The COVID-19 pandemic has rapidly accelerated the digitization of the financial services sector. As with many other industries, global lockdowns forced financial institutions to quickly adopt remote services and expand their digital capabilities to continue meeting the needs of customers. This major shift in how customers interact with businesses means tech is more vital than ever for financial services companies, and the market growth of the financial technology sector certainly reflects this trend; this year, the global value of fintech is expected to reach $310 billion, more than double its market value from 2018. With the acceleration of digital innovation brought on by the pandemic, it’s crucial for financial organizations to consider market trends while investing in new technology. Alternative payment methods, digital banking, the adoption of API management platforms, and process automation dominated the fintech industry in 2021, and we expect these trends to continue in 2022.
Alternative Payment Methods
While quarantines slowed down in-person shopping, consumers migrated online, leading to an unprecedented boom in ecommerce in 2020 and 2021. Alongside this growth in online shopping, the use of cash decreased sharply, a trend that is expected to continue into 2022 and beyond. According to Worldpay’s Global Payments Report 2021, cash payments have declined by 42% since 2019, and online payments using digital wallets grew by 52% in 2021 alone. As the paradigm continues to shift, this year digital payments could surpass cash for the first time ever.
Along with the surge in use of digital wallets, short-term financing apps have also exploded in popularity, offering consumers the option to spread out the cost of purchases into multiple, interest-free installments. While Buy Now, Pay Later (BNPL) apps such as Klarna, Afterpay, and Affirm are not new, their popularity has grown exponentially in a short period of time—a 2021 survey found that 55.8% of shoppers have used a BNPL service, an increase of nearly 50% from the previous year. There are now ten companies offering BNPL apps, and Paypal recently joined the competition with its own version of the service, the Pay in 4 Plan. BNPL apps are loved by shoppers and merchants alike, so this year we expect to see a continued increase in online retailers offering the option and new BNPL apps entering the market. Worldpay projects that BNPL will grow by a staggering 181% through 2024.
As customers’ shopping habits have changed, so have their banking habits. According to a 2021 survey, more than 75% of Americans used a mobile device for their most recent banking transaction, and around 40% of younger customers visited a brick-and-mortar bank only as a last resort due to a poor digital experience. Rising to the occasion are neobanks, online-only banks with apps that are designed to cater to the mobile experience. While the breadth of services offered by neobanks may be more limited than a physical bank location, the standout features and streamlined digital experience for the user has more and more people opening new accounts. Chime, the most popular digital bank in the United States, has grown from 8 million to 13 million active users between 2020 and 2021.
The desire to ditch cash and credit cards in favor of financial service mobile apps will likely continue to drive consumers to neobanks in 2022; projections estimate that account holders of digital-only banks will rise from 29.8 million to 47.8 million in the United States alone. Traditional banks certainly recognize the potential of emerging challenger banks to disrupt the market; to remain competitive, banks worldwide have invested $1 trillion in improving their digital capabilities to retain loyalty from their customers.
API Management Platforms and Open Banking
While the finance industry has historically been reluctant to loosen its hold on customer banking data, recent laws passed in the EU, U.K., and Asia require banks to create application programming interfaces and open their APIs to third-party developers with customer consent. This new open approach to banking allows software developers to integrate data between apps and services for a more personalized digital experience for the user. APIs allow merchants, payment companies, and banks to easily and securely connect with one another to offer expanded services. APIs also pave the path for innovation by making it easier for developers to create new apps and services, powering the rapid digital transformation of the finance industry.
While the United States has not passed legislation requiring financial institutions to open up their APIs, in 2021 an increasing number of U.S. banks embraced integration options to match pace with the global fintech market. Open banking will likely soon become the industry standard, and the use of API management platforms is on track to continue growing substantially this year. The worldwide market size of API management is projected to reach $6.2 billion by 2024 as open banking ushers in a new fintech era. Legacy banks should take note and invest in upgrading their banking systems to make them more optimal for integration of APIs, or risk being left behind as the face of banking continues to evolve.
SEE IT IN ACTION: Certegy is a sophisticated risk management system for processing ACH payments used by retailers and financial institutions across the United States. Working in conjunction with existing Certegy risk assessment and fraud abuse detection systems, Sourcetoad built an API and interface to use for collecting payments on iOS and Android devices.
Artificial Intelligence and Machine Learning
As the pandemic forced businesses to shift more to remote working, financial organizations increasingly embraced automation out of necessity. Artificial intelligence (AI) and machine learning (ML) now play a central role for many financial institutions, as these technologies allow companies to automate time-consuming functions and services that were previously handled by employees. AI can perform problem solving tasks, while ML can learn from data, and the combination of the two technologies are powerful assets for the finance industry. With process automation powered by AI and ML, organizations can broaden their capabilities by streamlining services and freeing up skilled employees for higher-level tasks.
The sky is the limit with AI use-cases in financial services—from data management, risk assessment, forecasting, fraud detection, and customer service. Notably, AI can also be leveraged to handle sensitive financial transactions objectively without human bias. Lending and investing, trade decisions, and compliance analysis are all tasks that are increasingly automated by cognitive computing technology. The growing popularity of deploying AI for automation in finance is driving up its global value significantly; AI in fintech is projected to reach $22.6 billion by 2025, increasing rapidly from 2019’s market value of $6.67 billion. In 2022, we expect AI to become even more widely adopted by the finance sector as the use-cases for the technology continue to grow.
SEE IT IN ACTION: Industry Genome is a business ontology platform that uses intelligent data aggregation to specify relationships between companies and their industry classifications. The results are highly detailed dashboards and reports that promote smarter investment decisions.
Necessity drives innovation, as we have seen with the acceleration of digital transformation during the pandemic. As the world of finance continues its evolution into a digital-first new normal, consider the trends above to have an impact on your firm’s future. As you plan your organization’s tech investments in 2022 and beyond, it’s vital to find an experienced partner to help you on your journey.
Sourcetoad has been building software applications for nearly 15 years and understand how to transform customer demands, regulatory requirements, and long-term visions into effective technological solutions that work with existing core systems. Whether you’re looking to improve process efficiency or introduce a new customer-facing product or service, our team has years of experience developing, implementing, and maintaining successful projects like yours. We’ve designed and built bank payment processing applications, payroll management systems, accounting tools, business intelligence applications for investment banks, and a variety of other fintech solutions for forward-thinking financial services firms.
When you’re ready to begin developing custom finance software for your organization, reach out to schedule a 30- or 60-minute call. We’d love to introduce ourselves, learn about your needs, and hear how we can help turn your idea into reality.