Q1 Scorecard on Financial Services Trends
The 1st Quarter of 2022 comes to a close this week. In the financial services industry, these first three months delivered on certain predictions and trends mentioned at the start of the year, while showing minimal progress on others.
In this Q1 recap, we cover 8+ areas driving forward within Banking-as-a-Service (BaaS), FinTech, and Blockchain.
a closer look at BAAS, fintech, blockchain for 2022:
With SaaS companies looking to roll more “as-as-service” sectors, Banking-as-a-Service remains the dominant area for growth in modern financial services. Evolving from linking customer accounts at financial institutions to delivering virtual banking platforms, BaaS vendors and providers continue to gain momentum. Non-financial platforms (in ecommerce, healthcare, education) are also working with these companies to embed banking & finance into their app.
The broader fintech and blockchain sectors continue to experience growth with funding & investment, new product offerings replacing traditional ones (DeFi savings), and mixture of support and monitoring from regulators.
Banks and fintechs will stress-test their partnerships: Successful fintech companies with seasoned platforms, large user volume and transaction activity demand better terms and services out of bank partners. The ability to take their recurring revenue to another institution should be a concern.
On the opposite side, banks also seek increased ownership by fintechs regarding compliance and mitigating operating risks. Early stage startups tend to rely heavily on banks and BaaS providers instead of sharing ownership in this area.
Platforms deemed high-risk or posting losses due to fraud or returns are suspended or shut down by bank partners. Both sides need to establish a balance between risk & user experience and collaborate in maintaining a sustainable banking program ongoing losses.
More banks become comfortable in offering BaaS partnerships: Beyond regional banks and credit unions, the number of partner banks is growing . Additionally, the partnership activity within these banks is also increasing. It’s a low-cost WIN for these licensed entities as they are able to expand deposit volume virtually with minimal costs (i.e. less retail bank branches).
We have yet to see a large, top-tier bank add a BaaS play — this will change in 2022. HSBC is a making a first move, which is noteworthy as they have a global presence. Ultimately, the challenge comes back to how the tech infrastructure will be built and offered. Many well-established banks carry legacy IT architecture that is costly to ‘rip and replace’ with a modern, API based banking core.
Embedded finance becomes commonplace: Enhancements to mobile banking and user experience are flowing into non-financial services apps. Banking-as-a-Service providers made offering bank products easier, faster, and less costly over the last 5 years.
We’ve seen this take place with large eCommerce retailers. In 2022, there will also be movement among small and medium-sized businesses (SMBs) with core businesses outside of financial services. Embedded banking (or finance) is projected to reach $130B in the next four years. A key driver comes from their existing customers eager for more features.
ESG in fintech platforms takes a prominent role: Numerous fintech companies establish themselves as inclusive platforms that increase financial health and wellness. Other firms are going further to add a focus tied to the Environmental, Social and Governance (ESG) movement. We’ve seen this so far with fintechs that promote eco-friendly banking and rewards tied to improving the environment (e.g. planting trees based on user spend).
This especially holds true for financial institutions who seek to improve their image with clients and not support fossil-fuel industries or companies driving to reduce their carbon footprint. Both fintechs and banks promoting ESG will be looked at closely through the actions of their company, executives, operating practices.
As Fintech matures in the U.S., regulators will increase their scope and oversight: We’ve observed this trend predominantly with cryptocurrency and specific regulatory agencies. The expectation is that the focus will now include neobanks and lending platforms, who aren’t licensed but partner with financial institutions.
There’s growing sentiment that ‘synthetic banking providers’ & fintechs are operating in ways that licensed banks can not. All players should be held to similar standards — meaning regulation will come for fintech banking/lending in 2022. Compliance & RegTech vendors stand to gain by supporting inexperienced platforms that seek regulatory guidance.
DeFi becomes a leading alternative to traditional bank savings: Consumers speculated with cryptocurrency in the last 7 years, but held back the majority of savings in FDIC-insured deposit accounts with low interest rates. This changed during the pandemic as savings balances increased and users tested the waters with Decentralized Finace (DeFi) yields on stablecoin deposits.
Returns of 8% - 12% attracted ‘new-to-crypto’ clients. Last year’s record-breaking level of crypto investment will be fueled in 2022 by larger deposits per customer and non-fungible tokens (NFTs) becoming more mainstream.
Governments rally behind blockchain: Enthusiasts behind this sector have been promoting operational benefits from blockchain as early as 2014. Globally, administrative divisions within government agencies tested out the tech in managing data and transactions for voting, tax processing, business registration, welfare payments, and county records.
Central Bank digital currency (CBDC) is the latest area to see progress — 8 countries in the Caribbean and Nigeria (first in Africa) have launched coins. India, US, Brazil Russia, China, Sweden, and others are actively reviewing or announcing a formal plan to roll out their own CBDC. This runs parallel to countries accepting Bitcoin as legal tender — El Salvador was the first to make this move in September 2021.
Cybersecurity is front and center: Despite the lack of industry headlines, cyberattacks and security breaches are increasing in terms of occurrence & exposure. This applies to not only small startups, but large corporations (i.e. Nvidia, Samsung, and Microsoft) are under attack by hacker groups such as Lapsu$.
Industry groups are pushing for new policy and guidelines in reporting incidents, but the focus should be on proactive prevention and safety. Banks, fintechs, and 3rd party vendors all play a role in protecting data and executing best practices.
Capital continues to pour into the sector: This holds true with blockchain and the broader arena of FinTech. Coming off of a breakthrough year in funding, this year is poised to see even more growth based on investors that waited for the pandemic to subside.
Newly public fintech firms are struggling with the overall drop in valuation across the market, but their operational performance remains strong heading into Q2. More companies are expected to have an exit as well (compared to the 700 in 2021).
As the 2nd Quarter kicks off, we are in ‘wait-and-see’ mode on the impact/influence of rising inflation, the conflict between Russia and Ukraine, supply chain constraints, and increasing fuel prices towards the financial services industry.
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