FINTECH TRENDS TO LOOK OUT FOR IN 2022 WHICH WILL CHANGE THE WAY WE DEAL WITH FINANCE!

  • Embedded Finance is estimated to be a $3.6 trillion market opportunity (Matt Harris, Bain Capital Ventures)

Embedded Finance means it’s embedded in an existing ecosystem, it complements the customer experience already there with i.e. ‘one click finance/insurance, it’s the dashboard, app or POS where your customers already interacts.

To put this opportunity in perspective, it is larger than the mobile, cloud and the internet value creation over the last 25 years! Embedded lending is expected to account for nearly a third of the opportunity and some of this impact we already see today. Think about the embedded payments, you book and pay your taxi, food delivery, groceries delivery or Amazon delivery in one simple click.

Rob Straathof
Rob Straathof

Klarna is one of the leaders in embedded consumer lending with their Buy Now Pay Later proposition, you purchase your fancy new pattas (Dutch slang for shoes) in 3 instalments from your favourite webshop without having to think about payment or repayment. It’s all automated in one-click from your bank account, whilst Klarna does the KYC, credit and bank account checks in less than a second. Other applications will be the ‘checkout free’ shopping experience that Amazon is pioneering, which will come to the hospitality sector soon. And for SMEs, we will likely see the large market of leasing / hire purchase disrupted by instant financing offers on equipment, that is traditionally still majority done manually through broker networks.

 

  • Revenue Based Finance is celebrating it’s 150 year anniversary, and is making a rapid return to become the standard for Small and Medium Business funding

Yes – you read that correct… the rumours are that Revenue Based Finance dates from the late 1800s where oil wells were funded with this construct. High upfront cost to develop an oil well required creative structuring for repayment through a percentage of their future revenues. Over the years, this construct has been around as the Merchant Cash Advance and is now rapidly becoming main stream for funding fast growing eCommerce merchants to purchase inventory and high ROI marketing so they can double down on growth without diluting themselves with expensive venture capital equity raises.

Liberis has been pioneering Revenue Based Finance since 2007 and funded over $800m in more than 40,000 transactions. Small and Medium size business owners love the construct as it doesn’t dilute their equity, the outstanding amount repayment flexes as a percentage of their daily sales so they don’t ever have to think about making the monthly payments, and pricing is typically a flat fee so throughout the pandemic, Liberis’ impacted customers weren’t hit with increased fees or ballooning interest. That’s truly fair and flexible for the business owners!

 

  • Buy Now Pay Later will become a true challenger to the credit card but regulation is looming

Buy Now Pay Later has been around for many years by banks and store credit, though the embedded finance version of BNPL started off in the late 2000s with players like Klarna, Affirm and Zilch having made the mainstream public embrace the term BNPL and as a result they have shown record breaking equity raises and valuations! This trend is here to stay, it’s easy and fast checkout journey and merchant revenue boosting features mean it’s liked by both sides of the transaction. We will see a rapid advancement in the number of players with banks and credit funds looking to take a slice of those consumer debts, and commercial BNPL startups are likely the trend of early 2022.

But regulators are moving in to review customer impact of BNPL as they fear there are negative consumer impacts especially by young adults who don’t realise you have to repay this over time (!) and get themselves into trouble due to the easy availability of credit and BNPL players not having to report their debts to the credit agencies. My view is that the UK, US and other regulators in Europe will look to regulate BNPL similar to other consumer credit with stringent affordability checks, credit limits, credit agency reporting and regulated debt collections. In Sweden the regulator has already moved in, and in the UK the FCA is reviewing the sector. And as they showed with High Cost Short Term Lending and Guarantor loans, the FCA moves in quickly and with no mercy if players aren’t having the customers’ best interest at heart.

By no means will this imply that BNPL is just a fad which will disappear in the next years. It will grow rapidly because of consumer preference, ease of use and rapid online adoption. Though over time, the regulators will imply the same framework on BNPL as it has done on credit cards and personal loans. This means BNPL players will have to conduct appropriate affordability checks, and regulators will ensure sufficient consumer protection which will likely reduce the amount of BNPL players in the market. And reporting outstanding balances on peoples credit files will help reduce consumer over-indebtedness or long term indebtedness if people lose track of the many different credit solutions they’re using.

 

  • One Click anything will become the defacto way of interaction for all embedded finance

I’m probably not the only one who facepalms when I have to fill in all my details for the 3rd time when buying something online or when applying for insurance/cards/loans/online payments etc. With the pre-population features by Google Chrome / Apple Safari / Edge, online payments and address details are made much simpler, but what really makes it stand out is the experience by i.e. Amazon Payments, Shopify and Paypal Checkout on websites. Though you still have to log in with your email and password (or face scan for Apple).

In 2022, many fintechs and hopefully several banks as well will roll out one click checkout for their products, including one-click finance, one-click insurance and for existing Liberis business customers, one-click funding that will hit your bank account in as little as 5 minutes. So Small Business owners don’t have to wait weeks for finance to buy that bargain discounted inventory, pay for goods that won’t be delivered until 3 months from now, or launch a great marketing campaign!

 

  • Will Crypto lending become mainstream?

Crypto is here to stay, even the ‘never crypto’ crowds can’t deny that blockchain and crypto will become mainstream over the next 10 years, crypto is here to stay in one way or another for both the Decentralized Finance (DeFI) world as well as in traditional finance. This can be money transfer, financial exchanges, insurance, healthtech, identity, lending, etc. What it’s really great at, is reducing the ‘cost of trust’ between 2 or more parties. Over the past year, we’ve seen many companies who have launched ‘lending’ features for crypto to allow for speculation on crypto and mostly hedge funds to borrow crypto through middlemen, which allows high interest rates to be paid to retail crypto investors.

So far, the SEC has shut down several of these programs such as Coinbase’s Lend program, and deems them ‘securities’. There is a huge appetite for higher interest rates, especially in the light of high inflation, and savvy adopters of crypto will look to monetise their considerable crypto deposits. It’s a high risk, potentially high return strategy though if there is one key learning from the pandemic and the enormous amount of ‘free money’ pumped into the economies, is that consumer demand will drive rapid innovation and the FinTech platforms will find a regulated way to offer crypto lending products to stay ahead of the competition.

 

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