A global pandemic, a hot war in Europe, 80s’ style inflation: even Nostradamus might have struggled to predict the scale of the upheaval of the last three years. So it’s no surprise that halfway through 2022, many of the expectations the banking and fintech sector had at the beginning of the year – especially around a return to normal – have been turned upside down. Nevertheless, amid the chaos, some trends are beginning to emerge. Here are five that banking experts are discussing right now:
Capital is moving away from unprofitable fintechs. The increase in interest rates and the slowing down of the global economy will affect access to capital for FinTechs. Over the past few years, low interest rates, the stagnation of traditional capital market opportunities and the covid-driven success of Big Tech firms created a perfect environment for cash-hungry fast-growing FinTech firms. Today these firms are seeing a drop in investment interest. Consequently, firms such as Robinhood, Better in the US and Klarna, Nuri and Freetrade in Europe are shedding costs (and employees). Many FinTechs are not profitable yet. They know very well that if they are not going to be profitable, their growth (or even survival) may not be sustainable.
Corporate social conscience has become a priority. The post-covid repositioning of our values is continuing. Customers, employees, constituents and the media are pushing corporates to adopt more ESG-driven goals. According to The Payment Association, the financial services industry is making significant progress toward embracing sustainable practices and ethical goals. A survey of their members showed that over 90% of companies measure progress towards gender equity, 80% consider the social justice impacts of their products and services, and 60% have identified their ESG stakeholders and prioritised them.
While this sounds promising, investors and the public’s inability to assess the trustworthiness of some of the ESG claims is giving rise to scepticism. The fallout of “greenwashing” is already evident: From 2024, the EU Corporate Sustainability Reporting Directive will require companies with over 250 employees to comply with clear guidelines when reporting their ESG performance. Interestingly, the US has announced no such initiative. Also, In the coming months, we will see some firms attempt to rate the credentials and truthfulness of ESG credentials, making it possible to compare one company’s performance to another. This move could produce a powerful comparison tool for purpose-driven customers and focused investors.
Crypto will have to grow up. The recent collapse of cryptocurrencies is seen by many as proof that they are a fad. Arguably the opposite is true, and we are witnessing cryptocurrencies becoming “normal”. The markets always test the validity of an asset’s value claims. The investors’ attack on stablecoins was exactly that. The claims made by Terra/Luna or Tether that they could remain stable without owning sizable currency reserves proved false. The recent collapse will have the effect of separating the wheat from the chaff. It’s unclear which players will prevail. Two use cases are emerging: the first is the currency play. The best example of a currency play is CBDCs (Central Bank Digital Currencies) which will be as stable as the countries that issue them – transactions in eYuan, and the future eEuro and eDollar are probably going to replace today’s payments ecosystem. The second model is the Asset Play. Some cryptocurrencies are a way to store value behind blockchain networks, they are like “Digital Gold”. Buying Bitcoin is akin to buying a commodity; it’s a risk but not a random one – more like investing in a commodity than playing roulette. Bitcoin will rise again (I hope).
Card schemes are back – In the last few years, the dramatic improvement of the bank-to-bank transfer capabilities making them practically instant in many countries, has created the perception that the future of the card schemes is at risk. We are now seeing a change in this idea. During the last Money20/20 Europe conference, it was striking to hear card scheme senior executives talk about the orchestration layer. In its simplest form the orchestration layer connects card scheme clients with third-party applications. The orchestration layer will go beyond payments to broaden and deepen the services that card scheme brands currently provide. Card schemes connect billions of customers, to millions of retailers, to thousands of banks. Today they simply process a huge volume of payment-related transactions. In the future – the vision suggests – they will add new services. These could include identification, insurance and lending. One way of looking at the Orchestration Layers the card schemes talk about is to describe it as a gigantic specialised Banking-As-A-Service platform. The card schemes are back.
The West mulls coordinated Big Tech regulation. The expectation that Big Tech should be more regulated Is growing. In the coming months, we will see a push for a broader, deeper, more coordinated regulation of Big Tech globally, especially in the West. A good example is the EU-US launch of a Joint Technology Competition Policy Dialogue coordinated between the European Commission Executive Vice-President Margrethe Vestager and the US Federal Trade Commission Chair, Lina Khan. Both leaders have expressed deep concerns about Big Tech not being accountable to anyone. Big Tech fears both. Meanwhile, as tech firms such as AWS, Azure and Google Cloud continue to supply the banks with infrastructure and technology, they will also be directly supervised by the financial regulators. The recent improved political coordination between EU states and between the EU and the US resulting from the war in Ukraine suggests that this trend will continue.
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2022 is already proving to be one of the most unpredictable years of recent times. Businesses in the financial services sector are under more pressure than ever to adapt their traditional offerings to the fast changing new reality. Amid all the upheaval, the best course of action for incumbent players is to really understand what the customer needs and find a partner to help deliver it. One thing is certain, January 2023 will be very different from January 2022. Few businesses are equipped to weather the turbulence ahead without a laser-life focus on their customer and partnerships that help amplify their offer.
