Unignorable changes are in the air.
We’re now heading towards the future so many of us envisioned when we first began our careers. A world where technology and finance collide to create unprecedented experiences. Where banks and FinTechs merge into fully evolved services.
The free-credit party is over. Banks can do more with less. And FinTechs must work even harder to remain competitive. But it’s not all bad news. It’s the start of a new beginning. A rising from the ashes.
We’re part of a pivotal moment in history
As time goes on and regulators tighten the clamps on this elusive asset, we’re likely to see it settle into becoming just another routine high-risk asset. Even the global trend of the metaverse and NFTs (Non-Fungible Token) are unlikely to reverse the centralising course of direction.
Like a delinquent youth growing up into an average run-of-the-mill person, crypto has been on a journey of self-discovery. Once so alternative – the reserve of drug lords, teenagers, and libertarians– over recent months its proved itself to be anything but a decentralised and alternative asset class. Its value appears to align and correlate with fiat currency and stock market movements.
1. Crypto reveals its true self
Interestingly, another direction is taking hold too. Smaller FinTechs and financial services are recognising the economics of using BaaS for their underlying technology too. We're likely to see more of these partnerships among forward-thinking firms.
Banking-as-a-Service (BaaS) will continue to gain momentum, evolving in several directions. The classic approach of non-banks incorporating banking licensed technology into their processes will continue to gather momentum. And banks will continue to learn and improve their offerings to maximise revenue efficiency.
2. New channels and new models
Those that can manufacture and distribute products simply and easily will be able to win over customers, who stand to benefit.
Rising interest rates, combined with the need for revenue means incumbents, new entrants and neos are all going to be in a competitive tussle as net interest margin becomes de rigour.
Innovative products, competitive pricing and seriously good promotion and placement are back in fashion for banks. The age of 4P’s marketing is back.
Over the past few years, many FinTechs have been successful thanks to superior user experiences, as well as incumbents being too limited by low margins to respond. But the combination of rising interest rates and banks embracing cloud-native technology changes this.
3. Competitive pricing reaches boiling-point
Cloud-native technology with a low total cost of ownership - and the kind of customer margins many banks can only dream of - opens the floodgates of opportunities.Expect those that embrace it to leverage their superior cost-to-income ratios and make up for the lost time.
One interesting case in point is Chase UK. This incumbent spin-off is a cloud-native platform, designed for multiple geographies and segments. It's this kind of tech-first thinking that will empower banks to create new and unforeseen services and products. FinTechs are advised to guard their turf, as incumbents reclaim old territory, and charter new courses with strong balance sheets behind them.
Another new dawn is awakening. After years of speaking about digital transformation, cloud-native platforms are now becoming mainstream for incumbents. (And it only took one global pandemic, three lockdowns and an impending worldwide recession to get there!).
4. Cloud-native comes of age
The new economic backdrop could impact the BNPL landscape significantly. As times get tougher, firms will need to stem the credit losses from their unproven decision models - and the regulatory burden which is likely to introduce friction and affordability assessments to one-click shopping experiences could erode revenue. This double pinch could see a consolidation in the market. We could even see some opportunistic banks entering the market through timely acquisition of devalued providers.
FinTechs dealing with credit will feel this pinch the hardest. Up until now, funding has been dirt cheap – virtually free. With so many firms relying on this, we could see loan-based services like Buy Now Pay Later (BNPL) tumble as the funding line gets pulled away and margins erode.
5. Buy Now Pay Later faces new hurdles
Rises in interest rates are initially helpful for banks as they improve margins and the bottom-line P&L. But if we slip into a real recession, it will put pressure on banks as invariably credit losses will go up. However, all the structural challenges and pressure that banks are facing, and have faced during the pandemic, are even greater today. The demand for better user experiences and the need to drive down the cost-to-income ratio becomes stronger every day. Any downward pressure on profit and loss will make those pressures worse. Some banks may of course delay change programmes, but the smart ones will accelerate them, and that provides opportunities for FinTechs.
Competition for those precious funds will increase over 2022 and beyond, with cash-positive companies and those showing cost control likely to come out on top. For fintechs, this puts extra pressure on the strength of their business models. It’s no longer enough to prove a concept, they will need to demonstrate that their tech is a sound investment with a clear path to cash in the midst of an economic crisis.
To slam the brakes on inflation, central banks are raising interest rates. Dramatically! The Bank of England has already hiked the rates at least five times this year. As well as making credit much more expensive, it also makes investors risk averse and much more reluctant to part with their cash. In the US, venture capitalist funding for fintech dipped by 21%, while funding for emerging hotspot India plummeted by 45%. When the market goes risk-off, often they move like sheep.
6. Pressure on FinTechs and banks
FinTechs have always strived to overcome the market challenges and they know how to get the job done. But the obstacle course is about to get even tougher. With rocketing interest rates, dwindling valuations and increased competition, here are six trends driving fintech today.