By Stephen Lemon, co-founder of B2B payments firm Currencycloud
When we look back at the state of the economy over the past few years, its easy to feel gloomy. It’s true that times have been extremely tough on many industries. Fortunately, though, we’re now seeing the green shoots of recovery in many countries, including the UK.
Some industries, like fintech, have even thrived in the context of rapidly changing consumer preferences and digitalisation. So, how will we look back on 2022?
We’re witnessing the convergence of several long-term trends, and many companies in the industry are flush with cash after last year broke investment records. In my view, it will be a defining year for the fintech industry.
Decentralised finance gets real
Few will be surprised if crypto continues to be red hot this year, but media fanfare around the likes of Dogecoin and Bored Ape NFTs belies some more intriguing developments across the world of decentralised finance.
Take CBDCs – we’ve seen the UK government continue to make noises around the development of a British CBDC – a so-called ‘Britcoin’. A relatively unproven concept, CBDCs are nonetheless a tantalising prospect to many: central banks could gain a razor-sharp monetary policy tool, quite unlike anything they have today, with the potential to apply different interest rates across different parts of the economy. But it’s a hot point of contention: the House of Lords Committee recently concluded there was no “convincing case” for a Britcoin. Whatever happens, you can expect plenty of rigorous debate on the topic this year.
Of course, cryptocurrency is just one application of DeFi. By removing intermediaries and enabling finance to become an action taken up directly between two individuals, or indeed individual companies, DeFi could have massive implications for banks and other financial institutions, while potentially revolutionising everything from music royalties to contract law.
We grow closer to cashless than ever before
Following the pandemic, we’ve seen a dramatic increase in businesses that were previously reluctant to embrace digital payments, like cafes and public transport, doing just that. Adoption that would have taken years has happened in the space of a few months. Now just one in six payments is carried out with cash.
In the UK at least, full-scale lockdowns look as though they are a thing of the past, but the changes that have taken place in terms of the digital payments landscape will endure.
That means a truly cashless society looks closer to becoming reality than ever before, and that comes with consequences. For some, it will be a boon – like the market for mobile point of sale (mPOS) terminals, used to take digital payments, and the accompanying businesses and software providers that support the technology. But it will also carry risks, especially for smaller merchants who need to process lower value transactions, as well as those consumers who continue to rely on cash.
Ditching physical money also has privacy and security implications: a digitized currency means a traceable one, something sure to rile privacy advocates, and more digital cash transactions become an even bigger target for increasingly sophisticated cybercriminals.
Herein lies the opportunity for the fintech industry. These problems need answers now, not in 10 years’ time. Already there are some intriguing solutions being developed, like blockchain-based digital identities that are secure and allow users closer control over their data. Watch this space.
Fertile ground for embedded finance
Two convergent trends point towards 2022 being a vital year in embedded finance – the term used to describe the act of companies (often non-financial ones) integrating financial products or services with their existing business.
Firstly, we’ve seen fintech companies increasingly focus on developing services that are made available through APIs. An API is a code that lets two applications talk to one another, and in practice this allows businesses to easily integrate features like payments, credit, and insurance to existing applications or services their customers are already using – like making invoice payments through an accounting package, or trading stocks within your banking app.
The second is the unprecedented digitalisation we’ve seen over the past couple of years. This means there are now many more companies with a strong digital platform onto which they can bolt on financial products or services.
If you also factor in the need for companies to identify new revenue streams in the wake of economic disruption, it’s easy to see why embedded finance is so attractive. Think of an online retailer that sells bicycles. While their main source of income is likely to be selling bikes, they can use an embedded finance solution to sell an insurance product along with every purchase – taking a revenue stream that relies on making a few individual, high-value sales and turning it into a steady stream of income.
Opportunities galore for the fintech industry
The next 12 months will be defining for the industry. On the back of a record-breaking year for fundraising and investment, many companies are flush with cash that they can use to launch new products and services, enter new markets, and buy up talent.
Each of these trends – from decentralised finance, to an increasingly cashless society, to a booming embedded finance market that lets businesses pick and choose financial products to offer their customers as if they were on a supermarket shelf – offer bountiful opportunities for those with an entrepreneurial mindset. It’ll be fascinating to see who grasps them.
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