2022 saw the financial services industry deal with a range of complex challenges ranging from Russia’s illegal invasion of Ukraine and its impact on inflation, to the continued ripple effects of Brexit and changing consumer habits. The year also saw the emergence of new technological solutions along with the continued rise of challenger banks and FinTechs that are shaking up the status quo.

The coming year looks set to be just as dynamic, so FStech has reached out to thought leaders in the space to get their thoughts and opinions on what to expect in 2023.

Open Banking Payments continue to mature

“With open banking approaching its 5th year since inception, it is reaching a maturity in the UK where the open banking rails is being increasingly used for more complex use cases,” notes Philip Benton, senior analyst at tech research house Omdia.

He explains: “Open banking infrastructure consists of regulatory buy-in, market adoption i.e., how many banks share APIs for open banking, number/quality/growth of API calls, real-time payments adoption and existing third party providers of open banking technology.

“From a market demand perspective, awareness is a key metric (although according to Tink’s PIS survey, this is less relevant for France), e-Commerce and smartphone penetration (ideally need biometrics/face ID to authenticate), merchant adoption and existing ‘live’ use cases.”

The analyst concludes that “SME payments account for a large volume of overall payments but high friction exists for paying bills/invoices – creating a great UX could drive user adoption for both C2B and B2B payments. SME market difficult to sell to due to market fragmentation so requires strategic partnerships that have existing SME relations.

“From a consumer perspective, OPB for multi-banking and P2P payments is biggest opportunity to increase trust and encourage adoption in other use cases.”

Economic uncertainty and faster payments to cultivate scam-rich environment

It stands to reason that consumers will be more susceptible to financial crime during times of economic hardship. After all, when bills are piling up a friendly phone call or email from someone promising to reduce how much you’re paying for your gas and electricity may be more tempting.

And though security checks and measures are now commonplace, this all comes at a time when it is easier than ever for users to access their accounts and transfer money without having to really get much proof from the person asking for the details.

As such, Andy Renshaw, senior vice president of product management at identity fraud data science firm Feedzai explains: “As old and reliable fraud tactics like account takeover (ATO) attacks have become harder to pull off, fraudsters are increasingly turning to scams and currently have two distinct advantages working in their favour.

“The first is economic uncertainty. Many global markets are fearful a recession is imminent – if not already in effect. When people are uncertain or desperate about their financial lives, they are more likely to fall for scams. This includes fake job offers, unemployment fraud, or even romance scams. In other words, scams evolve quickly to reflect the current environment. Scammers are also more sophisticated and know how to adjust their tactics (e.g., phishing, vishing, etc.) to be as effective as possible.

“The second is the rise of faster payment systems in new global markets. The US and Canada, for example, are launching their own faster payment schemes similar to the UK’s Faster Payments Service. These systems enable money to move with a few taps of the screen.”

The exec says that identity solutions alone will not be enough to stop scammers, but that this “heightened threat of scams” can present opportunities for banks. “If banks proactively offer to protect their customers they can offer an attractive market differentiator,” he concludes.

The shift to coreless banking

Interoperability has historically been a hurdle for FSIs, with a lack of universally adopted standards stalling growth. This is something which will increasingly be in the spotlight in 2023, predicts Hans Tesselaar, executive director at the Banking Industry Architecture Network (BIAN) – a collaborative not-for-profit ecosystem formed of leading banks, technology providers, consultants and academics.

“Over the past few years, banks have faced immense disruption and struggled to transform its organisation with technology,” Tesselaar says. “Our research with IBM found that 88% of banking executives are troubled by their bank's commitments to multiyear projects, interoperability across technology environments and theft of sensitive data.”

“A lack of industry standards is also causing significant problems and hindering the organisation's ability to bring new services to market.”

The executive calls on banks to adopt a ‘coreless banking model’ in order to advance the adoption of new services without relying on legacy systems.

He explains: “This approach will empower banks to select the software vendors required to obtain the best-of-breed for each application area without worrying about interoperability. Furthermore, this model will translate each proprietary message into one standard message model, meaning communication between services is significantly enhanced, ensuring that each solution seamlessly connects and exchanges standardised data.

“A system that can be reused and utilised from day one, and the ability to be used by other institutions, will mean the opportunities to connect the financial services industry are endless.”

BNPL goes B2B

With huge tech firms like Apple jumping on the buy-now-pay-later (BNPL) bandwagon, it seemed only a matter of time before the practice made its way into the business world, and this is something which Vishal Shah, head of embedded finance at financial services software solutions provider SAP Fioneer anticipates will be a major trend in 2023.

He explains: “BNPL was one of the first consumer success stories of embedded finance, but as global trade becomes increasingly digitised, and as companies begin to operate through electronic trade networks, the financial industry will be able to truly unlock the power of ‘instant’ payments and ‘just-in-time' credit.”

While consumer-level BNPL schemes have come under scrutiny for being glorified payday lenders, Shah believes that embedded finance for Micro, Small and Medium Enterprises (MSMEs) will meet the “unmet needs of this sector” and unlock value.

“We are seeing examples of Buy Now Pay Later and Working Capital Financing appear in the B2B context, which allow businesses to borrow money to cover day-to-day operations rather than purchasing equipment,” he says. “As finance becomes deeply embedded over time, the financial service will become part of our everyday life and activities.”

AI to the rescue

Artificial Intelligence (AI) has long been a buzzterm amid anything vaguely tech-related, but 2022 saw a genuine explosion of AI solutions in everything from banking to art.

Andy Efstathiou, principal banking Analyst at business process services (BPS) and IT services (ITS) research and analysis firm NelsonHall predicts that AI will play an even bigger role in FinTech in 2023 as FSIs look to manage and secure transactions.

He posits: “2022 has been a strong year for IT services firms delivering digital services to the financial services industry. 2023 looks to be a different year for these vendors as they will need to focus limited resources in a few key growth areas to have a successful business. In 2023, IT vendors will need to change their focus to implementing transaction processing AI and data management tools.”

The analyst argues that banks have previously focused their AI efforts on entity or account analytics, but this approach will change in 2023 towards compliance and coustomer analytics. He says: “Financial institutions are driven by evolving regulations, which are now focusing on transactions monitoring. These initiatives include Europe’s Digital Operations Resiliency Act (DORA) to be implemented by Q4 2024, the pilot regimen for market infrastructure in DLT, and various real-time payments/transactions initiatives such as FedNow, the Federal Reserve bank’s instant payment service, which launches summer of 2023.

“These initiatives will drive securities exchanges, payments networks, banks, and capital markets firms to deploy cloud orchestration and AI FinTech tools to improve security and reduce operational risk.“

Efstathiou explains that “implementing transaction-oriented FinTech solutions is more complex than account-based solutions because transaction-oriented solutions require orchestration and transparency across the entire network infrastructure,” but concludes that “The industry and regulators are committed to delivering on the promise, so the implementation work will start in 2023."

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