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The year 2021 brought many unexpected events. For one, the country is still fighting its way through a pandemic, which many hoped would be long over by now. On the other hand, stimulus checks, fintech and celebrities on social media helped breed a new class of amateur investors, who brought previously obscure and volatile investments such as cryptocurrency, nonfungible tokens – known as NFTs – and meme stocks into mainstream conversation.
What can we expect for the banking industry in 2022? Most likely, more disruption to traditional financial systems. Below is a look at what experts predict for banking next year.
Banks Will Transition Away From Traditional Credit
The general digitization of financial offerings has started fueling a transition away from traditional credit cards, says Christian-Robert Joseph, co-founder and CEO of Grain, a digital credit product. So has the economic climate. Millennials, in particular, have been wary of credit cards as a result of the Great Recession, as they tend to be more financially savvy and have a fear of falling into the same unsustainable debt that precipitated the 2008 crisis.
"The economic uncertainty resulting from the 2020 pandemic only exacerbated that fear and accelerated people's adoption of alternative credit," Joseph says. "So as we look to 2022 and beyond, providers of consumer credit will have to account for the shift in landscape in how people access credit digitally and reconcile the need for credit versus the justifiable consumer fear of unsustainable debt."
Major Banks Will Begin Offering Services for Crypto Assets
More than a decade into the life of Bitcoin, services that provide storage and security for cryptocurrency owners are still dominated by crypto-focused companies such as Coinbase. According to Francisco Oliva-Vélez, a partner at Plaintext Capital, a crypto investment firm, there are two major reasons why. First, there was a lack of institutional players asking for the service. Second, there was simply too much regulatory uncertainty.
Today, Coinbase’s institutional trading volume makes up 72% of its total market, according to its latest quarterly report. "These (traders) are undoubtedly already clients of the big banks, who are currently forced to take their business elsewhere," Oliva-Vélez says, adding that they’d likely prefer to hold their crypto assets with a longstanding financial institution where they do all of their other banking. "As for regulation, the (Office of the Comptroller of the Currency) has spent the last year and a half publishing letters and clarifications on how national banks can custody crypto assets," he says. "It is only a matter of time before enough legal clarity is provided to encourage big banks to jump in."
Banks Will Accept Bitcoin as Collateral for Loans
Once crypto assets are custodied by traditional banks, Oliva-Vélez says, it will be much simpler to use those assets as collateral for loans. "Following a record year, investors are sitting on huge gains and will undoubtedly seek ways to access liquidity without triggering capital gains," he says. "Loans are some of the stickiest products for banks, and this could open the door to a plethora of products, like asset-backed mortgages, as crypto investors seek to diversify their assets."
Decentralized Finance Will Be Adopted Rapidly
Blockchain was a buzzy topic in 2021, largely because it's the technology that backs cryptocurrencies such as Bitcoin. However, its applications go well beyond crypto. Next year, we can expect a growing interest in decentralized finance, or DeFi, which draws inspiration from blockchain.
DeFi is a global alternative to the current financial system, built on open source technology, says Matt Williamson, vice president of global financial services at Mobiquity, a digital services provider for various industries, including banking. "Most of the intrigue is based on the ability to create a whole suite of financial services outside of regulatory bodies," he says.
Currently, not many organizations are investing or participating in DeFi, but Williamson says the enthusiasm is undeniable. "And enthusiasm often leads to seed capital," he adds.
ESG Will Become an Even Bigger Priority
Consumers have long recognized the importance of environmental, social and corporate governance, or ESG, when choosing where to put their money. In fact, one 2021 report found that 85% of investors considered ESG factors in their investments last year.
In 2022, that momentum will become a business and legal imperative for banks, says Lisa Ledbetter, a partner at global law firm Reed Smith. "We expect to see expanded sustainable banking and investment products and services; broader initiatives around diversity, equity and fairness; and innovative thinking about climate data, loan underwriting and transparency," she says.
Consumers Will Have a Renewed Desire for Professional Financial Advice
Despite rampant inflation, a lingering pandemic, political turmoil, supply chain troubles and weak employment numbers, the market has rewarded investors generously. Many have taken a DIY approach to investing, made easier by social media, Reddit forums and trading apps such as Robinhood. However, the market can't sustain its upward trajectory forever, and many experts believe a correction is coming next year.
"Discount brokerages, apps, funds and fractional shares have democratized investing while the market's overall boon has made investing look easy," says Dan Wright, executive director of strategy at Accutech Systems Corp., a banking and investing technology provider. "Should a correction occur, investors will discover a newfound appreciation for the expertise of trust managers and financial planners."
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