by Stephen Lemon, Co-Founder and Vice President, Strategic Partnerships & Corporate Development at Currencycloud
It’s become cliched to point out the strangeness of the past few years, but it remains true. In the context of the past 24 months, making bold predictions for the next 12 might seem a bit foolhardy.
But while it’s not been easy, the financial sector has managed to perform well amid uncertainty. Perhaps most promisingly, fintech, an industry that exists to digitise, upgrade, and improve old and outdated processes, has thrived in an era of change and upheaval.
This progressive and reformist nature means that when the fintech industry does well, it brings others with it too – and fortunately, the industry looks to be in a strong position for the year to come. Here are three key reasons to be optimistic about the sector in 2022.
This year will be a tipping point for embedded finance
2022 will be a big year for embedded finance, the term used to describe the act of companies (often non-financial ones) integrating financial products or services with their existing business. A bicycle retailer, for instance, may see bike sales as its main revenue source – but it could supplement this by offering bicycle insurance products as well.
But why will 2022 be such an important year? Two convergent trends point in this direction.
Firstly, we’ve seen fintech companies increasingly focus on developing services that are made available through APIs. An API is a code that lets two applications talk to one another, and in practice this allows businesses to easily integrate features like payments, credit, and insurance to existing applications or services their customers are already using – like making invoice payments through an accounting package, or trading stocks within your banking app.
The second is the unprecedented digitalisation we’ve seen over the past couple of years. This means there are now many more companies with a strong digital platform onto which they can bolt-on financial products or services.
If you also factor in the need for companies to identify new revenue streams in the wake of economic disruption, it’s easy to see why embedded finance is so attractive.
Niche fintech services begin to broaden their proposition
Over the past few years, companies from fintech subsectors like insurtech and wealthtech burst out of the gate in what you might call the great unbundling – niche providers offering a single, specialist service in insurance or wealth management, and not doing a whole lot else.
Increasingly, we’re seeing that logic flipped. In effect, the great unbundling has become the great re-bundling. Now those same specialists are beginning to broaden their offering – like wealthtechs that have won customers with a core proposition now providing other banking services.
Some forward-thinking industry commentators believe the future of financial services lies with companies that are best able to curate a selection of very high-quality services and APIs and offer them to customers – not necessarily the businesses who develop proprietary propositions.
This means many businesses that were once happy to sit alongside other niche providers are now vying for the same customers. Who wins will play a big part in deciding what the future of the fintech industry looks like.
Crypto mania to mask more interesting emergence of real-world DeFi applications
Few will be surprised if crypto continues to be red hot this year, despite inevitable continued volatility. Perhaps the most interesting aspect of this will be companies, governments, and other groups introducing more practical use cases for crypto and other forms of decentralised finance, or DeFi.
We’ve already seen growing support for Bitcoin as legal tender in Latin America following its adoption by El Salvador, a move derided by some but ultimately carried out as a play to tackle import-driven fluctuations in domestic prices.
We’ve also seen the UK government continue to make noises around the development of a British CBDC – a ‘Britcoin’. A relatively unproven concept, CBDCs are nonetheless a tantalising prospect to many: central banks could gain a razor-sharp monetary policy tool, quite unlike anything they have today, with the potential to apply different interest rates across different parts of the economy.
Of course, cryptocurrency is just one application of DeFi. By removing intermediaries and enabling finance to become an action taken up directly between two individuals, or indeed individual companies, DeFi could have massive implications for banks and other financial institutions, while potentially revolutionising everything from music royalties to contract law.
A year of optimism for the fintech industry
The past few years have been dominated by doom and gloom. Fortunately, there are reasons to be optimistic for 2022. What’s good for the fintech industry – whether a company that moves money around the world more easily, or one that helps businesses spot financial crime more easily – is often good for society too. I think that’s as good a reason as any to be optimistic for 2022.
The Evolution and Challenges of Crypto Regulation
Cryptocurrency regulations are evolving quickly around the globe with authorities responding to developing risks professed by criminals exploiting the latest payment methods to mask and launder the profits from their crimes.
According to William Je Founder & CEO, Hamilton Investment Management Ltd, this has warranted the introduction of a more stringent level of due diligence by additional bodies to introduce preventative measures.
William Je Founder & CEO, Hamilton Investment Management Ltd explains: “The past ten years has seen several structural changes in Know Your Customer (KYC) and anti-money laundering (AML) regulations in both Europe and across the world. High-profile money laundering cases and the penetration of illegal monies into global markets have caught the attention of regulators.
“As regulators improve their understanding of these criminal practices, AML requirements have also been improved. However, these improvements have been a reactive process.”
To address the challenges of the blockchain ecosystem, the European Union has started to introduce financial regulations that further bolster the regulatory system in order to improve licensing models. Many member states are regulating crypto assets individually, and Germany is leading the way in being the first to regulate.
Je continues: “These national driven regulations clearly point to a future pathway for crypto companies, outlining the requirements for obtaining and maintaining a financial license from the regulator.
“Compliance, however, is to my mind essential as it not only boosts investor confidence but adds a necessary layer of protection to investors.”
As crypto evolves, so have regulatory bodies’ efforts to monitor, address and enforce restrictions. The most prominent is the Financial Action Task Force (FATF), which details guidance and determines best practices in anti-money-laundering practices and combating the financing of terrorism.
FATF Recommendations number 16, better known as the ‘travel rule’, which requires businesses to collect and store the personal data of the originators and the beneficiaries in blockchain transactions, is the most notable.
Je concludes: “What does this mean? In theory, access to this data will enable authorities to have better oversight and enforcement of crypto market regulations. In other words, they’ll know exactly who is doing exactly what.
As we have always argued – transparency is key. We need to regulate crypto as an asset class with efficacy, which necessitates legislation that is applicable specifically to digital assets and does not hinder the market.
The criminal financial trade which arguably encompasses money laundering, illegal weapons sales, human trafficking, is also international. Thus, cracking down on it is, out of necessity, an international effort.
The decentralised nature of blockchain, which runs contrary to the central-server standard we know and use nearly everywhere, presents a formidable challenge here. Rules and regulations for traditional financial institutions are being implemented wholescale into the crypto sector. We believe that this is arguably wrong footed as it ignores the innovation and uniqueness this asset class and its underlying technology entails.
Traditional forms of regulation from the fiat world do not reciprocally apply to every aspect of crypto nor to the fundamental nature of blockchain technology. However well-intentioned they may be, because these imposed regulations are built on an old system, they must be adapted and modified.”
How bug bounty programs can help financial institutions be more secure
Rodolphe Harand, Managing Director at YesWeHack
Financial services have been one of the most heavily targeted industries by cybercriminals for several years. One alarming stat from the Boston Consulting Group found these firms to be 300x as likely as other companies to be targeted by cyberattacks.
Furthermore, the pandemic has led to a significant increase in the number of cyberattacks targeting financial institutions (FIs), with around 74% experiencing a spike in threats linked to COVID-19.
With FIs holding some of the largest collections of sensitive and private data, it’s clear they will remain an attractive target for malicious actors, especially as any data stolen can be used for fraudulent activities. This leads to the reputational damage of the financial entity that was compromised and has a knock-on effect in terms of monetary and reputational damage to affected customers.
For CISOs at FIs, the conundrum faced is how do you protect intellectual and customer data, and ensure accountability and transparency for clients and stakeholders, at a time when the pandemic has created budget constraints. Research from BAE Systems found that last year alone, IT security, cybercrime as well as fraud and risk departments had their budgets cut by a third.
Below we look at how bug bounty programs can help to address these pressing issues.
Protecting valuable data
Protecting customer and intellectual data has always been a top priority for FIs. However, as opportunistic cybercriminals have a lot to gain by stealing this valuable data, there is a constant evolution of threats, which means FIs must stay on their toes. By deploying a bug bounty program, FIs can work with ethical hackers that have a wealth of experience and unique skills when it comes to identifying security weaknesses within a FI’s defence, thus helping to implement effective security measures to help prevent data breaches.
Building trust among various stakeholders such as customers, suppliers and investors is critical for achieving business goals. By deploying a bug bounty program, FIs send out a message that they care about protecting the security of the data of those they work with – which in turn can have a cascading effect resulting in better business performance.
For FIs to win customers and keep them happy, amidst the growing threat of neo banks and customer-centric fintech organisations, speed of innovation is crucial. As such, many FIs have adopted an agile approach to build, test, and release software faster to bring online and mobile banking solutions to market quicker. However, this can create frictions between development and security teams. Security mandates are deemed to be unnecessarily intrusive and a cause of delayed application development and deployment.
Yet, with DevOps teams needing to build and deploy applications faster than ever before, an epidemic of insecure applications has emerged. According to Osterman Research, 81% of developers admit to knowingly releasing vulnerable applications, while research from WhiteSource found 73% of developers are forced to cut corners and sacrifice security over speed.
With developers often not having the time, tools, skills, or motivation to write impeccably secure code, there is an evident need to provide developers with more support when it comes to building applications securely Fortunately, bug bounty programs can provide a “fact-based” financial implication of inherent security flaws within the process. This makes it possible to hold development teams and service providers accountable for creating or delivering insecure products, thus addressing inherent security gaps within the business units and helping to drive continuous improvement.
Moreover, security awareness and education of developments teams can be improved significantly for those developers that are directly involved with the management of vulnerability reports for their bug bounty programs. This is because, the mere fact of exchanging information with ethical hackers, or assimilating the thinking of a potential hacker and having proof of concepts of vulnerability exploitation on their application components, naturally accelerates consideration of security early in the development stage and provides ongoing learning.
Get more return on your investment
According to Gartner, 30% of CISOs effectiveness will be directly measured on their ability to create value for the business. When security budgets are challenged, CISOs need to demonstrate business value through initiatives designed to enhance efficiency whilst stretching the dollar.
This is where bug bounties can help tremendously. Compared to conventional penetration testing, bug bounty offers a fast, complete, and measurable return on your security investment, with businesses only paying out for successful discovery of vulnerabilities. Equally, businesses get access to hundreds of ethical hackers that can test their programs, each with their own unique skillsets as opposed to only one skilled researcher testing the network. This results-driven model ensures you pay for the vulnerabilities that pose a threat to your organisation and not for the time or effort it took to find them.
Bug bounty programs also deliver rapid vulnerability discovery across multiple attack surfaces. With this approach, organisations receive prioritised vulnerabilities and real-time remediation advice throughout the process to accelerate the discovery of, and solution to vulnerabilities.
Another appeal of bug bounties is that due to the continuous nature of testing, more vulnerabilities are found over time as opposed to pen-testing. This is key to financial institutions that require agility to keep up with the continuous roll-out and updates of applications.
The cornerstone to a successful security programme
The risk posed to financial institutions by cyber threats will only continue, as evidenced by the number of data breaches seen in recent times. The COVID-19 pandemic has only exacerbated these risks, especially with almost all FIs having needed to shift to a remote working environment – which has only widened the attack landscape.
For FIs, a bug bounty program should be considered a fundamental cornerstone of any security strategy, with it being a modern-day cybersecurity solution that is well-equipped to tackle the immediate security challenges they face. In doing so, FIs will not only prove to customers and stakeholders their commitment to data protection and security but this will also be help them to avoid the monetary damages that could be imposed by regulators if a breach was to take place.
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