The Top 5 Trends In Fintech And Banking For 2022

OBSERVATIONS FROM THE FINTECH SNARK TANK

This list of top banking and fintech trends for 2022 won’t tell anyone anything they haven’t already heard about. It’s meant to help banks and fintechs plan for 2022—i.e., what trends should be on their strategic priority list for the coming year.

Trend #1: The Great Overdraft Overhaul

In June 2021, following Ally Bank’s announcement that that it would no longer charge its customers an overdraft fee, I published an article titled It’s Time To End Overdraft Fees (And Chase Bank Is Just The Bank To Do It), I speculated that:

“Banks and credit unions will wait and see who else eliminates overdraft fees. If nobody blinks, the issue goes away. But if a few make the move, there will be a rush, because no one will want to be the last financial institution with overdraft fees.”

The big guys blinked:

• PNC added a feature called Low Cash Mode enabling accountholders to see what charges will hit their account and—if a shortfall is anticipated—to change the order in which transactions are processed to avoid overdrafts. 
• Bank of America launched Balance Connect, a service that allows customers to avoid overdraft fees by automatically transferring money from another of the user’s accounts with the bank for a $12-per-transaction fee.
• Capital One said it will eliminate overdraft and non-sufficient funds (NSF) fees for all bank customers, foregoing $150 million in annual revenue.
• JPMorgan Chase announced that it will give customers more leeway on overdrafts before charging fees by allowing customers to restore overdrawn balances and access funds from direct deposits of paychecks two days early.

In 2022, community banks and credit unions will have to revisit and overhaul their overdraft policies and strategies.

They don’t necessarily have to eliminate the fee altogether, however. According to Terence Roche, partner at consulting firm Cornerstone Advisors, community-based financial institutions could:

“Lower their NSF fee to the $5 to $7 range and market it as a convenience fee. Let the customer choose whether to pay the check for the fee or return it with no fee, and give the same choice for debit—pay with fee or decline without.”

This coming overdraft fee overhaul will be a boon for technology providers who help financial institutions with the analytics needed to determine which customers should get which overdraft offer and provide real-time notifications to customers.

Trend #2: The Cryptofication of Banks

If (like me) you’re tired of hearing bankers say “we’re a technology company with a bank license” you’re going to really hate it when bankers start telling the world “we’re a Web3 gateway with a bank license.”

Granted, the numbers don’t quite portend an onslaught of banks getting into crypto. In Cornerstone Advisors’ upcoming 2022 What’s Going On in Banking study, just 10% of financial institutions said they’ll launch crypto investing services in 2022 with another 13% planning a 2023 launch. I’m anticipating ever more adoption in 2022 due:

• Demand. According to a Cornerstone Advisors survey of US consumers, 60% of crypto owners would use their bank to invest in cryptocurrencies. Just 4% of current crypto owners said they wouldn’t use their bank to invest in crypto because they wouldn’t switch from the exchange they currently use.
• Supply. The Big 3 bank tech vendors—FIS, Fiserv, and Jack Henry—have all partnered with NYDIG, making it easy (OK, easier) for mid-size institutions to integrate crypto services into their core and digital banking platforms. The payment networks are getting into the act, as well. Visa announced the launch of a crypto advisory service for its banking and merchant clients.
• Fear. FOMO, as banks see their peers offering crypto feel pressured to join in, and outright fear, as the DeFi drums bang louder and louder and bank boards pressure management teams to get into the crypto game.

For banks, crypto will be to 2022 what social media was to 2015.

In US-based bank board meetings in 2015, directors told their management teams about how their grandchildren were on Facebook everyday and wanted to know what the bank was doing about social media.

In 2022, board members will tell their management teams about their grandchildren’s Bitcoin investments and want to know how the bank plans to respond.

Bankers have plenty of legitimate reasons and excuses for resisting cryptocurrencies. But resistance is futile, as they say.

Trend #3: Faster Payments and Payments Modernization

The topic of “faster payments” is hardly new. The Clearing House (TCH) launched the RTP® network in November 2017. According to TCH’s website:

“Today the RTP network’s real-time payment capabilities are accessible to financial institutions that hold 73% of US demand deposit accounts (DDAs), and the network currently reaches 60% of US DDAs.”

I don’t doubt that that’s a true statement. But the percentage of payments in the US that are “faster payment” transactions is probably in the single digits.

While many of the largest US banks are in TCH’s RTP network, the vast majority of small and mid-size banks and credit unions aren’t. 2022 will find many of them launching a real-time payments strategy.

Mid-size financial institutions will jump on the real-time payments bandwagon in 2022.

According to Cornerstone Advisors What’s Going On in Banking 2022 study, 15% of mid-size financial institutions have already deployed real-tine payments, with 28% expecting to launch in 2022, and another 26% planning to launch in 2023 (many of whom are waiting for FedNow).

According to Dimitri Dadiomov, CEO of Modern Treasury:

“Accelerating the deployment of real-time payments puts those at the front at a competitive advantage to secure more of tomorrow’s fastest growing companies, who are looking for this capability.”

Chris Nichols, Director of Capital Markets at SouthState Bank, agrees:

“The amount of new products that can be spun off of RTP can make an innovator’s head spin. It’s the data in the messaging of RTP that will alter a bank’s trajectory.”

Faster payments is just one aspect of a broader trend for 2022: Payments modernization, which is fundamentally about generating more (non-interest) revenue for banks. And that’s going to be a huge focus for financial institutions in 2022.

Trend #4: Embedded Finance Grows By 5 to 10 BIPs (BaaS Infrastructure Providers)

Anyone who’s paid attention to the banking and fintech space in 2021 knows how hot embedded finance is. Forecasting the continued success of embedded finance and banking-as-a-service (BaaS) doesn’t take a crystal ball.

A big development in 2022, however, will be the growth of BIPs—BaaS infrastructure providers—like Synctera, Bond, Moov, Treasury Prime, Unit, and others (don’t @ me if I didn’t mention your company).

A recent Cornerstone Advisors survey of bank executives found that one in 10 banks is in the process of developing a BaaS strategy and another 20% are considering pursuing a BaaS strategy.

Unlike many of the banks who pioneered BaaS, few of the banks developing a BaaS strategy will go it alone, opting instead to work with a BaaS infrastructure provider.

“Revenue” will be the mantra of bank-fintech partnerships in 2022.

In terms of fintech partnerships, 2022 will represent a transition year (not a transitory year, which is just a BS term used by clueless economists and politicians) for banks.

A transition, that is, from internal capabilities to new business and revenue growth opportunities.

According to banks—per Cornerstone Advisor’s What’ Going On in Banking studies— digital account opening has been their most common type of fintech “partnership” initiative over the past few years.

This is nonsense.

Banks don’t “partner” with technology companies for digital account opening applications and capabilities—they buy technology as part of a vendor (not partner) relationship.

“Revenue” will be the mantra of bank-fintech partnerships for 2022, and BaaS infrastructure providers will be critical players in that quest.

Trend #5: The Open Banking Battle Heats Up

2021 was a big year for Open Banking in the US:

But seriously, is there any term in banking more annoying than “open banking”?

In his Fintech Takes newsletter, Cornerstone Advisor’s Alex Johnson wrote:

“The trouble with Open Banking is that it has a great name. After all, who doesn’t want banking to be more open? Banking shouldn’t be closed! It shouldn’t be cumbersome or challenging to navigate. Customers should own their data and they should be able to take it with them wherever they want!”

Can I get an amen?

A number of developments will elevate open banking to a top trend for 2022:

• Biden’s executive order. The 2021 order encouraged the CFPB to prioritize Dodd-Frank regulations that would make it easier for consumers to access their data and transfer it to other banks and fintechs.
• Banks’ increased focus on APIs. The percentage of banks and credit unions that have invested in or developed APIs has grown from 35% in 2019 to 47% in 2021—and another 25% plan to invest in or develop APIs in 2022.
• The data aggregation battle will heat up. In October, Plaid announced a new payments partner ecosystem that will attempt to make ACH bank transfers a more attractive alternative to credit card transactions. This is not a bank-friendly move. MX and Akoya will leverage their financial institution-friendlier business models to escalate the open banking war.

There’s an Open Banking business model battle brewing.

Don’t buy what the Open Banking sycophants are selling—everything isn’t all rosy in open banking land, however.

The elephant on the table that nobody wants to address is that the value equation in open banking is unbalanced—fintechs capture the lion’s share of the benefit while incumbent institutions get the short end of the stick.

According to Scott Harkey, Chief Strategy Officer at consulting firm Levvel:

“Banks will figure out how to build these services and monetize access to them. With that model in place, ‘open banking’ will only grow as more and more services become ‘verified’ by the one entity consumers actually trust to hold their money—the banks.”

Regardless of who ultimately wins and loses, open banking will be a headline trend in 2022—without any regulatory imperatives.

Click here for 2021’s Winners and Losers in Fintech and Banking.