By: Dr Pooja Lekhi, University Canada West
The COVID-19 pandemic has forced the banking industry to embrace change. In the last couple of years, consumers have switched to using digital alternatives, such as online payments and internet banking, more than ever. Due to a slow recovery in spending globally, point-of-sale (POS) payments are declining, and peer-to-peer (P2P) digital payments are increasing.
Consumers today are more likely to opt for online and digital payments instead of using cash and cards.
Just like smartphones have consolidated our hardware needs within a single device, super-apps combine many of our retail, social and banking needs. In 2022, we will see digital banking grow exponentially, with functions like checking balances, paying bills and making deposits embedded into broader platforms that include other services like commerce and social networks.
Some other trends we will see in banking in 2022 include:
Open banking will become more widespread
In 2021, embedded banking started building steam and is expected to grow faster in the year ahead. Banking services are now being offered to consumers through shopping websites or mobile apps. One example is Shopify’s e-commerce software for merchants that includes embedded payment services. The buy now, pay later loans offered on many retail websites are trending and expected to grow even more in 2022.
Banks and other financial services providers will try to present products to consumers on the platform where they are most useful. This could include offering mortgages as someone is buying a new home online, personal loans through home contractors, doctors and lawyers, or businesses getting bank accounts through accounting software.
Emerging Variable Recurring Payments
Variable Recurring Payments (VRPs) are one of the more exciting elements emerging in open banking today. VRPs and sweeping offer a major opportunity for people and businesses to ‘unbundle’ their banking services. Sweeping is a particular mechanism that can be developed using a VRP to automatically move (or sweep) money between accounts.
It would be even easier to have an overdraft with one provider, a credit card with another provider and a currency account with a third. Money could move seamlessly and automatically between accounts to meet payments and deadlines. It’s a genuinely game-changing advancement for open banking.
Banks launching digital currencies
Several central banks around the world are launching digital currencies and many more are thinking about it. A central bank digital currency (CBDC) is the virtual form of fiat money. As of October 2021, 83 countries were pursuing CBDC development. The United States wants to introduce CBDCs to improve its domestic payments system.
The goal of CBDCs is to provide users with the convenience and security of digital as well as the regulated, reserve-backed circulation of the traditional banking system. They are designed to function as a unit of account, store of value and medium of exchange for daily transactions.
CBDCs can prevent illicit activity because they exist in a digital format and do not require serial numbers for tracking. Cryptography and a public ledger make it easy for a central bank to track money throughout its jurisdiction, thereby preventing illicit activity and illegal transactions using CBDCs.
So, expect to see more financial institutions and government agencies sharing data and ideas on how to incorporate aspects of this new type of digital currency into the global financial system.
Collaboration between banks and fintech companies
On the one hand, we have the established banking infrastructure, credibility with regulators and a large customer base that still trusts banks; on the other, there’s the freedom to innovate and the agility to build tailored solutions for niche customer segments.
When Bank of America wanted to give its digital payment capabilities a big boost, its vision was to make it as easy as possible for customers to send, receive and request money via mobile. That’s when it partnered with Zelle, a US-based digital payment network.
Another example of a successful partnership is Cross River Bank and one of its fintech partners, Affirm.
Affirm has been making headlines with its buy now, pay later (BNPL) offering, but it’s Cross River that handles the compliance and financial end of the operation. For Cross River to build a BNPL solution of its own could be challenging, from product design and development through regulatory scrutiny, and for Affirm to own the financial side of lending, accepting deposits and processing transactions, they would have had to tap into multiple third-party infrastructures and undergo the same scrutiny by regulators.
Partnerships like these are proving how valuable these opportunities can be.
We can foresee more collaborations between banking and fintech companies to develop more exciting products for customers according to their needs and wants.
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