OBSERVATIONS FROM THE FINTECH SNARK TANK
It’s the start of a new year, which means it’s prediction/trend/forecasting season for industry insiders (like me).
I always look forward to seeing what people have to say about what’s in store for next year, but to be honest, I’m usually disappointed with most lists.
A list that basically says “things that started this year will continue next year” isn’t very illuminating. Then there is the confusion between “prediction” and “trend”. Saying “things that started this year will continue into next year” doesn’t really qualify as a prediction, does it?
I recently received an email containing someone’s “open banking” predictions for 2023. Number three on the list: “The search for value continues.” Is that a prediction? I don’t even know what you mean by “value”.
In the early 2000s, experts predicted that each coming year would be “the year of the customer.” I’m still waiting on that.
Five predictions for banking and fintech in 2023
Hoping not to fall into the traps other experts have fallen into, here are my banking and fintech predictions for 2023:
1) Big banks will get into BaaS
Conventional wisdom holds that BaaS (banking as a service) is a small bank game due to the favorable exchange rates banks have under $10 billion (in assets).
For big banks, doing a 70/30 revenue sharing deal (fintech to bank, vs. 50/50 offered by smaller banks) is just a margin decision for a big bank like JPMorgan Chase or Bank of America. .
If the potential partner, which to me is more likely to be a large retailer or merchant than a fintech startup, promises a high payment volume or, better yet, loan volume, the big banks will be more than willing to take the hit in the exchange. margin.
However, big banks will not necessarily get into BaaS by partnering with consumer-facing fintechs. They will focus their BaaS efforts on the commercial or small business side, partnering with SaaS vertical providers who have existing relationships with companies in various verticals (for a good example of this strategy, take a look at Synovus Bank’s Maast).
2) Integrated fintech will be a bigger trend than integrated finance
Consulting firms like McKinsey and Bain estimate that integrated finance will grow to trillions of dollars of revenue in the US in the next few years. In a recent LinkedIn post, I wrote that by 2025 there will be no more than 300 banks providing BaaS services. Most commenters thought he was overestimating by a factor of three.
So if only 100 banks are going to be in the BaaS business, what are the other banks and credit unions going to do? Follow an integrated fintech strategy.
Embedded Financial Technology: The integration of financial technology products and services into the websites, mobile applications, and business processes of financial institutions. Cornerstone Advisors research found that more than 50% of consumers want their banks to integrate services like identity theft protection, data breach protection, subscription management and bill negotiation services with their checking accounts.
This strategy will be particularly important in 2023, as many banks will face a decline in loan volume.
As platforms like Square, Amazon, and Shopify diversify their service offerings (often into financial services, among others), they are deepening their relationships with their small business customers. An integrated fintech strategy focused on small businesses will be needed for banks to buck this trend.
3) Buy now, pay later will come back to the banks
Buy Now Pay Later (BNPL) providers will evolve from individual purchase financing to credit line financing. In other words, BNPL will become the new entry-level offering for credit cards. While there are providers that help banks offer BNPL services, very few banks show interest in this service according to Cornerstone Advisors’ What’s Going On in Banking study.
With fewer banks and credit unions focusing on credit cards in 2023, midsize financial institutions are potentially positioning themselves outside of future credit card growth. Many people, not just bankers, misunderstand the BNPL space. Companies like Klarna and AfterPay are not “BNPL companies”, they are merchant enablement platforms. They help merchants sell more, with payments being only a small part of the offer.
4) The Supreme Court will defend the constitutionality of the CFPB
If bankers think the CFPB is a thorn in their side now, just wait until they see what 2023 holds for them. In a blow to the banking industry, Roberts and Barrett or Kavanaugh will side with left-leaning judges to defend the constitutionality of the Consumer Financial Protection Board.
In general, the regulatory environment for banking in 2023 will be unpleasant. The FTC recently told Mastercard that it must provide other debit networks with the keys needed to convert account information from the tokenized card (encrypted for security purposes) to the original account number for online transactions. Apparently, for Washington regulators, merchant and retail revenue is more important than fraud prevention and consumer safety.
5) 2023 will be the “year of the chatbot” in banking
After several years of listening to pundits and futurists tell you how disruptive AI will be in banking, 2023 will finally be the year bank executives do something about it.
Not because they are paying attention to the calls from the experts, but because their children and friends will show them how great ChatGPT is.
Financial institutions also need to invest in conversational artificial intelligence to accelerate their digital transformation efforts, and many, particularly credit unions, seem ready to do just that. In Cornerstone Advisors’ What’s Going On in Banking study, one in four credit unions said they plan to implement a chatbot by 2023.
Although I am forecasting that 2023 will be “the year of the chatbot”, I am not predicting that the quality of many chatbot interactions will be particularly good.
Looking beyond 2023, banks will require more than just implementing a chatbot.
In response to the need for higher caliber digital service and engagement, financial institutions must implement Intelligent Digital Assistants (IDAs). What is the difference between a chatbot and an IDA?
Chatbots can be defined as rule-based systems that can perform routine tasks with general FAQs. IDAs are fully equipped with natural language understanding and can support a broader range of use cases with greater ease of implementation and onboarding, and more sophisticated, higher quality conversation capability.
For a free copy of Cornerstone Advisors’ 2023 What is happening in banking study, click here.