From digital currencies and embedded finance to leaps forward in alternative payments, AI and ESG, 2021 was a busy year for innovation and further digital transformation of the sector.

To assess the impact of these changes we’ve asked a range of experts from across the industry for their reflections on the past year and thoughts on what’s to come in the next 12 months.

Digital currencies

2021 was the year that digital currencies began to break into the mainstream, with retail investors piling into crypto while major financial institutions explored the potential for setting up trading desks for digital assets and large payments players took steps to enable customers to pay for everyday purchases in Bitcoin.

Meanwhile the BigTech giants continued to forge ahead with their own plans for digital currencies in the face of widespread regulatory opposition. As the technology continues to advance, and regulators do their best to catch up, many financial institutions have already identified specific use cases for digital currencies.

Avivah Litan, distinguished vice president analyst in the Gartner IT practice, says: “Many large banks, payment platforms, institutional digital asset custodians and wallet providers have already done the heavy lifting in this area, which should provide large enterprises with a minimum of friction in deploying their own digital currency applications.”

Alexander Bant, chief of research in the Gartner Finance practice adds that additional factors that could make digital currency applications more attractive in the next 12 to 24 months included hedging against high inflation, increased regulatory clarity, improvements in energy usage, and widespread adoption by employees, consumers, and suppliers.

“2022 is the year that we expect CFOs to rapidly up their knowledge on digital assets, currencies, and other blockchain applications,” he explains.

“We are starting to see some Fortune 500 companies map out scenarios for how they will respond if a country or supplier moved to doing business with only digital currency and what steps they would take as a result,” he adds.

But while the picture looks optimistic for digital currencies in 2022, some experts are advising the industry to proceed with caution amid warnings that cryptocurrency fraud is likely to “skyrocket.”

Benoit Grangé, chief technology evangelist at OneSpan, a digital identity solutions provider, says: “Without a doubt, the number of cryptocurrency hack incidents will break records in 2022.

“The most common types of crypto hacking are phishing and social engineering attacks, even though the technology to protect customers against those attacks has already existed for years and has been in use by traditional banks.”

CBDCs

Regulators’ investigations into central bank digital currencies (CBDCs) have also been gaining momentum, with countries around the globe, such as Sweden, Norway, South Korea and China, testing government-backed e-money in the real world.

Meanwhile the Bank of England is set to deepen its work into the potential impact of a digital pound on the UK economy in 2022 following the announcement of a joint government CBDC taskforce in April.

Marius Galdikas, CEO at online banking service provider ConnectPay said: “CBDCs could provide a range of benefits, for example, lowering the cost of cross-border transactions, increasing financial inclusivity, and enhancing economic resilience of domestic payments systems. This is a tool that, if implemented thoroughly, could outweigh the offerings of payment service providers, which will have to immensely step up their game.”

He adds: “As for the multiple CBDC network, the main question of ‘how long will it take?’ remains, as developing a united framework seems like a Herculean task, with each countries’ efforts moving at a different pace."

In response to the question of timelines for implementation, Robert Hoffmann, chief executive of Merchant Services at Nets, says we should expect the rollout of new digital payments technologies in the very near future.

“Digital currencies issued by central and national banks are coming: it is only a matter of time," explains Hoffman. "The underlying technology for digital currencies like the e-Euro or the e-Krona is the same as for cryptocurrencies – in other words, it already exists! We just need regulation to catch up and to ensure the supporting technology does not exclude anyone.”

Embedded Finance

This year, embedded finance went from being a much-hyped ‘technology of the future’ to a reality, as financial services providers and payments firms partnered up with leading consumer brands and made use of Open Banking APIs to integrate a range of services within the overall customer experience.

Ryan Joyce, head of FinTech UK&I at Salesforce, predicts that 2022 will see more sophisticated examples of embedded finance in apps and online: "The world’s biggest brands are rapidly fusing financial services – from e-wallets and cards to lending and insurance products – effortlessly within their customer journeys. And it’s not about to stop.

“In pursuit of increased loyalty and providing unique experiences for consumers who prioritise convenience, the world’s leading brands are set to launch a variety of new propositions. A ‘space race’ across brands is on its way to quickly launch personalised products, build partnerships and continuously iterate their propositions for greatest impact.”

He adds that: “Embedded finance will release an avalanche of new financial data – curated by FinTechs and shared with global brands to generate insights around spending patterns, behaviours and transactions. API management is crucial to enable real-time processing of data between two organisations – fast decisioning to open an account, originate a loan or underwrite a policy. This will help keep consumers ‘in-app’ for a seamless experience.”

Nigel Verdon, chief executive of Railsbank gives some examples of where consumers are likely to benefit from Embedded Finance in 2022: “The potential here is enormous and largely untapped.

“For example, football teams could expand their offerings, going beyond solely providing tickets and merchandise to also connecting fans to hotel and travel deals for away matches. All of this can be handled in one app with seamlessly integrated payment and the opportunity for fans to accrue loyalty points redeemable against exclusive experiences.”

But the data sharing required by such apps will also lead to an expansion of Open Finance services and a ramping up of risk, according to financial services industry analysts at Forrester.

“Bank execs already talk about embedded finance, but in 2022, the focus will be on Open Finance — the rails that enable it — as many wake up to the opportunities and threats,” they write in their 2022 banking predictions report.

“The EU and UK have already consulted on Open Finance, a push that will yield more data sharing between financial and non-financial firms.

“2022 will see adaptive banks focus on the data mash-ups and co-created journeys they can weave with third parties.”

They add that 2022 will also “see the number of banks offering lifestyle platforms double — using “super apps” such as Alipay and WeChat in China as inspiration.

“Large banks must leverage Open Finance preparation and their scale to curate their own domestic versions, while midsize and smaller ones must design services for incorporation in others’ platforms.”

Internet of Payments

As customers’ lives became increasingly digital in 2021, the growing number of IoT (Internet of Things) devices sparked discussion in the financial world of the ‘Internet of Payments’ (IoP), a phrase describing payment processing over IoT devices, for example, smart home assistants, like Amazon Alexa, or smaller wearable accessories, such as smart watches.

Marius Galdikas, chief exec at ConnectPay, says: “The merger of IoT and payments brings consumers extraordinary convenience with reduced friction.”

Galdikas adds: “As Open Banking enables third-party providers and FinTechs take on the roles of IoP providers, this opens up an entirely new area for innovation. Also, IoT creates the opportunity for businesses to gather more data about the consumers, which will help to elevate user experiences.”

However, Grangé at OneSpan said increasing integration of digital payments into people’s lives will require a renewed focus on privacy to maintain customer trust.

“Companies that are not able to demonstrate that they apply security by design will lose market share,” he predicted.

BNPL

No financial services professional could have got through 2021 without noticing the explosion in firms and merchants offering Buy Now Pay Later services, and 2022 is set to see further runaway growth in payments in digital installments.

Robert Hoffmann, chief executive of Merchant Services at Nets, says: “Successful start-ups and incumbents are increasingly offering this solution to appeal to Millennials and Generation Z consumers, who are used to more flexible digital payment methods. The growing popularity of BNPL means that businesses that do not provide this option risk having a significant portion of their potential customers go elsewhere.”

But the adoption of flexible payments has not escaped scrutiny, as providers came under fire for potential consumer harm due to a lack of awareness around defaults for missed payments and the mental health impact of debt and damaged credit scores.

“In 2022, regulators in the EU and the UK are looking to further understand and balance the need for growth and innovation with protection for consumers who love the newer payment methods. Until this is in place, expect BNPL payments to continue their very rapid ascent,” Hoffman added.

Banking as a Service

An enterprise-wide take on embedded finance, Banking as a Service (BaaS) involves use of cloud-based technologies to integrate financial services infrastructure within a company’s existing technology.

In 2021, BaaS gave rise to a number of new market players, which took advantage of Application Programming Interface (API) driven platforms to enter the financial services industry much faster than building their own solutions from scratch.

Marius Galdikas, chief executive at ConnectPay says the trend is set to continue in 2022: “BaaS enables companies to leverage market-tested infrastructure without the regulatory overhang, saving a significant amount of an organization’s resources.

“As the pandemic led many to redistribute their budget, outsourcing banking infrastructure became an even more appealing choice—leveraging banking-as-a-service enables them to direct more resources towards product innovation, rather than framework building. Therefore, BaaS providers will continue to fly high.”

A number of leading financial services institutions have themselves ventured into the BaaS market, with analysts at Forrester predicting that banks will prioritise identity as they explore as a service business models.

“At least one in four banks will explore delivering select capabilities as a service to capitalise on their recent Open Banking connectivity investment and the vogue for what this year is being called “embedded finance.” They will double down on core services, with leading banks opening their gambit for a bigger role in digital identity through initiatives such as GAIN (Global Assured Identity Network).

They add: “More banks will also reconfigure and repackage products for sale through others’ marketplaces and channels. Others will follow Goldman Sachs or Standard Chartered’s Nexus and build banking-as-a-service capabilities for FinTechs, tech titans, and e-commerce marketplaces to gain scale via B2B2X business models. In 2022, tech execs must evangelise, elevating connected architecture to be part of the daily conversation throughout the bank.”

AI & Hyper Personalisation

In the past few years financial services players have often talked about AI technology, but proven use cases have remained tricky to pin down. In 2022, AI and analytics are set to finally come of age, with increased data volumes from the shift to digital bearing fruit in the form of more AI-driven products and services as well as more advanced risk management.

Matthijs Aler, CEO, at Ohpen, a Dutch financial technology company, says: “AI will continue to find patterns in complex data and pick up trigger points across consumers’ financial behaviour – spotting credit problems before they arise.

“With algorithmic trust growing across business, financial advisors will look to AI to predict exactly which accounts and clients may need monthly interest and loan repayment support. In fact, this trend will continue well beyond 2022, as digitising the credit space becomes increasingly important.”

Ryan Joyce, Head of Fintech UK&I, Salesforce adds: “Next year, a new wave of AI innovation will grow across Fintech, unleashing deeper intelligence and speed and extending the competitive advantage of the industry. By driving more processes through machine learning and automation, we are set to see AI transform several business-crucial elements other than customisation alone.”

AI as a driver of more tailored services will also translate into greater adoption of self-service, Aler predicts, as consumers embrace ‘DIY finance’.

“This power of AI-led prediction will eventually be handed directly to the consumer, too. In fact, we are about to see unprecedented levels of data, information and guidance built into consumer omnichannel experiences. Financial institutions have already stepped up their digital offering for consumers – but 2022 will see heightened consumer autonomy across personal finance management.”

“Recognising the benefits, for all parties, in a pandemic age of helping customers help themselves, the savviest banks and financial services providers will offer up more predictive analytics directly to consumers across front-end widgets on mobile apps and web-based functionalities.”

This shift to greater hyper personalisation of financial services will also address issues of financial inclusion which have been brought to the fore during the pandemic, according to Joyce at Salesforce.

“More than a million UK adults were financially excluded pre-pandemic; with Covid-19 disruption set to continue into 2022, financial inclusion is imperative to help reduce this inequality gap.

“The next decade is set to build on this foundation, enabling the hyper-personalisation of products or offerings to support every consumer and business. This will serve those that need financial support the most but are the hardest to underwrite.”

He added: “The key to unlocking this progress must be centred on leveraging data to better cater for customer needs. Automation, including single platforms to streamline business processes at scale, is vital, as well as AI to build enriched customer profiles. API Management is the final piece of the jigsaw, combining existing data with Open Banking data to strengthen a fully customer-focused approach.”

ESG

And finally, no predictions piece for 2022 would be complete without a mention of Environmental, Social and Governance (ESG) which shot to prominence this year as consumers and corporates focussed on the race to net zero and the need for all industries to get transparent about sustainability and the wider social impact of their activities.

As banks and FinTechs began to roll out solutions designed to track carbon footprints, and sustainable investment became a standalone industry, the role of AI and analytics to accurately report on ESG was central.

In 2022, consumer and regulatory pressure is set to ramp up further, with Kevin Levitt, director of financial services at NVIDIA predicting that AI is likely to be a key component in companies’ response to demands for greater ESG accountability.

“Companies will invest in significant computational power to run AI models, including deep learning and natural language processing models, that analyse all the data necessary to track company performance relative to ESG. It also will be needed to analyze the available data externally to measure which companies are excelling or failing relative to ESG benchmarks.”

However, while the number of sustainable finance products is set to triple in 2022, industry experts from Forrester warn that “not all will pass muster.”

“As banks try to outcompete each other on sustainability, racing to tap into
government rebates and fiscal incentives, they will need to fight accusations of greenwashing,” they cautioned in their banking predictions report.

“Some regulators are helping to address the lack of transparency, with China and the EU providing standardised taxonomies and Hong Kong and Singapore incentivising banks to create frameworks of their own.”

But, they added: “Leading banks must validate borrowers’ environmental, social, and governance (ESG) claims and use of proceeds, using data and emerging technologies — internet of things, decentralised ledgers, and AI — and independent ESG ratings providers to drive a new surge of FinTech innovation linked to sustainability.”

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