Despite pandemic-induced delays, 2021 was still a strong year for growth in the financial technology, or fintech, industry. As the world gets used to the “new normal” way of life, what can we expect going forward in fintech?
According to CB Insights’ latest “State of Fintech” report, the third quarter of 2021 was the second-highest on record for fintech financing with an impressive 147% increase YOY.
So, what does 2022 hold for fintech? Let’s find out.
Embedded Finance Continues to Roar
Embedded finance, as the name suggests, is a seamless integration of financial services that are embedded into a non-financial platform by a non-financial company. Essentially, embedded finance empowers companies to offer consumers credit without having to leave their platform.
The industry is taking the financial world by storm, with growth expected in 2022 and beyond.
If you’ve ever been shopping online for a high-cost item like furniture, and you’ve seen something like “pay as little as $100/month or 0% APR with Affirm,” you’ve seen—and maybe even taken part in—embedded finance.
Embedded finance is a rather large sector and includes:
- Embedded payments
- Embedded card payments
- Embedded lending
- Embedded investments
- Embedded insurance
- Embedded banking
Embedded investments make investing even more accessible through easy and inexpensive access to funds and stocks. A key player in this space is the embedded investment app Acorns. The app rounds up the spare change of its users when they make purchases and sends it to an investment account automatically.
The Rise of Buy-Now-Pay-Later
Another key part of embedded finance that’s on its way to becoming mainstream in 2022 is buy-now-pay-later (BNPL).
On Black Friday, PayPal facilitated around 750,000 BNPL transactions—a 400% increase from 2020.
With its explosive growth, we’re also anticipating regulations surrounding buy-now-pay-later to come under more fire in 2022. In December 2021, the U.S. Consumer Financial Protection Bureau (CFPB) asked Affirm, Afterpay, Klarna, PayPal, and Zip, five of the country’s largest buy-now-pay-later companies, to provide information about their business practices. This request came after concerns that consumers who use these services are being exposed to serious financial risks, particularly accumulating debt, data harvesting, and regulatory arbitrage. In fact, a survey done in September 2021 by Credit Karma found one-third of U.S. consumers who use pay-now-buy-later services had failed to make at least one of their payments on time. Seventy-two percent of respondents said using the services caused their credit scores to drop. But still, these services continue to grow in popularity, and that growth is not expected to stop anytime soon, as consumers who are financially insecure continue to find innovative ways to pay their bills and fund other purchases. The biggest appeal to the buy-now-pay-later market comes from the millennial and Gen Z demographics, which make up 75% of total users.
The rise in popularity of BNPL coupled with the financial impacts of the pandemic will cause the BNPL industry to accumulate $680 billion in transactions in 2025.
Financial institutions and entrepreneurs are taking note of this growth potential as banks start launching their own BNPL products and new BNPL offerings pop up almost daily.
What’s more, there’s room for further growth in the BNPL space through “save now, buy later” offerings. We caught a glimpse of this in late 2021 when Accrue Savings launched a bank account that encourages consumers to save up their money for a product or service before they buy it—who would’ve thought?
Accrue Savings encourages the “save now, buy later” mindset with its retailers like Casper and Camp.
When people sign up for a save-now-buy-later account with Accrue, they receive a savings schedule and a debit card that connects to the retailer once the savings goal is reached. Why not just use your savings account? Accrue’s save-now-buy-later solution offers retailer rewards and other features to keep savers motivated.
Web3 Becomes More Mainstream
The buzz continues to build around Web3 as consumers and corporations alike look forward to more ownership over their digital goods. Today, most of the internet is owned and run by “Big Tech” companies. Web3 wants to change that by decentralizing the internet and rebuilding it on the blockchain. Decentralized finance, which is referred to as DeFi, enables peer-to-peer transactions but does not rely on any financial intermediaries, such as banks and brokerages. The current lack of oversight creates significant risk. In 2022, we expect these gaps to be filled as leaders in the Web3 space start delivering solutions to the challenges of consumer protection, accessibility, and usability in Web3. This will instill much more confidence in the public, making them more likely to adopt it at scale.
Last year, DeFi went from an obscure pipe dream to widespread adoption as the total value increased from $18.7 billion to $247 billion. Although currently it’s mostly used by crypto enthusiasts, in 2022, we believe more forward-thinking banks will start to test out DeFi.
2022: The Year of the Blockchain?
As crypto, the Metaverse, and virtual reality start taking shape in everyday life, 2022 is expected to be a milestone year for blockchain technology as web 3.0 starts to become safer and more accessible.
Deloitte’s 2021 Global Blockchain Survey found that 76% of surveyed executives “believe digital assets will serve as a strong alternative to, or outright replacement for, fiat currencies in the next 5–10 years.”
Although most financial analysts are focused on how blockchain technology will disrupt banking, it’s important to note there are a number of banks already dipping their toes in the blockchain pond.
For example, BNP Paribas recently announced its plans to start looking at how it can apply blockchain technology to BNP Paribas currency funds and order processing.
Financial institutions are drawn to the blockchain’s unprecedented security offered to both sides of the transaction, especially in terms of identity management. Blockchain is being used increasingly to fight fraud and manage regulatory, compliance, and audit issues.
Traditional financial products can’t keep up with the speed of blockchain transitions. Fintech is used to accelerate asset transfers, payments, and investments while eliminating errors that lead to delays and extra costs.
The benefits of blockchain and the growth of cryptocurrency will also lead to a growing demand for blockchain-as-a-service (BaaS) as companies look for innovative ways to digitize and streamline all areas of their operations.
Blockchain solutions are being used more and more for cross-border payments, which brings us to our next 2022 fintech trend.
Cross-Border E-Commerce on the Rise
The pandemic continued to inflict seismic changes in 2021, and those effects will be felt well into 2022, including how people shop. A recent Accenture study found the total cross-border payment flow worldwide is growing about 5% per year and is slated to top $156T by 2022.
In the wake of the COVID-19-induced e-commerce explosion, international transactions now offer enormous growth potential for small and medium-sized businesses that used to only cater to their “hometowns.” The caveat is that these consumers expect easy and simple payment options — no matter how many worlds away they’re making the order from.
About 40% of large enterprises nationwide have already adopted real-time payments, a percentage that’s expected to keep climbing.
But it’s not only B2C that’s seeing growth in this sector. In fact, business-to-business (B2B) transactions are expected to account for $150 trillion by 2023—the largest share by a long shot.
Demand is already skyrocketing for the immediacy of payment settlement, which gives businesses a powerful advantage while also reducing the risk of payment failure and improving cash flow efficiency. As this trend becomes more popular domestically, you can expect real-time payment capabilities to extend to cross-border payments in 2022.
The Dawning of the “Super App”
In 2022, be prepared to take the adage “there’s an app for that” to the next level. So-called “super apps” offer vast and diverse suites of services and products from one platform. These services include transportation (like Uber), retail (like Amazon), food delivery (like DoorDash), banking, entertainment, and more.
Customers can purchase products and services with their super apps, and they can also schedule appointments, make reservations, and even send packages to wherever they choose.
Super apps like WeChat, Alipay, and Grab already dominate the Asian market, and we expect to see the trend take shape in Western countries in 2022 as a handful of fintech companies in the United States and Europe strive to bring a diverse range of services to consumers through a single app.
PayPal is one of the popular American platforms aiming to become a market leader in the super app space. In February 2021, the company’s CEO acknowledged PayPal’s ambitions to build a super app offering a “connected ecosystem where you can streamline and control data and information between apps.”
In September, the company released its first version of the super app, which empowered customers to manage their payment, retail, and saving and investing needs.
On a smaller scale, Block is expected to debut its highly anticipated super app in 2022. Block bought Afterpay and owns the highly successful mobile payment app, Cash App, as it inches closer to launching its super app, which is described as “an ecosystem of fintech services that will enable Block users to conduct a variety of tasks and transactions without hardly ever having to leave the app.”
The Infusion of Artificial Intelligence and Machine Learning
From traditional institutions deploying “Robo advisors” to advanced algorithms assessing a credit applicant’s risk, fintech companies will continue to expand their use of AI and machine learning in 2022.
Fintech has been one of the keenest early adopters of artificial intelligence, as its automation capabilities allow companies to automate repetitive processes, risk management, and fraud prevention. AI also helps predict consumer behavior and enables targeted and personalized product recommendations to improve the customer journey and upsell customers automatically.
During the COVID-19 pandemic, nearly half of survey respondents report making “significant changes” to how they bank, which positioned 2022 perfectly to see more financial institutions use AI and machine learning to keep up with today’s consumers’ evolving needs and demands.
Established banks are facing more competition than ever as fintech startups, big retailers, and tech giants alike all race to sign customers up for services that traditionally would have fallen in their domain. All of these newcomer competitions use AI and data-driven data, which means that traditional financial institutions and insurance companies can’t afford to ignore adopting these tools if they want to keep up. AI saves time and effort for businesses by handling customer FAQs through chatbots, which frees up employee time to focus on higher-level tasks and customer service needs.
IDC predicted the financial services industry would be the second-highest spending industry on AI between 2021 and 2025—second only to retail.
Another area in which we anticipate growth in this space is the use of AI to ensure people applying for credit are treated fairly and equitably as algorithms become more efficient at determining where bias is during these processes and how to eliminate it.
AI will also play an increasingly important role in identifying fraud as it happens. For instance, if a large purchase takes place that’s not consistent with a consumer’s typical spending behavior, the technology will flag the activity, automatically sending an alert to the consumer, who can then approve or reject the transaction.
The Transition to a Cashless World
If you haven’t noticed, cash is no longer king. Although the transition to a cashless world is already well underway as consumers and companies digitize their payments for more transparency and easier tracking and management, the cash takeover is expected to gain even more traction in 2022. In Sweden, officials expect the entire nation will be fully cashless by 2023. Sweden is one of many countries touting the benefits of going cashless, including higher convenience for vendors and consumers, deterred criminal activity, and innovation.
There is already a wide range of apps that bring whatever service we want to our fingertips, from groceries to entertainment and other goods. And, as people stay vigilant in the wake of spreading COVID-19 variants, consumers are growing increasingly turned off by the idea of touching cash that has changed hands thousands of times.
These top eight fintech trends to watch for in 2022 all have one thing in common: they make the lives of consumers and businesses much easier. Although there will likely be some growing pains in adopting these technologies at scale, in the long run, the benefits will far outweigh any unease during implementation.