Happy New Year!
I thought we would kick off this year with a look back at some of the trends that shaped 2021 and ponder how these will play out during the coming year in fintech. The progress that fintech made in 2020 accelerated in 2021 and I see seven key areas that will shape fintech in 2022.
Buy Now Pay Later Faces a Reckoning
Arguably the hottest niche in all of fintech in 2021 was Buy Now Pay Later (BNPL). The leading companies in the space continued to add customers and grow volumes at a frenetic pace while new offerings appeared on an almost daily basis. This included many banks that launched their own BNPL product in 2021, often in partnership with fintechs.
Along with all that growth came rumblings from consumer protection advocates and regulatory agencies. The CFPB has opened an inquiry into many of the leading players and there is already talk of adding BNPL payments to consumer credit reports. The reality is that consumers really like this product, so it won’t be going away any time soon. But in 2022 we can expect more attention from regulators as they look to put some guardrails in place.
Fintech Goes Public
One of the least talked about trends of 2021 was the fact that close to two dozen fintech companies went public and now provide detailed reports every quarter on the status of their business. This attention brings a maturity to the industry that has often been criticized by the incumbents.
This year will see more fintech companies go public although maybe not as many as 2021. What this really means is that fintech continues to become more mainstream and an established part of our financial system. With the gains made in the past two years, you would be hard pressed to find a traditional financial institution of any size that thinks digital innovation is not important in 2022.
We are Finally Seeing Changes in Overdrafts
For me, one of the most gratifying trends of 2021 was the changes that many large banks made to their overdraft programs. While I was a little early in 2019 when I wrote about the movement towards no overdraft fees I think 2021 marked the tipping point and the beginning of the end for this inequitable practice.
We saw a number of large banks announce they were either eliminating or reducing overdraft fees in 2021. Ally Bank and Capital One have decided to eliminate overdraft fees completely with PNC, Bank of America, and even Chase taking steps to help their customers avoid overdraft fees. With the CFPB and OCC taking a renewed interest in overdraft fees I expect we will see more movement in 2022 as banks seek less reliance on this kind of fee revenue.
Embedded Finance Takes Center Stage
The promise of “every company can be a fintech company” is nearing fruition. Of course, not every company should embed financial services into their customer offerings, but in 2022 those who want to do so will have plenty of options.
Whether you are looking for lending, payments, stock trading, checking accounts, or savings there will be multiple fintech companies looking to make this easy. So, we will see more embedded offerings from well-known brands as well as smaller banks and credit unions offering new services for their customers.
Cash Flow Underwriting Becomes the Data Enrichment Layer
Forward-thinking lenders have been touting their cash flow underwriting capabilities for quite some time now. And since the start of the pandemic, this capability became critical.
When I speak with lenders and credit data providers today there is talk about the next step in this process. It is one thing to have access to a borrower’s bank account data, thereby enabling cash flow underwriting, it is another to combine that data along with the myriad of other data sources into a sophisticated credit model. People are starting to talk about the data enrichment layer as the next step in underwriting tech.
Central Bank Digital Currencies Continue to Develop
CBDCs may well be the most important development in fintech this decade. If done right it could enable a Cambrian explosion of fintech innovation. And 2022 will see a lot of movement here. China has said it will be doing widespread pilots of its CBDC, possibly in time for the Winter Olympics next month. Many other countries are in the process of developing their own CBDC with the latest being Mexico, which announced over the holidays that they plan to launch theirs in 2024.
In the U.S. we have been waiting (for months now) on the Federal Reserve’s detailed plans for our own CBDC in a report that has been dubbed Project Hamilton. We should see that report in Q1 and I expect that will usher in a flurry of interest in CBDC innovation.
The Rise of Web3 in Banking
Web3 encapsulates the rise of decentralized blockchain-based ecosystems and 2021 saw this term being used to signal the next phase of the internet. In 2021 DeFi went from an obscure curiosity to widespread adoption as we saw a huge increase in the total value locked from $18.7 billion to $247 billion. It is still primarily being used by crypto enthusiasts with little in the way of mainstream banking adoption.
I think that changes in 2022 as we will begin to see some forward-thinking banks start to edge their way into DeFi. The initial primary use case for DeFi is collateralized lending, an activity that banks know very well. While there is still regulatory uncertainty I have had conversations with a couple of banks that intend to launch products in 2022. The rise of Web3 will be one of the most exciting trends to watch this year.
Now, there are many trends I did not include here that will also be important in 2022. I didn’t mention real-time payments, open banking, or NFTs and each of these will no doubt create numerous headlines in 2022. One thing is for certain, though, it is going to be a very interesting year in fintech.
