Over the last two years, financial services, and digital banking specifically, have seen the benefits of innovation and necessity meeting head on. Even the most traditional players have leaned into digital service offerings, and customers have embraced the convenience of it all.
Additionally, the increased popularity of crypto has altered the personal finance landscape and opened up the possibility for less traditional methods. The big question heading into 2022 is will major players in the banking industry get involved?
Here are three areas we are keeping our eyes on...
DeFi - Decentralized Finance
Decentralized finance (DeFi) was one of the topics that had Money 2020 buzzing. DeFi is a global alternative to the current financial system, built on open source technology and with the ability to create a whole suite of financial services outside of regulatory bodies.
Currently, few organizations are participating or investing their resources into DeFi, but the enthusiasm is undeniable, and enthusiasm often leads to seed capital. If this continues, we expect to see organizations dip their toes into the pool. By next year’s Money 2020, major players could be very involved.
If you think this sounds like a return to the deregulated markets of the late 70s/early 80s, you’re not alone. Yes, there are benefits to deregulation, but those regulations generally exist to protect consumers, and DeFi could leave people unprotected. As big banks are traditionally risk-averse organizations, the trepidation around DeFi is real.
BaaS - Banking as a Service
Banking as a service (BaaS) allows digital banks and other third parties to connect with banks’ systems via APIs and build new offerings on top of the regulated foundation and infrastructure. The idea is that opening up legacy systems to emerging startups and third parties, you can enable greater transparency and better customer experiences.
In terms of strategy, companies, including banks, outsource services around things that aren’t core/strategic to free up management to focus on the things that are important to the organization. There’s an opportunity to create a well-known, well-established service to move money, enable loans, open accounts, etc.
To date, the limited use cases haven’t been terribly promising. At least one large bank put a lot of resources into BaaS and had a “tree falling in the forest” moment. No one really noticed. Additionally, putting all services in the cloud, providing microservices and charging “a la carte” isn’t actually cheaper for customers in the long run (10, 15, 20 year period).
BaaS for Corporate Banking
Retail banking gets a lot more attention in the news and trades because it has a bigger audience and is easier to understand by people who are not in banking, but corporate banking is ripe for disruption.
People who get certain services in their personal lives often wonder why similar processes and offerings have to be so much more tedious and complex in their work life, and they are right! Like the move to AWS, there may be a complete toolbox available that is easier than licensing each individual piece of the entire toolbox.
One concern about BaaS is that there needs to be a banking license involved, someone has to own the balance sheet. Banks have found solutions to work around this challenge, but there is always risk involved and someone has to own it.
Buy Now, Pay Later will grow rapidly
By far, the biggest trend in personal finance is Buy Now, Pay Later (BNPL). Once dismissed as “modern layaway,” the interest-free payment framework has taken off thanks to the flexibility it gives consumers. In a recent interview with CNBC, PayPal CEO Dan Schulman said use of the company’s BNPL option grew 400% on Black Friday.
BNPL has been dominated by fintech players thus far. That will change in 2022 as big banks work to avoid another “Venmo Moment.” After sitting back and watching the P2P giant catch on with consumers, they scrambled to create Zelle as a response. They will almost certainly not let that happen with BNPL. Expect to see some major developments, and soon.
Well...um…Ok, this one is as close to a lock as it gets. Consumers love it because it fits their lifestyle. Merchants love it because consumers buy more and abandon fewer carts. Banks love it because it’s an opportunity to grow even more relevant in their customers/ lives.
Widespread innovation tends to happen when major players have the resources, the know-how, and the motivation to evolve. The exciting prospect for 2022 is that all those factors are present. One big question remains - is the risk worth the reward?
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