The fintech industry is on the top of its blooming, still, it has challenges to overcome and very rapid changes for the market to adapt to. We gathered in this article the main trends for the upcoming year, highlighting innovations, digital banking, startups, and others.
Digital-only banking is looming
The very first form of digital banking is dated back to the emergence of an ATM and spread of the credit cards in the 1960s. With the internet adoption in the 1980s, online networks evolved and offered a digital communication path between retailers, suppliers, and customers, and so the vending platform with it. The need for credit cards in the online world came naturally, and customers efficiently absorbed it.
It was in the 1990s when the internet gained its popularity and accessibility in the world, and online banking became as valid and normal as the traditional one. With the emergence of smartphones, and with generations grown in the mix of both digital and IRL spaces, online banking now is a new model of financial interaction.
No more digital finances are only for youth in the western world. And statistics prove it. One of Statista’s reports presents numbers of online banking users across the globe. In 2020 there were around 1905 million active online banking users, in 2021 this number grew to almost 2045 million. The prediction depicts that by 2025 this number will rise to 2555 million.
This survey proves a tendency that digital banking and new fintech companies are here to rival, and maybe even substitute the classical institution. At least when it comes to private and business accounts. In fact, digital banking is offering customers those benefits that keep them mobile and rapid. Here is a list of the digital banking trends that will make the industry even more valuable.
Digital banking trends
- Ecosystem development. Digital banking aims at proposing more and covering many payment sectors of daily life, containing it all in well-designed apps and web pages.
- Contextual solutions. With big data analytics and live metrics, the digital banking industry can offer customers a better experience.
- AI implementation. AI evolves quite fast, and online banking benefits from it. Redirecting manual routine work to algorithms, and also simple customer assistance to chatbots.
- Customer-oriented approach. Great opposition to the stereotypical physical banking treatment. As digital banks are mostly established and powered by young people, the customer approach is less heavily official and way more human-like.
- Sustainability. The trend that gets to all the industries eventually, and online banking is no exception. Sustainability in digital banks can mean a green initiative or inclusivity for customers and employees.
Blockchain in finance make-over
A blockchain is a type of database that is structured in a special way that makes it secure and hard to breach. Database in this case is electronic information on the device. This information can be stored in many ways, but when it comes to a blockchain, it is structured and separated.
A blockchain gathers data and puts it in groups, that are called blocks. Blocks hold pieces of data. They also have limited storage volumes and so, when a block is filled up with data, the other block is appearing, being chained to the previous one. Here is where the name ‘blockchain’ comes from. Afterward, all new data that comes behind a newly chained block is compiled into other blocks step by step.
A blockchain is commonly being utilized to decentralize access to data. So that no single individual or group has full control of it. Instead, all users collectively obtain it. To modify a piece of chain, a hacker would have to control more than half of all the devices in the same distributed ledger. It is highly unlikely, but still possible.
Blockchain technology is widely used in many industries and sectors such as cryptocurrencies, video games, energy trading, healthcare, and finance. In digital banking, blockchain is applied in anti-fraud measures, Know-Your-Customer identification technology, security in general, and smart contracts.
Intensifying fintech regulation
When we talk about fintech’s latest news we can not avoid major compliances that have already become a must and only will obtain more and more value from the international law perspective. Currently, we can highlight three grand global standards for huge financial institutions and new fintech startups, that for sure affect the digital banking industry.
First of all, the PCI DSS compliance. PCI DSS stands for the Payment Card Industry Data Security Standard. It imposes certain obligations for all the businesses in the world that process, store or transmit the cardholders’ data. The Payment Card Industry Data Security Standard is meant to secure the data during online payment processing. PCI DSS compliance is a must, and not abiding by it brings massive charges and potential termination of a merchant account.
Another standard for any new fintech company to know is GDPR. The GDPR or General Data Protection Regulation is the most powerful privacy and security law in the world so far. It was established in 2018 as an answer to changing internet privacy issues. The GDPR is the European Union law, and it protects all the people within the EU, no matter their location. And so it regulates any business in the world that collects, stores, or transmits both automatically and manually private data of the EU customers. Being not compliant menaces a 20 million euros fee or 4% of global revenue, whichever is greater.
At last, we must mention PSD2 in this list. PSD2 means the Second Payment Services Directive. The regulation impacts banks and fintech that have access to the clients’ payment data. The Second Payment Services Directive was adopted by the European Commission or Directorate General Internal Market. Its goal is to moderate payment services and payment service providers within the European Union and European Economic Area. It is PSD2 that requires an application of a strong customer identification technology. The absence of compliance with PDS2 would threaten a violation of local law.
2022 will bring us more native payments, deeply integrated experiences, and fluid purchases. From all of the trends and innovations, we would focus on the following: mobile wallets and mobile payments, contactless payments, identity verification technologies, AI, and machine learning.
Mobile wallets and mobile payments
A good example of a mobile wallet is Apple Pay or Google Pay. A mobile wallet is a virtual wallet that keeps cardholder data along with payment data on a mobile device. Mobile wallets are generally more secure than physical cards. A stolen card is easier to access, while a smartphone is much more protected. And mobile payments are way more convenient time-wise for both customers and vendors. Mobile wallets are already popular among payment methods in physical stores, and the demand will only grow in the future.
Contactless payment is a payment method that shapes the future until we go completely cardless. Contactless payment still requires the presence of a credit or debit card. But most of the time, it doesn’t demand the PIN or a customer’s signature. Still, it has a purchase limit that varies from country to country. We recently published an article about contactless payments and the way they work: “Contactless payment systems vs online payments”.
Identity verification technologies
Identity verification technologies are already an everyday case in digital banking. Starting with the account opening and KYC identification, and through all the other stages of confirmation and modification. The main purpose of all of the identification technologies is to reduce fraudulent actions and identity theft in the digital finance sector.
AI and machine learning
It has already been years since AI and machine learning algorithms are implemented deeply in digital banking. Mostly they reduce fraud attempts, comparing multiple factors that include IP address, location, number, along with the client’s behavior to declare a harmful action. But besides that, it is already a machine that does most of the routine and monotonous work, such as verification for example. Simple interaction is also a robot job, like chatbots that assist clients with minimal help. Chatbots sure can not solve complicated problems, nor can they freely understand human speech, but they can guide and interact while the human personnel is occupied.
Starting a fintech: what to be aware of
The fintech industry in general, along with digital banking, is not in its best shape, even despite all the trending aspects. Especially when it comes to starting a new business in finance. The most common reasons are the pandemic funding crisis, along with an extra overwhelming number of new fintech startups. The competition is quite harsh, and the market is booming with fresh ideas, which makes investors very careful in their choice.
Here we would like to list the most common reasons for fintech startups failure.
- Lack of industry expertise. Starting a digital banking business requires strong research and good knowledge of the industry. No need to implement it all. Still, you must understand the mechanism and select the niche correctly.
- Lack of strategy. Just trying to be good now and forever won’t save the day. Apply the marketing tools. And we do not mean advertising, we are talking about knowing the product, the customer, and understanding how to connect them.
- Careless attitude toward compliances. Ignoring legal compliances will eventually come up with massive fees, potential high-risk business labels, and even merchant account termination. Better to comply.
- Lack of onboarding guides. If the customer is confused at the very beginning about how to use the service, they will leave very soon. Onboarding guides are essential, even if it might seem to be obvious and regular, do not take risks with the first interaction, as customers do not yet have an attachment to the service, they would not stay to try again.
- Overcomplicating the product. It is better to select your precise niche and operate there, than trying to offer all kinds of solutions for all the matters. The product should be simple, enjoyable to use, and responsive to clients’ needs.
- Limited technical background. If you don’t have technical skills, hire a specialist who does. Dealing with fintech requires a strong awareness of technologies, as this expertise represents the ‘behind the scene work’.
China to lead the fintech revolution
Looking at the recent research of Statista, there are very impressive numbers regarding the China market. Total transaction value in the digital payments sector currently hits almost $3 million. At the same time, the market’s largest sector is digital payments, with a transaction value of around $2,9 million. Next year, the neobanking sector in China is expected to bring a revenue growth of almost 65%. And lastly, the number of users in the digital payments sector is projected to be around 1,224 million by the year 2025.
China is indeed on top of fintech growth. It is mostly so because of a stimulating ecosystem established by the wide use of mobile phones and smartphones, along with the internet connection. The digital payment ecosystem is growing to dominate in China thanks to the government’s encouragement of technological and financial development and innovation to support economic growth.
Smart contracts make it all work together
A smart contract is a new kind of decentralized application that performs business logic in reaction to happenings. Smart contract implementation can lead to money exchange, service delivery, data manipulation, privacy protection, and so on.
In the fintech industry, smart contracts help to make different kinds of financial services simpler and more rapid. Insurance companies often use smart contracts to establish formal arrangements and resolve claims. Stock markets usually interpret securities trading obligations in smart contracts to provide grounds for regulatory compliant trading. Banks and digital banking normally install smart contracts to process loans rapidly and reduce operational risks.