There are clear trends which are pushing the banks and fintechs forward, despite all the economic hardships
What should we expect from the year to come? Here are some predictions from banking experts. Source: pexels.com
It seems there’s no end to the ongoing pandemic, which is preventing many businesses from functioning to their full scale. Whether 2022 will finally let people pull their masks down is a tough question. Nevertheless, pandemic or not, the financial industry has shown some resilience.
Technology & sustainability
According to the leading global market research company Forrester, leading banks will embrace a future-fit technology strategy and accelerate their end-to-end digital transformation, focusing on innovation.
The Forrester expert team expects tech spending by banks to achieve double-digit growth in 2022. Lavish investments will not only flow to the creators of innovative banking solutions, but also will be aimed at attracting a skilled tech workforce and providing adaptive talent management in-house. To be able to compete in a fast-growing digital environment, banks will be forced to invest in or acquire promising fintechs.
Another focus will be on sustainability and environmental, social, and governance (ESG) principles. In 2022, financial services firms will enhance their offers of ESG products and services, e.g. green loans and mortgages, or checking accounts with sustainability and carbon-tracking features. The major reason is the transition to climate neutrality, which the world’s biggest economies are collectively committed to.
Finally, Forrester believes next year will become a starting point for open finance to reshape financial services for good. While regulators across the globe are pondering the data sharing reforms, banks might as well experiment and evolve their business models toward a more open, collaborative platform approach.
Credit
The year 2021 has brought major changes to how people manage their money and deal with expenses. The shifts in investment strategies and credit tactics are here to stay at least for the next year.
Firstly, the overall loan services will undergo optimisation and digitisation processes. Back-end processes must be transformed to allow for fast origination and seamless onboarding, while overall user experience should be improved and digitised. Innovations such as optical character recognition (OCR) and machine learning can and will be used to eliminate manual work. APIs can also help banks access and analyse transactional data from current accounts to categorise risk in a more detailed way than traditional credit scores.
The general digitisation 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. The main fear among Millenials is to get into a trap of unsustainable debt.
The estimates from Consumer Financial Protection Bureau (CFPB) confirm that the average credit card utilisation rate declined substantially for all consumer groups amidst the global pandemic. Moreover, credit card balances have continued to fall even as purchase activity rebounds.
According to Bankrate’s research, only 43% of 18-31 year-olds have at least one rewards credit card. Among Gen Zers, the level of credit card ownership has fallen to 36%. Besides already-mentioned fears of unsustainable debt, the reasons are high “ability to repay” standards, unstable financial situations, high credit card fees, and more accessible alternatives.
Therefore, the buy now, pay later industry will continue growing, along with other types of alternative credit. BNPL is an attractive alternative for many people seeking trustworthy options of short-term, low value credit. If banks want to compete, they must transform their lending practices, looking up to challenger banks and fintechs which engage and inspire the consumer during the lending process.
Investments
This year has witnessed a rise of a new class of amateur investors, not averse to risk. Thus, previously obscure and volatile investments such as cryptocurrency, NFTs, and meme stocks have now become mainstream. Will this trend continue in 2022?
Despite the new, volatile, and unregulated nature of NFTs, global law firm Clyde & Co believes its popularity will continue to skyrocket in the coming year. That will present both opportunities and challenges to insurtech players who can cover for associated losses or thefts regarding not only traditional products but also digital assets like NFTs and crypto.
Cryptocurrencies will remain on top of the market trends as well. Moreover, predictions are, major banks will begin offering services for crypto assets. Experts believe traders will appreciate crypto storage and security offers from trusted financial institutions where they do all of their other banking.
Once crypto assets are custodied by traditional banks, Oliva-Vélez says, it will be much simpler to use those assets as collateral for loans like asset-backed mortgages.
U.S. Bank, the fifth-biggest retail bank in the nation, didn’t wait for 2022. It has already launched its cryptocurrency custody service, in partnership with NYDIG, for investment managers to store private keys for bitcoin, bitcoin cash and litecoin. Support for other coins like ethereum is expected over time.
As for retail investment trends, they are likely going to expand as well. However, as more people are gaining easier access to relatively complex investment instruments and strategies, more financial education and financial advice services will be needed.
At the same time, stimulus wind-down may hurt meme stocks and speculative assets, as amateur investors would get less money to experiment with and might treat investments with more caution.
Inflation
As U.S. inflation hits a 31-year high, it’s not going to end soon. Higher carbon prices and environmental taxes, that will prevail due to the global sustainability commitment, increase production costs for industrials. Meanwhile, under-investment in fossil fuels has triggered a spike in energy costs which threatens to disrupt economic growth and output for a while.
Although inflation is going to recede gradually, black swan events may intensify the price rise. If inflation in the US persists for too long, it will pressure central banks to tighten policies, raising borrowing costs for highly indebted countries, and draining market liquidity.
As per Reuters information, Wall Street banks are already planning for a sustained period of higher inflation, running internal health checks, monitoring whether clients in exposed sectors could pay back loans, devising hedging strategies and counselling caution when it comes to deals.
Higher inflation is generally seen as a positive for banks, raising net interest income and boosting profitability. But if it jumps high too quickly, inflation could become dangerous for the banking industry. A sustained period of higher inflation would pose both credit and market risk to banks, disrupt record deals and public offering pipelines, as well as derail the global economy and stock markets.
Metaverse
The buzz word of the year – Metaverse – is understood as a persistent immersive digital space which creates a sense of presence in a realistic environment. Global brands and organisations believe it’s the technology of the future, so financial institutions won’t stay away for long.
Some banks are already making efforts to intensify their VR and AR tools. For instance, Bank of America has announced that it will launch VR training for its employees in nearly 4,300 financial centres nationwide to practice a wide range of skills including: strengthening and deepening relationships with clients, navigating difficult conversations, and listening and responding with empathy.
Meanwhile, BNP Paribas has launched a virtual reality app allowing retail banking users to access their account activity and transaction records in a VR environment. Bank of Kuwait is utilising VR in the new branch design, while Citi is exploring holographic workstations for financial trading.
The Industrial Bank of Korea (IBK) plans to launch on social media platform Cyworld Z’s metaverse. Other major banks in South Korea such as KB Kookmin, NH Nonghyup and Hana Bank also plan on moving toward the metaverse. Korean online bank K. has even created a virtual ‘financial town’, operating since July 1st on a metaverse platform. In its test virtual branch, customers can move with their avatars and talk to their banking advisers through video chat that starts automatically.
At the same time, 2022 won’t likely bring humanity to a unified virtual world. The concept is still at its early stage, and experts believe it would take some time to deliver a high-quality interconnected ecosystem where numerous business entities will be equally represented. There will be separate corporate versions of Metaverse though, created by each brand investing in the emerging trend. Those Metaverses will need their financial systems too, with blockchain technology most likely to be the backbone.
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