2022 will be both a challenging and an exciting year for financial institutions. Innovative new technologies are redefining the sector, shaping the services that financial organisations offer, the ways in which they interact with consumers, and the ways in which they apply new sources of data across departments.
The evolution of financial services is set to continue. Let’s examine the 5 top trends for financial organisations in 2022:
- Buy now, pay later (BNPL) will continue to grow
- Open banking will dominate the future
- Cloud-native systems will replace legacy alternatives
- Artificial intelligence (AI) and machine learning (ML) will increase in importance
- Cybersecurity continues as a top priority
Trend 1. BNPL will continue to grow
Buy now, pay later (aka BNPL) has radically altered consumers’ behaviour by allowing them to buy goods online and pay the cost back in a series of instalments. In other words, they can buy goods and services that they can’t afford—at least, not at that time. That’s why it has become so popular, growing at an annual rate of 39%. Indeed, the market as a whole is expected to be worth over $260 billion by 2025.
A recent Bain & Company report on BNPL points out that “for businesses in financial services, over the past few years it has been essential to have a fintech strategy. Now it’s also essential for businesses that intersect payments, lending and e-commerce to formulate a BNPL strategy.”
Take Klarna, for example, the leading BNPL player. The company recorded sales of $57.3 billion in Q3 2021—a $22.1 billion increase compared to 2020—demonstrating the growing popularity of BNPL. Interestingly, a massive 45% of UK-based 18 - 34 year-olds used BNPL over the past year. Given that Millenials and Gen Z will soon be the largest demographics (both numerically as well as in terms of purchasing power), we can expect BNPL to continue to rise in importance.
Additionally, BNPL companies such as German fintech startup Bilie are also entering the space to address the B2B side of BNPL. Billie has in fact added Klarna as a strategic partner, who in turn has subsequently become the world's first payment provider to offer a comprehensive range of BNPL payment methods for both B2C and B2B.
But there are some downsides to using BNPL—particularly on the B2C side. More than 2 in 5 people have struggled to repay what they owe when using BNPL, while 1 in 4 people used it to pay for something they couldn’t actually afford. When consumers can’t pay back what they owe, this will pose a huge challenge to financial organisations. Financial institutions that leverage BNPL need to collect what they’re owed. Otherwise, it doesn’t benefit the business.
So how can they do this? By using three future-proofed collections tactics: using multichannel communication strategies, letting customers self-cure their debts, and leveraging account management capabilities. This makes it easier for agents to contact past-due customers and to help both customers and the business to stay on top of the end-to-end repayment process.
Trend 2. Open Banking will dominate the future
According to Statista, the number of global open banking users “is expected to grow at an average annual rate of nearly 50 percent between 2020 and 2024, with the European market being the largest”. Considering how open data benefits consumers as well as financial players, it’s easy to understand why this trend will become increasingly popular moving forward.
By granting third parties access to consumers’ financial data, organisations can better understand how consumers behave, what they want, and most importantly, what they need. In turn, financial institutions can therefore improve their customer experience, which results in higher retention and engagement.
According to PWC, the “retail customer propositions that are enabled or enhanced by Open Banking will include:
- Account aggregation to provide single view of accounts across different banks
- Financial management tools using data analytics to identify spending patterns to budget and save more effectively
- Tailored product offerings based on transaction history, such as customised holiday loans based on flight and hotel bookings and anticipated spend
- Increased access to credit for ‘thin-file’ customers due to improved access to financial data”
PwC goes on to state that Open Banking has created a £7.2 billion revenue opportunity—and 71% of SMEs expect to adopt it by 2022. Financial institutions are beginning to act as they look to embrace this opportunity. 47% of banks developed Open Banking APIs in 2021, with another 25% looking to do so in 2022. In addition, this momentum has been furthered by political action, such as President Biden’s Executive Order on Promoting Competition in the American Economy.
Expect Open Banking to dominate the financial services sector in 2022 and beyond.
Trend 3. Cloud-native systems will replace legacy alternatives
Leading financial organisations continue to embrace cloud-native systems. For example, in 2020, HSBC signed a long-term deal with Amazon Web Services to move their existing legacy functions over to new cloud-based alternatives. And then there’s Deutsche Bank, which partnered with Google to deliver a cloud-native “fully-managed environment for applications”.
But why is the cloud so important? According to IBM, cloud-based systems support increased agility, decrease IT costs and operational expenses, and play a key role in ensuring that employees can be effective when working remotely.
This last point is especially important. Hybrid working is the future—in fact, 90% of employees surveyed by Loom are happier with the increased freedom that working from home gives them. By leveraging cloud-native systems, employees can access crucial financial data at any time and any place. With cloud-native capabilities, financial institutions can maintain high performance at all times and dramatically improve both customers’ and employees’ satisfaction.
Cloud-native architecture and systems also enable faster new feature development and automatic upgrades (instead of disruptive updates that require downtime).
Trend 4. Artificial intelligence and machine learning will increase in importance
Artificial intelligence (AI) and machine learning (ML) make organisations more efficient and more effective. These technologies gather, sort, and analyse enormous datasets in seconds—and are almost error-free. Financial institutions can spend their time acting on these data-driven insights, instead of wasting unnecessary time and effort manually digging through the data itself.
IDC predicts that by 2026, 85% of organisations will use AI and ML in some capacity to augment their foresight, resulting in a 25% increase in productivity. Low-code/no-code AI is a great example, allowing people without coding knowledge to build applications themselves. While Gartner reported that “low-code tools will make up 65 percent of all app development by 2024”, Forrester also pointed out that low-code/no-code industry spending is expected to increase to approximately $21 billion by 2022.
Whether these technologies are used to personalise service offerings, better understand consumers’ behaviour, or reduce errors, one thing is for certain: AI and ML will only grow in importance moving forward.
Trend 5. Cybersecurity will become a top priority
Cybersecurity has always been crucial for financial institutions. However, with the number of data breaches up until the 30th of September 2021 exceeding the total number of events throughout 2020 by 17%, it’s clearly more of a concern than ever before. These cyber attacks have a wide-ranging impact on organisations. In fact, 42% of businesses say that digital fraud prevents innovation and halts their expansion into new channels.
Cybersecurity breaches are particularly damaging for financial institutions. Their customers’ financial and personally identifiable information (PII) are incredibly valuable for hackers—and security breaches may well result in the bank losing a huge quantity of customers as well as revenue.
Hence, financial institutions must prioritise cybersecurity in 2022 and beyond. They must not only optimise their own internal processes, but they must also be selective about only working with third parties that put data security at the heart of everything they do.
An exciting year in store
The financial services sector is rapidly evolving. The 5 trends outlined above will only accelerate this evolution, dramatically redefining the industry over the next 12 months. The pace of change is so quick that financial organisations cannot afford to fall behind, even for a moment.
Working with innovative partners, ones that understand and implement new technologies and trends, is the best way for financial players to future-proof their business going forward.