By Berivan Demir, Product and Banking Relations Director of Clear Junction

After two years of explosive success for fintechs, the pace of innovation hasn’t slowed down yet. Fintech start-ups raised $32.4B globally in Q1 2022, which is up 27% year on year and is largely driven by venture capitalist investment in cryptocurrency, raising over 7 billion dollars in funding in Q1 alone.

The rise of digital assets, such as bitcoin and ethereum, could mark the next stage in financial evolution. These digital assets have been generating substantial market interest (although the cryptocurrency market is experiencing something of a crisis at present). Native players in the digital assets landscape have enjoyed enormous value creation, while in the traditional enterprise space, firms have taken technologies developed and tested in the digital assets market and adapted it to payments and settlement, record keeping, securitisation and trading.

As adoption accelerates – and digital assets become more mainstream – the scope for growth in profitability and market share for financial institutions in crypto has arguably never been greater – but where has this growth opportunity come from?

Over the past two years, banking customers have changed expectations and demands about what they receive from their financial services providers. Transparency, speed and channel options; there is an abundance of advancements to be made by banking services to keep up with what consumers want. Traditional banking institutions may serve the majority of customers currently, but they suffer from a lack of agility. Technological advancements are frozen by thick bands of red tape, as any new service that banks explore needs to be examined under the lens of compliance.

Key digital banking trends to navigate

Especially in finance, finding the balance between exploring nascent technology and remaining compliant with intense regulations is difficult. The early adopters of a technology often reap the largest rewards, as it gives them a unique competitive advantage in the market before others capitalise on it. However, new technologies have steep learning curves and take significant time and resources for any company to make use of, no matter how agile they are. As such, understanding and predicting the most influential emerging trends becomes an incredibly important strategy for financial services trying to carve out their niche in a competitive market.

The first major digital banking trend to navigate is the rise of digital payments. The pandemic forced rapid changes across the globe to keep the economy churning. A recent Capgemini report found that by 2025, instant payments and e-money payments will account for more than 25% of global non-cash transactions, up from 14.5% in 2020. The speed, ease and reliability of digital transactions are advantages that the average person is unlikely to give up and will continue to disrupt traditional payment channels like cash.

In parallel, as digital banking continues to grow, so too does the amount of data available for institutions to take advantage of. There are now an uncountable number of endpoints involved in digital payments processing, each with its unique data reported. Open banking, while still not widely appreciated by the average person, is enabling banks and financial services institutions to unlock the potential of the swathes of data generated by each user.

Open banking is a practice in which traditional banks share their user’s data with 3rd parties, such as fintechs, for them to analyse and utilise. Some benefits of openly sharing user data like this include enabling customers to identify the best financial services available to them, e.g. a credit card with a lower interest rate or helping lenders get a more accurate picture of a consumer’s finances.

How to create a personalised banking experience

Open banking is an important key to turn in the pursuit of meeting transforming consumer demands. One of the major digital banking trends for financial services to consider is the demand for more individualised insights into their money. Creating personal customer insights gleaned from data shared with open banking partners is a now-unmissable opportunity for financial institutions to take.

If a customer has purchased a flight and a rental car, then they are most likely looking for a hotel as well. Banks that can offer the most attractive hotel to that customer based on their personalised insights have an enormous advantage in keeping customers. Spending habits, specific item purchases and even geographical spending habits are just a few of the myriad financial data being generated through digital transactions that could be taken into consideration. Partnering with fintechs who specialise in this data analysis and profile building can afford traditional banks the ability to keep up with disruptive challenger banks who are also trying to exploit this niche.

Where will money be held in the future?

Digital banking services such as tap to pay and mobile banking are nothing new, but the potential for digital banking is nowhere near realised yet. Physical cash is unlikely to go away soon – not in the next decade or two anyway, but the benefits of data generated through digital transactions will likely become too large to ignore.

The concept of a country creating a central bank digital currency (CBDC) is being researched by almost every large economy in the world. CBDCs are digital assets, similar to cryptocurrency, issued by a central bank, which are intrinsically linked to the value of that country’s fiat currency. Countries like the UK, USA, India and China are already exploring the possibility of moving currency completely digital through a CBDC.

The path ahead. The role fintech in evolution of digital payments.

It is clear that digital assets are going mainstream and will shape the evolution of financial services in the years to come. The opportunity to combine the technical properties of digital assets and the autonomous enforcement of business logic across participants and adversaries with the trust, reach and balance sheet of major financial institutions is significant.

Traditional banking institutions suffer from a lack of agility, but by partnering with disruptive fintech, they can meet the rapidly shifting demands in the market. The exploding financial market has opened the doors for banking providers to transform the services they offer into safer, faster, more personalised solutions, but they need help to realise them.

Fintechs can partner with banks to help them explore nascent technologies like digital assets, the rise of digital payments, open banking and digital banking services. Consumer demands for increased speed and personalisation are pressuring the financial market to respond swiftly, but accurately, to ensure that they stay ahead of disruptive competitors.