The past two years have been a catalyst for the growth of the FinTech (Financial Technology) industry and its adoption in day-to-day consumer life. The coronavirus pandemic paved the way for new forms of payments, transactions, and gadgets that took over since face-to-face transactions were not possible because of lockdowns.
According to Investopedia, FinTech “describes new technology that seeks to improve and automate the delivery and use of financial services.” Online banking, payment processing companies such as Stripe, and chatbots in banking platforms are examples of applied FinTech in the financial world. Adoptions of these technologies gave way to new companies working to satisfy growing demands for digital financial products. An estimated 26000 FinTech companies were launched last year, with an estimated volume of transactions of $8.49 trillion in 2022.
2022 was one of the best years for FinTech companies, with a market value of $131.95 billion, having grown 24.8% from 2021’s market value of $105.41 billion. The coronavirus pandemic accelerated the need for digital payment and new financial technology to satisfy the demands of an ever-growing customer base. But other areas in traditional finance have also helped it rise. Traditional banking has neglected areas of its business models such as small business lending, ineffective customer support, flexibility in payments, and in-person appointments. Growth in API (application programming interface) usage has permitted FinTech companies to source third-party businesses to develop products and services that work with them. In addition, venture capitalists recognize the potential in the FinTech sector and have injected large amounts of capital into existing and future companies.
This article will help C-level executives to understand upcoming trends in this growing segment and provide information to leverage and address pain points in their business.
5 FinTech trends you should expect to see in 2023
Having had a great 2022, things continue to look up for the FinTech industry both in adoption and market value. As new trends and business models continue to emerge, those are forecasted to make a big impact in the industry in 2023.
Virtual cards are like credit cards, but they work completely online. They contain the same card details as their physical counterpart, including the card number, expiration date, and CVV security code. Unlike traditional credit cards, the card information changes every time a purchase is made. This means that for every purchase you want to make, different card details will be provided by your bank to proceed with that purchase.
Virtual cards can come in two types: single-use cards or recurring (subscription) cards. Single-use cards work only for one-off payments, so once the payment has been made, the card will cease to work. Alternatively, recurring cards can be reused by charging them multiple times. This will only work for one assigned vendor and a stipulated spending amount. For this type of virtual card, changes can only be made by the card-holding admin.
Virtual cards help companies in a range of different ways:
- Reduce risk by helping protect companies from internal and external risk and fraud by changing the card details every time a different transaction is made.
- Monitor spending by limiting the amount given to each individual virtual card. Transactions can be followed in a real-time spending dashboard. This helps control spending limits for different teams in the organization without needing to micromanage.
- Virtual cards offer control because they can be locked and unlocked from a smartphone at any time.
Virtual cards are a great option for companies that need to manage expenses, want to control the amount given to spend to each employee, or who need an extra layer of protection for sensitive information to prevent bank fraud.
According to builtin.com, embedded finance is “ the integration of financial services like lending, payment processing, or insurance into nonfinancial businesses’ infrastructures without the need to redirect to traditional financial institutions.” Embedded finance helps companies give value to their customers by removing tedious paper and bureaucratic work. With embedded finance, companies can give agile attention to their customers in payment processing, lending, and insurance, among other areas.
The most common types of embedded finance include:
- Embedded Payments: Embedded payments help companies avoid lengthy checkout pages by allowing them to make one-click purchases. Customers then can choose their desired payment option, such as PayPal, Klarna, or Stripe, to finish their transaction.
- Embedded Credit: Usually seen as buy now, pay later (BNLP), embedded credit has become a great way to finance customer purchases. At your website or app checkout, users can pay in installments. The user takes a short-term loan at the point of purchase, only that the loan does not have any additional fees or interest rates. Some apps offering embedded credit include Afterpay, Klarna, Zip, and Affirm.
- Embedded investing: According to Nasdaq, “[Embedded investing] provides platforms with a launchpad to seamlessly integrate stock market investing into their vertical offerings.” It also allows investors to invest in their favorite stocks from their favorite platforms, be it a blog, a social media app, or their favorite website. Some interesting apps in the embedded investing space are Robinhood and Etoro.
- Embedded Insurance: Scott Stice, Principal Director of Strategy and Insurance at Accenture, defines Embedded Insurance as “any insurance that can be purchased within the commercial transaction of another product or service.” A good example of embedded insurance is purchasing travel insurance through an app such as Skyscanner when buying a plane ticket.
Embedded finance offers different tools for companies to give a better experience to their customers, offers the ability to upsell different products, and creates a one-click method of helping their product offer to become better through third-party apps.
Artificial Intelligence & Machine Learning
Artificial Intelligence (AI) can be seen as the simulation of human intelligence processes by machines, especially computer systems. AI helps FinTech companies analyze a huge segment of data, assisting them in automating processes, routine procedures, and customer service on a scale surpassing human intelligence and response times.
Machine learning (ML), on the other hand, is a subset of AI. ML is an application or subset of AI that allows machines to learn from data without being programmed explicitly. ML helps FinTech companies manage data for predictive analytics and helps give insights to support data-driven decision-making.
Companies can leverage AI and ML in FinTech to:
- Automate data automation and credit risk assessment to realize greater workflow efficiencies.
- Improve security through bank fraud analysis.
- Increase safety with features like biometric security.
- Gain a clearer picture of revenue generation with sales forecasting.
- Provide better customer service by implementing automated customer support chatbots.
- A better understanding of user behavior to improve operations and gain a competitive advantage.
Regulatory Technology, also known as RegTech, is a technology that helps the financial industry manage regulatory processes by assisting companies in meeting compliance obligations set by regulatory institutions.
RegTech uses big data and ML to help companies’ compliance departments reduce risk. The digitalization of the economy has given way to risks such as data breaches, hacking, and money laundering, among other fraudulent activities. Because of this, traditional compliance teams may not be aware of some illegal activities due to the rise in underground marketplaces.
RegTech helps to analyze and monitor transaction data in real-time, which have taken place online, and scrutinize these for any irregularities or issues that might arise. RegTech tools make these irregularities visible to the company so that they can analyze each case and see the correct method of proceeding.
The rise of RegTech companies helps companies that handle large amounts of data to understand and mitigate their risks. Using cloud computing and advanced ML algorithms, coupled with data that RegTech companies already own, they can mix both data inputs and help predict where the risk might lie so that the information presented to regulatory entities is satisfactory.
Open banking enables third-party financial services providers to access consumer banking information such as transactions and payment history. Open banking relies on APIs to connect consumer banking providers with third-party apps.
Instead of booking a meeting with a bank to access money, open banking allows customers to access their banking data through third-party apps. By enabling and giving consent to third-party FinTech apps, users get to experience accessing that data through different platforms in a secure and personalized manner. Open banking pushes big banks to innovate in how they do business since smaller, more tech-savvy banks have begun competing for their customers’ attention. This means better products, more innovation, and a better experience for bank users.
Apps like Mint and You Need a Budget leverage open banking systems to provide valuable information in the savings space for their clients. Accessing their customers’ banking data helps them tailor a different financial experience, catering to each unique customer’s needs.
Businesses can also gain a lot from the use of open banking. By being able to access real-time financial data, companies can be more effective in the way they manage and understand their money. Open banking also provides an alternative way of making account-to-account payments, which can be more cost-effective than credit card payments.
FinTech is here to stay and will become a big, if not the biggest, player in the financial industry. Understanding FinTech’s upcoming trends is a must for business owners who want to increase their companies’ growth levers.
Taking a look at the trends above, executives can better understand what options they have in store for the coming years to better address their pain points. Whether it’s customer relationships, fraud and risk management, or other improvements, FinTech will benefit companies and clients’ future growth and innovation.