, Bank of America and Deutsche Bank, among many others, have committed to net zero by 2050 at the latest.
Some other ways in which some financial institutions are demonstrating their commitment to going green are:
- Switching to renewable energy
- Abandoning contracts with fossil fuel companies
- Choosing to do business with sustainable companies, such as those holding the B Corporation™ certificate
- Using a percentage of profits to donate to green causes, for example, planting trees
- Offering smart technologies that allow consumers to monitor the carbon footprint of their financial transactions
For more detail, have a look at our recent article in which we examine how the financial industry can reduce its environmental impact.
The pressure to wave the green flag is undoubtedly more pronounced for fintechs, as not only are they often run by Millennials, but their customer base is also largely made up of both Millennials and Gen Z – the two generations most concerned with issues of sustainability. As such, we’re likely to see fintech put an even greater emphasis on being green in 2022 and onwards.
Banking for the underbanked
As mainstream banking becomes ever so competitive, investors flock to emerging markets for promising opportunities to put their money into. Take Africa, for example, where levels of funding in 2021 reached a record $5 billion, according to the Africa Investment Report 2021.
Sixty-two percent of the funding received by the continent has gone to fintechs such as OPay, Flutterwave and Wave, all of which joined the “unicorn” club in 2021. Considering the region had only one such unicorn in 2019 and now boasts seven, it’s likely that the number will continue to rise while investment begets investment.
As technological advancements forge ahead and financial backing continues to flow in, we can also expect Africa’s fintechs to expand across the continent and into new services. Given that, beyond Nigeria and South Africa, the region remains largely “under-banked and underserved,” the opportunities for acquisitions and consolidations of lower-capital banking groups from neighboring countries are many, according to Investment Monitor.
Other opportunities are found among underserved groups in traditionally strong financial markets such as migrants or small entrepreneurs.
Back in the days, many powerful fintechs started off as apps targeted at students – a group usually overlooked by established institutions – ultimately yielding great results.
Embedded banking adoption soars
Embedded banking – namely, “the process of integrating financial solutions with a business’ platform or app through the use of APIs” – made great strides in recent years, foreshadowing yet another year of significant progress.
Originally taking on the realm of payments and addressing the hassle of having to navigate to external websites or enter our card details every time we make a purchase, fintech APIs have gone far beyond their original offerings.
What we’re facing now is a world where “every company is a fintech company”, as McKinsey puts it. The wide range of APIs allowing businesses to create added value for their customers without having to break the bank (pun somewhat intended) to build their own fintech infrastructure makes such a world highly likely.
The recent rise of super-apps such as WeChat in Asia where mobile-first affinity runs strong is testament to the potential and rapid growth of embedded banking.
Apps such as China’s WeChat and AliPay, Careem in the Middle East or South Korea’s Kakao, offering a plethora of services ranging from making purchases, booking trips, ordering food or ride hailing, now boast hundreds of millions of users.
While such extensive use of fintech APIs is yet to be seen in Europe and the US, the pressure to catch up is real. According to Kearney, “mastering high-tech is becoming a matter of survival” while Europe’s political leaders are acutely aware of how critical it is for the continent to keep pace with technological advancements occurring in Asia. The year 2022, therefore, is likely to feature a lot of European and US businesses leveraging the working solutions present in Asian markets and making the most of all embedded banking has to offer.
A considerable part of that process is likely to revolve around insurtech. The insurance industry has, for a considerable time, resisted tech adoption and failed to switch from a product-centric mode to a customer-centric one.
As such, there is a lot of room for improvement in insurance technology. Building on its success in 2021, during which funding has skyrocketed, insuretech will continue to make headway, with ‘embedded insurance’ further reshaping insurance distribution.
In essence, this will mean that any ecommerce player boasting a considerable customer base will be able to integrate insurance products in their offerings and make it a central part of their customer journey.
However, whilst the insurtech market is, on the surface, ripe for the taking, Florian Graillot, the Co-Founder at astorya.cv raises an important point:
“Everyone is talking about it now. Insurers speak about ‘open insurance’ but the market is moving fast and only a few players are really able to make it at scale as you need both technology and insurance”.
DeFi gives investors more buck for their money
For a long time, the concept of DeFi (or decentralized finance) has been almost synonymous with cryptocurrency and “buying Bitcoin.” In 2022, we are well past that point. DeFi has created a parallel financial industry for companies offering marketplaces, lending services and asset management, amongst many others – and its scope of offerings is only set to grow further.
The creation of legal frameworks will also be a key focus for DeFi in 2022, allowing it to gain the legitimacy that it needs to attract more investors, particularly big financial institutions leveraging DeFi for private market investments. Countries that excel in this arena have a lot to gain from doing so – e.g. improved market efficiency, faster innovation and a “wealth of possibilities that go far beyond finance.”
The growth of DeFi itself will benefit from a number of conditions – financial or otherwise – which will allow it to skyrocket in 2022. Amanda Orson, the Head of North America at Curve explains how:
“Inflation’s impact on consumer spending will drive interest in financial education.”
"The ‘flight to yield’ will continue to drive dollars from high yield saving accounts (or similar) to providers who offer high yield stablecoins. The combination of the great resignation [and] maturity of the FIRE movement increased consumer interest in passive income, savings, and retirement planning.”
The accessibility of decentralized finance coupled with the events of the past two decades, such as the 2008-9 financial crisis, which “steamrolled younger workers just as Millennials were entering prime working years” make DeFi an attractive option for this particular generation. According to research by Fintech magazine, passive income in the form of cryptocurrencies enjoys the most popularity among Millennials.
Disenchanted by both traditional finance and their jobs that leave them burnt out (see: the great resignation), Millennials and Gen Z will continue powering the financial revolution by experimenting with alternative finance options and pursuing them.
Slashing operational costs
Part of the competitive edge that fintech has over traditional banking institutions is to do with its considerably lower operational costs. After all, brick-and-mortar banks require far more real estate and employees to run as opposed to fintech that, due to their largely online existence, can cut back on such costs.
Even so, in order to be profitable, high-valued fintechs will need to find ways to cut operational costs.
Neobanks struggle to make profits, similar to the BNPL industry which, despite being one of fintech’s hottest trends in 2021, has a mean industry profit margin of around -2.6%.
As it stands, none of the biggest BNPL providers, such as Klarna and Afterpay are profitable as of yet. While financial analysts predict the industry to achieve profitability by 2023-24 and competition is growing, it’s key for the players in the space to slash operational costs and avoid losing money before then.
On the other hand, established institutions are now scouting the fintech environment for solutions that have proven effective, and could save them money through AI and digital transformation.
Fintech trends 2022 wrap-up
Although the nature of fintech is unpredictable and thus renders it vulnerable to sudden changes, we can expect the world of financial technology to continue to expand its presence and scope. As the Global Head of Infrastructure at Danske Bank, Ken Robson, tells us:
“...the trends I see that have potential to shape the fintech industry in 2022 are embedded finance, Web 3.0 and the new economies such as the gig, the sharing and the platform economies.”
Some of the less fun scenarios are sudden market disruptions, mass cyberattacks sparked by emerging conflicts, and side effects of new regulations. However, given fintech’s recent growth, innovation and investor engagement, I prefer to remain optimistic. Even if things do go south, a more challenging year means we get to see more resilient fintechs in 2023. It’s more than likely the sector will enjoy another fruitful year.