What does the future of Fintech hold for founders, banking partners, and financial technology providers? Since 2008, a Payments Innovation Jury has been convened to investigate how innovation in Fintech and payments happens and what makes innovative ideas into commercial success. Taking part in this year's Jury and research is our very own Co-founder & CEO, Alistair Cotton.
This article brings you the latest and most significant findings of the Payment Innovation Jury 2022 research. Read on to find out what’s hot and what’s not in the modern world of Fintech.
About the Payments Innovation Jury report
The Global Payments Innovation Jury of 2022 comprises the views of 79 global industry leaders who shared which innovation will most likely be the next big thing.
So far so similar to many other research papers. This research paper, however, applies a clever twist by looking at areas of payment innovation where sweeping claims are frequently made, and jury members give their views on the credibility of these claims. According to the research, “This Jury has broken new ground because it includes views from not only major investors in payments companies but, in a highly significant development, several regulators and public policy organisations.” (Global Payments Innovation Jury, 2022).
Research exploration paths
Drawn from all five continents and all major industry stakeholders – established financial institutions, Fintechs, national payments operators, investors, and regulators – the Jury gave their views on the following areas:
- Whether the rise of new payment types, such as mobile money and real-time account-to-account payments, lead to the development of new dominant payment forms?
- Whether and how Central Bank Digital Currencies (CBDCs) increase innovation?
- Which of the many regulatory and market initiatives encouraging Fintechs to participate in payments are most successful?
- The value proposition and future role of Buy Now Pay Later (BNPL)
Top Fintech innovation findings
Real-time Account-to-Account (A2A) payments and mobile money transactions
Real-time Account-to-Account (A2A) payments - whereby money moves directly from one account to another without the need for additional payment instruments - are expected to increase steadily over the next five years.
Mobile money transactions - financial transactions and services consumed using a mobile device - are also likely to grow continuously. However, challenges identified for real-time A2A and mobile payment include strong card adoption in developed countries that may deter A2A adoption.
Card payments, also referred to as embedded cards, allow Fintechs to build a frictionless buying experience, enabled with as few clicks as possible.
The continued growth of card payments at a Compound Annual Growth Rate (CAGR) of 3% (Money, Credit Card Statistics, 2022) will be harder to achieve than in the past due to the fee structure, which usually favours financial institutions to the detriment of merchants and therefore will keep attracting regulatory intervention.
Regulation and policies reducing barriers-to-entry
From a legal perspective, Fintechs utilising a Payment Institution (PI) licence means they are effectively a channel partner of the financial institution they work with. In most cases, Fintechs who choose this agency/distributor model don’t contractually own the customer relationship and must work under the licence holder’s rules.
More new Fintech market entrants are likely to be seen due to national government policies and the introduction of regulatory frameworks aimed at facilitating lower barriers-to-entry costs through the creation of payment institution licences with lower regulatory capital than the traditional banks. These frameworks and policies are also, in part, likely to positively influence the growth of BaaS.
Authorised third-party service providers can access read-only consumer banking and financial data through banking APIs. Due to lower costs, reduced fraud and improved cash flows, open banking is becoming more widely available, with Europe and the UK considered as the cradles of open banking. Still, in some countries, open banking has been left to key market players to develop, resulting in a lack of standardisation and slowing progress.
Banking as a Service (BaaS)
Often referred to as the provision of banking products and services via third-party non-banking institutions, BaaS enables Fintechs to bring specialised digital banking products to market quickly. As a result, BaaS is developing rapidly with an array of new-breed neo-banks offering attractive financial services to customers.
In addition, banking providers, aggregators and orchestration platforms are leading the path of innovation with various products and features such as on-demand core banking services, pre-built integrations and automated workflows with minimal intervention. However, according to the Jury, the hopes that traditional banking would benefit from these technologies seem misplaced.
Buy Now Pay Later (BNPL)
As its name suggests, BNPL enables consumers to make purchases and pay for them at a future date by utilising short-term financing and or lending terms.
Growing at a CAGR of 45%, BNPL is expected to reach USD3.6 Trillion by 2030 (Fintech Futures, Straits Research, 2022). Despite its rapid expansion, BNPL usage is seen by the Jury as a short-term occurrence rather than a long-term game-changer due to credit losses likely to increase over time.
Central Bank Digital Currencies
As of July 2022, there were nearly 100 CBDCs in the research or development stages (The International Monetary Fund, The Ascent of CBDCs, 2022).
The introduction of Central Bank Digital Currencies (CBDCs) is viewed as highly likely in most markets, although in very different timeframes. Adverse effects are expected to be experienced by traditional banks, with Fintechs more likely to benefit from CBDCs. However, the Jury was not convinced that sufficient demand for CBDCs exists, at least not enough to justify the high technological costs of developing the proper infrastructure to support CBDCs.
Winners and losers and why BaaS is here to stay
According to the Jury, real-time A2A and mobile payments will most likely create significant user benefits. The two areas “where the Jury felt that the reality diverted most from the promise were crypto and BNPL.” (Global Payments Innovation Jury, 2022).
Banking-as-a-service or BaaS enables Fintechs to reach a more significant number of customers at a lower cost by teaming up with various non-financial providers. Furthermore, BaaS is enabled by the seamless integration of financial services into multiple customer activities.
Banking Application Programming Interfaces (APIs) play an essential role in allowing BaaS services, such as FX, virtual account issuance, customer onboarding and many more, in being offered by non-financial organisations. Customers increasingly use these non-financial digital platforms to quickly and conveniently access daily life services such as digital banking, e-commerce, travel, retail, health and telecom.
Creating the APIs to facilitate seamless integration of financial services whilst ensuring they adhere to strict risk and compliance protocols is one of the biggest hurdles to embedded BaaS; a burgeoning market of intermediary Fintechs aim to reduce this task by building much-needed API infrastructure for other nonbanks. As a result, integrating financial services will become even more accessible so startups and established businesses can quickly and easily add financial products to their offerings and improve their user experience to become more competitive in an ever-evolving market.
"Nobody can argue that BaaS is a significant innovation in the digital delivery of financial services. Cloud computing and financial Infrastructure-as-a-Service, are also essential in financial technology innovation today, offering security, flexibility, mobility, and resiliency." Alistair Cotton, Co-founder & CEO, Integrated Finance.
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