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The future of finance in 2023 and beyond

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Venkatesh Varadarajan, Partner, Financial Services, Infosys Consulting

 

2022 put the UK though one of the most uncertain financial climates seen in over 40 years, with inflation and the cost-of-living crisis putting consumers, businesses, banks and government under enormous economic stress.

2023 will be a time for re-evaluating investment and streamlining processes. Banks will be focused on playing their part in protecting and supporting consumers against both fraud and financial instability, plus trying to stay competitive against tech-savvy challengers. Based on these key priorities, here are five banking trends I expect to see in 2023.

Banks are in wait and watch mode

The switching trend will continue into 2023 as consumers search around for better deals amidst a difficult economic situation. Banks are in wait-and-watch mode right now. They are passing additional costs on to consumers, effectively bumping up interest rates in the sentiment that these will increase even further next year. It’s unlikely they will go head-to-head with each other and offer aggressive rates, due to ongoing market uncertainties. We’ve already seen them take stock, withdraw offers and hike up mortgage rates. High rates will remain well into next year, and at least until the market situation stabilises further.

The power of AI in the fight against fraud

The globalisation of banking is opening finance up to a whole variety of new fraud situations. Increasingly, consumers can move finances online between standalone bank accounts in different countries, but this heightens the risk of money laundering and financial crime. In 2023, we’ll see more banks attempt to combat this by adopting tools that enable the earlier detection of suspicious activity in transactions. AI and machine learning tools have already seen a lot of traction post-Covid and during the economic bounce back. However, adoption will become more widespread as banks look to conduct data-backed sense checks which can identify causes and ensure the detection of fraud much earlier in the lifecycle.

Venkatesh Varadarajan

Both banks and insurance firms will continue to beef up operational, security and technology remediation activities to better identify potential risks. This means more audits of various processes, including legacy technology and disaster recovery. As threats increasingly target these business-critical areas post-Covid, we’ll see more programmes being driven under direct guidance from leadership, and teams bolstered by SMEs and external support.

Increased competition between big banks and smaller fintech players

Buy Now Pay Later (BNPL) is here to stay. It’s cemented itself as a new payment method, offering a flexible, faster way for consumers to purchase items. In the past year, we’ve seen UK banks like NatWest, HSBC, Monzo and Virgin Money all launch BNPL products, to increase appeal amongst younger customers where demand for the service is high. In 2023, we’ll see the bigger players move from strength to strength in this area, buoyed by consumers typically gravitating towards more established banks during economic uncertainty.

This isn’t to say smaller players like Klarna will suffer. In 2023, we can expect the tussle between the two sides to continue. As the cost-of-living crisis continues, a key challenge is ensuring consumers don’t overspend and fall into debt. Bigger banks have an upper hand as they can access rich customer data based on multiple transactions, credit cards and mortgages. On the other hand, fintechs like Klarna and Clearpay are far nimbler and quicker at mining this information. Both sides will need to better utilise these capabilities, as it’s likely more regulation will be introduced in 2023 requiring firms to check customers can afford to use their products.

The promise of the Metaverse 

The Metaverse is still a relatively small market, but it’ll grow substantially over the next decade—forecasts suggest by almost 40% yearly between 2022 and 2030. A lot of banks are already using the metaverse for training purposes, but it has huge potential to enhance the customer experience and excite customers to bank and shop for new products. Virtual banking is a growing space and can help keep banking costs down, reducing the need for physical space and enabling branch optimisation.

Big tech is already placing large stakes in this, and the intersection of tech and financial services will accelerate over the next few years. Major players like Meta, Apple, and Amazon all have a deep understanding of customer behaviour. They will use this data to wire up consumers in various ways and financial services are a critical component of this.

In terms of regulation, it’ll be smaller rules coming in that impact other channels, rather than big-ticket ones that we see in capital markets or investment banking. Like we’ve seen with certain sets of regulations introduced off the back of branch openings, then contact centres, then the internet and most recently mobile banking, the metaverse will be the next stage in this process as we look to virtual banks.

The generational appeal to stocks and shares

Capital markets activity will continue to grow despite market volatility as more consumers invest in stocks and Isas. Previously, the customer base in capital markets was very institutional in nature. However, the pendulum has swung, especially towards younger generations, thanks to the accessibility and ease of stocks and shares platforms online and consumers sitting on more savings from lockdown which they are willing to invest.

These platforms have not only increased awareness and knowledge around investing, but low or zero fees charged have made it far easier to invest smaller sums of money. We’ll see momentum with capital markets activity continuing into 2023 and beyond as younger consumers look to grow their investments in the long term.

Finance

Demonstrating fintech resilience in 2023

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Melba Montague, Head of Financial Services, Genpact 

 

Despite ongoing economic turmoil and a slowdown in investment, the UK has managed to retain the top spot as Europe’s financial centre, and London, as the Silicon Valley for fintechs. While 2023 looks uncertain still, fintechs are known for swift innovation and reinvention. UK fintechs in particular, will ride this wave, capitalising on the $28.2 million in capital invested in the industry in H2 2022.

However, the fintechs that come out on top will be those that focus on, and demonstrate to investors, one word: resilience.

To do this fintechs must remain laser-focused on operational basics to prove their worth. This is even more vital as the world watched the collapse of cryptocurrency exchange FTX and lender BlockFi in 2022. And with growing industry concerns around alternative finance, there is also no doubt that regulatory complexities will increase in the coming year, especially with a greater presence of Buy Now, Pay Later (BNPL) products on the market.

Access to capital will diminish sooner than you think

According to the latest Innovate Finance report, global fintech investment reached £75.6bn ($92bn) in 2022, a decrease of 30% from the previous year. The drop is the result of the macroeconomic and geopolitical disruption, but despite this, the UK fintech industry received £10.5bn ($12.5bn) in investment – only an 8% drop from a record-high 2021. This demonstrates great resilience in this space. Further, the report shows that the UK is still receiving more fintech investment than all the next 10 European countries combined and remains second in the world only to the US.

That said, for rapidly evolving fintechs looking to continue their scaling journeys across the UK and beyond, access to capital and a global slowdown in venture capital (VC) investment will test their durability in the market. Even as the cost-of-living crisis drives demand, inflation has hit BNPL companies, bringing down valuation as Klarna announced that it had closed its major financing round with an 85% decrease of its valuation, down to $6.5bn in the latter half of 2022.

This year, investors will want to see fintechs lower their reputational risks, follow regulatory advice to maintain compliance, keep customers well-protected, and make use of innovative technology to accelerate and scale their processes.

Regulatory complexities will increase

While the UK government cultivates a strong culture of innovation and boasts a strong reputation for financial services, it needs to be more proactive in its regulatory stance. This is especially true for areas of alternative finance, such as BNPL.

BNPL’s resurgence in recent years has made it an attractive alternative to traditional spending, but not without major risks. At present, BNPL is an unregulated, decentralised industry, and presents major risk to consumers borrowing beyond their means without adequate financial advice or safety nets. Arguably, BNPL has made it easier to create debt, with figures showing that 4 in 10 people will even use additional lending to pay off their BNPL debts.

With urgent calls for the FCA to advocate for new government regulations from the UK Treasury and consumer champions alike, this will begin to establish concrete guardrails for both fintechs and for shoppers looking to manage their finances. While waiting, providers must step up and protect customers as more structured regulatory models are finalised.

BNPL providers have also made growth commitments to investors. They will be expected to keep those promises this year, as well as maintain operational stability, all the while customer experience is not adversely impacted. It will be crucial for fintechs to take the high ground and look for innovative ways to both educate and protect their customers whilst preparing for regulations recommended by the FCA come into play this year.

Resilience will be critical

The FCA is expected to introduce new requirements to perform credit checks this year, fintechs, neo banks, and BNPL companies now hold a greater responsibility to identify those at risk and support them with appropriate measures.

This presents growing opportunity for fintechs to promote financial resilience to improve their valued customers’ financial health. For example, with open banking-enabled solutions, they can provide insight to customers looking to monitor and consolidate spending.

As the industry awaits these incoming regulations, the onus will remain with fintechs to ensure their products are not at risk of endangering consumer debts. As such, it is critical that a proactive approach to educate the consumer is taken to avoid exacerbating an already fragile cost-of-living crisis. This could be done in many ways, from improving financial education in schools and boosting financial literacy across the board, to turning the onus of accessibility on banks to ensure that customers can receive tailored, personal support and counsel on their finances.

BNPL providers must also ensure their collection process engages empathetically with its customers navigating through financial hardship. Providers should leverage data-driven insights and segmentation from data, technology, and AI (artificial intelligence) to align with BNPL users’ specific communication preferences and chosen payment methods.

In addition, machine learning, AI, and automation of complex manual processes will enable secure operations with consistent quality and controls, while finding new ways to pre-empt risk and meet compliance and reporting obligations.

Persevering in today’s financial landscape

Not only do fintechs need to demonstrate resilience to their investors this year, but they must encourage and enable financial resilience amongst their customers. Fintechs participating in BNPL schemes must be made aware of the potential pitfalls that come with unregulated short-term lending, as practice shows that it increases individual risk as consumers borrow beyond their means without sufficient financial advice and regulation.

Implementing advanced technologies, such as AI/ML and data analysis into fintech operations also improves efficiency, enhances the user experience, and saves cost, particularly vital during a time when companies are confronted with record-high inflation and a volatile stock market.

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Banking

E-commerce marketplaces have become more than third-party platforms

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By Luke Trayfoot, CRO, MANGOPAY

 

E-commerce marketplaces have become an essential driver of e-commerce growth. As found by Ascential in their annual Future of Marketplaces Report, by 2027, third-party sellers using marketplaces will capture 59% of global e-commerce sales. A trend accelerated by the pandemic. Marketplaces are helping more brands cater to the ever-changing needs of consumers.

As businesses are continually being challenged to provide a seamless shopping experience, marketplaces can support this venture. Without the added costs of warehousing, supply chain and logistics for additional products, marketplaces can help to alleviate some of those pressures, especially as consumer demand grows.

Now, marketplaces need to further evolve their offering through payments infrastructure, whilst remaining compliant with payment regulations.

 

The marketplace offering – lowering barriers to entry

 Beyond access to the best deals, seamless checkout and quick deliveries, marketplaces also exceed consumer expectations for an intuitive one-stop shopping experience. Through marketplaces, retailers can continue to evolve their proposition, collecting data on what their customers want and need and continually refining their offerings at the right time and in the right place (web/app).

Marketplaces can also support businesses entering new markets or competing with bigger players in their respective fields. Entering a marketplace network allows small businesses to quickly gain influence, benefiting from larger audiences and quickly generating high sales volumes.

With multiple sellers, many with an international presence, implementing a sophisticated payments environment is much more complex than building one for an e-commerce website. Trading globally has different rules and regulations to adhere to per country which means payments environments must be multi-layered, accepting various forms of payments, which can be an inhibitor to businesses scaling at pace. Marketplace’s innate customer-centredness must be maintained end to end, including the purchase journey, so a sophisticated environment is essential.

 

Building the right payments environment

 A crucial part of the customer experience, it is important that merchants provide a choice of payment methods at checkout. As payments have evolved, marketplace operators should consider what options they provide to sellers, and subsequently, their end consumers.

The number one expectation is of course payment security, which is a key step in building a long-term relationship based on trust. Increased control points, however, generally means more friction being introduced into the payment process, so this is a balancing act.

As the retail landscape continues to grow, so does competition and as new players enter the market, businesses must find new ways to innovate, and the creation of payment options is one of the most important avenue to do so.

 

Considering regulation at every step

 Increased marketplace activity has led to the introduction of regulation for the platform economy. In the UK, HMRC has implemented changes to VAT reporting requirements for digital marketplaces and their third-party sellers, especially for overseas sales. Across Europe, KYC (Know Your Customers) regulations intended to protect customers from data breaches on a marketplace and identify the persons (legal or natural) with whom the marketplace does business, as part of anti-money laundering and terrorist financing directives, have also been enacted.

As online platforms continue to play an increasingly significant role, the implementation of the Digital Services Act supports creating a safer, online experience for citizens. This regulation enables the expression of ideas, communication, and online shopping by reducing exposure to illegal activities and dangerous goods. Regulation can seem extremely daunting, especially for those looking to enter the market. However, its purpose is to protect both the business and users.

Marketplaces need to work with payment infrastructure specialists that can support providing methods for local users, as well as options that are familiar and trustworthy for a global audience. Additional flexibility also needs to be built in to adapt to different demographics to ensure that a variety of consumers are appropriately catered for. If a brand wants to establish itself in a new market, varied payment methods are not a nice to have, but a must.

Despite the current economic climate, global e-commerce will continue to grow in the years ahead. Those that will be able to stay ahead of the curve will ensure that their customers’ experience is balanced with greater choice and varied payment options, in tandem with regulatory compliance.

 

 

 

 

 

 

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