Financial technology will attract further attention and development as more people shift towards fintech and digital banking services. This article goes through six exciting fintech trends to watch for in 2022 and why they stand out from customers’ and companies’ perspectives.
2021 saw increased interest and financial investments in fintech in many parts of the world, with its scope extending well beyond its initial definition.
Recently we’ve experienced massive growth in the number of new fintech startups. The customer demands added fuel to the trend, making banks and other traditional financial institutions feel the heat.
According to CB Insights' recent "State of Fintech" report, Q3 of last year was the second-highest on record for fintech investments, with an impressive 147% boost year-over-year. The fintech market is set to grow to $31.5 billion by 2026, nearly four times higher than six years ago. Technologies behind innovative financial products and services are the main driver behind the development of the fintech industry.
Despite unfavorable market conditions in H1, fintech keeps holding its momentum. Today I will discuss the top six fintech innovations and trends to watch for in 2022.
But before we go there...
A brief review of 2021
Looking back at 2021, there was a strong sense of renewal, as numerous trends combined to drive both large firms and startups to reimagine what financial services may mean in the post-pandemic era.
The first two years of the pandemic saw big companies collapse and small startups thrive. As lockdown measures and pandemic fears enforced new trends, the ones that survived were those who were quick to identify and adapt.
These are some of the biggest trends we've seen across the fintech industry over the last year:
- Increased interest and investments in cryptocurrencies and blockchain as companies explored, tested and found where crypto can fit and assist in modern financial services.
- Improved collaborations as fintech startups extended into a broader range of services, including embedded banking, insurance, and financial products.
- Growing focus on core banking systems as banks identified how the legacy framework is holding them back from actual progress.
- Increased focus on global opportunities as corporates and venture capitalists (VCs) looked worldwide for the ideal fintech opportunities.
As we approach the H2 of 2022, the optimism about fintech investment opportunities is tangible, with different sub sectors well-positioned to keep growing and new ones anticipated to emerge and thrive.
Whether you're an emerging fintech entrepreneur or CEO of a big bank, the opportunities are limitless, as long as you refuse to be stifled by the legacy framework and thinking.
Moving forward: What is dominating 2022
The first half of this year saw the continuation of 2021's trends, and it looks like these trends will continue to grow in H2. Below I will go through them deeper.
Artificial Intelligence (AI)
The financial industry generates a large amount of data, and fintech is among the five areas with a high Big Data increase rate. Thus, the industry must have a potent tool for collecting, structuring, and storing data– that’s where artificial intelligence (AI) comes in.
McKinsey estimates AI adds up to $1 trillion of value to the global finance and banking industry annually. Banking, credit, and insurance companies benefit from smart algorithms in many ways:
Artificial intelligence "studies" the common behavior of users in a banking application. When fraudsters access the platform, AI recognizes unusual behavior and alerts clients and banks (like in the cases of ElderTech).
AI assists in the creation of smart virtual assets. These are chatbots that assist consumers in fixing problems around the clock.
Through the technology, users can receive tailored financial advice on more favorable terms based on their behavior.
Business managers can use AI algorithms to predict business outcomes and change their development strategies accordingly. A manager adjusts the company's operations based on AI predictions to achieve the company's objectives.
Researchers at Mordor Intelligence believe AI will be a defining technology soon, with market growth predicted to exceed three times by 2027.
Fintech companies will aim to implement virtual assistants into financial management soon. The voice biometrics technology will most likely become reliable in protecting user data, where a user can search for items and the balance by voice command while doing other things without needing to enter data manually.
For example, as part of its voice payments strategy, Capital One Corporation has recently introduced the Amazon Alexa feature, which facilitates the payment of credit card bills via voice.
Fintech companies also use voice assistants to replace chats, managers, and call center operators and offer consumers advice on complex issues.
2. Open API banking
According to McKinsey, less than 10% of open banking's potential has been realized so far.
Technology has the potential to impact the financial sector significantly. Users are gradually recognizing the use of open data since a data exchange can spur scientific research and software development and improve the financial industry.
The goal of open APIs, or open banking, is to make bank customer data available to third parties with the owner's consent. Information exchange in this format is helpful to bank customers.
For example, an existing customer may think that their bank is trustworthy and stable and does not want to change. However, the bank is relatively conservative and hasn't implemented many of the digital services available from its competitors.
To track consumer behavior and costs, the client wants to integrate analytics tools with financial data; thus, APIs provide analytics information to a third party. Open banking enables the account holder to get regular reports on the balance, spending, and savings.
Open API allows the bank to share details about the customer's finances with insurance companies, shops, and other parties. They must verify the customer's solvency before effecting insurance coverage, providing a loan, or allowing payment by installments.
Open banking is changing the market, allowing users to spend for goods online in a few clicks or taps and receive a loan in a matter of minutes. Statista predicts 63.8 million people will utilize open banking by 2024, which is practically five times more than 2020.
3. The rise of embedded financial services
An embedded financial service is typically provided by a non-financial institution, such as a retail company, an online platform, or a technology service provider, rather than a traditional financial institution (like a bank).
These services include but are not limited to individual and business credit cards, loans, payment processing, and insurance. Some examples of embedded financial services include:
- Buy now, pay later (BNPL) services provided by retail businesses such as CASHe in India.
- In-app payments processed by brands such as Apple, Google, or Amazon.
- Micro-insurance products offered by HealthTech companies.
The biggest trend of embedded financial services is buy-now-pay-later or BNPL. Many people have used BNPL at least once as they are included seamlessly into several major eCommerce platforms. By 2026, approximately 25% of all online retail sales will be made using BNPL services, with most of these purchases coming from Millennials or Gen-Zs.
The trend of using embedded financial services by non-financial organizations started a few years ago. Still, it has accelerated massively in the past two years and is expected to grow further in 2022.
4. Financial inclusion in emerging markets
The last year has seen a significant increase in people using mobile banking apps and other digital banking services in emerging markets. This trend will continue in H2 of 2022 as more individuals gain access to smartphones and the internet.
Underbanking has been a significant issue in many developing countries in MENAT, South-Asian, and beyond, as traditional banks have hesitated or cannot serve most of the population. This has led to a situation where only a minority can access essential banking services.
At the same time, the majority rely on alternative approaches such as pawnbrokers or peer-to-peer lending platforms.
Digital banking platforms have become a promising option for business owners and individuals to manage their finances more effectively and affordably, so I expect this trend to keep pace.
5. Blockchain and DeFi services are on the rise
Blockchain technology is also known as "distributed ledger" or "distributed database." Participants have access to each transaction recorded in a separate block connected to previous blocks in the network, and user information can never be changed, deleted, or forged.
A decentralized network cannot be "opened" because each block has a unique hash, and every transaction requires verification. A transaction is valid if it is approved by at least 50% of the participants.
Blockchain technology and decentralized finance (DeFi) services have seen a significant increase in interest from banks and start-ups in recent years. DeFi is a new approach to offering financial services on blockchains like Ethereum.
DeFi platforms can provide a wide range of reliable, transparent, and often automated financial products and services using smart contracts. Also, they're safer since they're not dependent on centralized facilities that can be hacked or manipulated.
Source: DevTeam space
Early in 2022, the DeFi industry's market cap declined 9%, but it quickly recovered and has grown since. Experts predict that 2022 will surpass last year’s $250B total value locked into smart contracts.
Decentralized crowdfunding is another prominent way blockchain technology has impacted the finance industry this year. More companies are exploring the potential of DeFi to disrupt traditional finance in 2022, and this trend will continue.
Using blockchain-based applications, decentralized crowdfunding lets founders raise money from many people, or backers, to help fund their companies. This is a more democratic way to raise funds since it doesn’t rely solely on wealthy investors.
In H2 2022, we expect more companies to use the decentralized crowdfunding model. This is because it offers several benefits over traditional fundraising approaches, such as equity capital or loans:
- Any internet user can access the platform, allowing businesses to reach a global audience of potential investors.
- Smart contracts ensure fairness and transparency in funding terms.
- The decentralized approach to fundraising is typically more efficient and faster than the traditional method.
6. The banking industry is going green
A final trend to watch out for in 2022 is that increasingly more banks and other financial institutions (online and brick-and-mortar) are embracing sustainable business models and tackling climate change.
So far, several large companies have committed to achieving zero emissions by 2050, including Deutsche Bank, HSBC, and Bank of America. As part of their sustainability commitments, some organizations do not do business with non-sustainable companies, potentially limiting their access to financial services and funding.
Business owners in every industry need to look out for the vital trend of sustainability in supply chain management that both local governments and companies support.
Bottom line: How TSLC leverages fintech to revolutionize how money is distributed
The top six fintech trends to watch for in 2022 have one thing in common: they make the lives of consumers and businesses easier. Although adopting these technologies comes with challenges, the final outcome will permanently reshape our interaction with finance in the long run.
The Social Loan Company, or TSLC, understands that inclusive finance means an improved availability of funds and promotes the principle of savings among low-income citizens. Fintech is the means to achieve this.
We do this by partnering with banking industry leaders and using alternative credit scoring and analytics to focus on future potential rather than the traditional credit history.
Our unique AI/ML-driven alternative credit scoring system and transformative collaborations with industry-leading banking and non-banking partners enable us to become the bridge between essential financial services and those who need them.
TSLC aims to provide more innovative services, shifting from traditional, institution-focused experiences to an AI-based, effortless, and customer-focused approach. The potential we aim to unlock is serving the underserved digital natives in emerging markets, including offering credit to credit-thin and credit-invisible individuals.