While the past year was dominated by continued response to the global COVID-19 pandemic, it also saw significant progress in the financial technology (FinTech) sector. From interest rates and cryptocurrency to consumer payments and digital wealth management, FinTech is evolving at an incredibly fast clip. What will the coming year bring? Each year, ICR draws on the deep industry knowledge of its sector-focused teams to share their views on the year ahead to help identify the key issues that will dominate the minds of investors and the media in 2022.
Below, we explore the trends, key growth drivers, and regulatory items to watch in the FinTech sector over the coming year.
- Omicron Variant, Inflation, Interest Rates. The Omicron variant has undoubtedly increased economic and financial markets uncertainty, which is particularly unsettling with equity markets near all-time highs. While current and potential new treatments should help overcome this variant, there is a possibility that it exacerbates the already evidenced inflationary pressures from supply chain bottlenecks, leading to the start of a potentially aggressive Fed rate tightening cycle sometime in 2022.
- Credit Cards. The credit card sector could fall out of favor this year if investors become more entrenched in the view that the Fed has to raise rates aggressively, thereby tipping the US economy into a recession. Higher rates could impact consumer spending and potentially light the fuse of credit quality normalization. However, if the Fed were to raise rates gradually and the employment picture remains strong, consumer credit card companies could still benefit from strong consumer spending and normalizing payment rates, offsetting credit quality normalization. Additionally, as the Omicron variant recedes, there are expectations for a pickup in corporate T&E demand.
- Consumer Payments/BNPL. Short-term financing at the point of sale (e.g. BNPL) is here to stay as it helps democratize consumer spending at all levels of the economy. Worth watching in 2022 is if BNPL further disintermediates traditional credit card lending as well as the payment networks. As the sector has become overly commoditized, it is also expected that the large incumbents will be aggressive in their efforts to grab consumer wallet-share by adding new and more creative versions of pay-over-time features. In addition to an overly competitive environment, the sector also faces potential scrutiny from regulators as they try to better understand the potential risks to the consumer from BNPL, including aggressive marketing, higher indebtedness, and outstanding balances not being reported to credit agencies.
- Fintech. It’s a digital world! Digitization and embedded finance will remain front and center in Fintech and Payments. Consumer spending and investing patterns, driven by advanced technology, have already changed meaningfully and there is no going back. Consumer behavior is expected to continue to rapidly migrate towards aggregation of services delivered online in a simple and near immediate manner. Newer Fintech players, including challenger banks, are seemingly more agile, better equipped and have a better culture to continue to meet the digital need of a new customer demographic. In fact, larger incumbents are potentially at risk of gradually being further excluded from the customer or business transaction. Consumers are relying less and less on larger incumbent financial institutions and gravitating towards two sided platforms. Third parties will also continue to embed payments and financial services into their interactions with their customers. As for incumbents, it is expected that they will not just sit and watch their market share continue to gradually erode – it is anticipated that they will spend heavily on digitization and technology overall in order to play catch-up to the more agile competition. Key risk to the Fintech sector in 2022 could come from a long and drawn-out stock market and capital rotation from Growth to Value sectors, particularly if interest rates move higher and at a faster pace than expected.
- Digital Wealth Management. Irrespective of near-term stock price movements, agile and well-funded digital wealth competitors who are determined to democratize access to financials assets, will continue to pressure larger wealth management incumbents. While technology and fierce competition have already driven the industry to “zero commission” equity trading, we expect newer entrants to push more aggressively to gain market share in advice and investment services from larger incumbents. This pressure is expected to drive traditional wealth managers to gradually shift their offerings towards lower-cost asset allocation products and to continue to expand the range of services offered in order to reach varying demographics. Key to watch in 2022, is if Retail trading engagement remains anywhere near the levels of 2021, particularly amid increased volatility in financial markets. Lastly, incumbents and new entrants are expected to raise investment spend on digitization and marketing.
- Crypto. While the crypto ecosystem is mired in complexity, it has direct and far-reaching implications to all Financial sub-sectors including Exchanges, Custody, Banking, and Payments. In fact, although large traditional financial institutions initially were extremely skeptical, to say the least, they now appear to be fully embracing the digital payments technology. Key for 2022 will be if cryptocurrencies continue to move away from being used mainly as a speculative asset and instead gain more traction as a method of payments in a decentralized economy. The theoretical benefits of a fully decentralized ecosystem would allow money to move freely across counterparties and bypass traditional intermediaries. However, there remain challenges to the mainstream adoption of crypto – potential user ‘trust’ and skeptical regulators, to name a few. For example, U.S. regulators continue to debate the possibility of cryptocurrencies being classified as securities and thereby regulated by the SEC. There also appears to be confusion as to how to classify stablecoins, given their potential to be used as sources of payments and their theoretical “stable value.” Lastly, late in 2021 the President’s Working Group on Financial Markets (PWG), along with the FDIC and OCC, published its regulatory oversight recommendation paper regarding stablecoins, which called for immediate congressional action to enact laws such as the issuance of stablecoins to be conducted by chartered banks. Positively, greater transparency and oversight by regulators could be a positive signal for digital currency skeptics.
- Additional Key Regulatory Items to Watch in 2022:
- Crypto assets – the Fed remains focused on potential crypto-asset oversight with the clear goal of establishing laws and guidelines to make cryptocurrencies ‘safer’ for investors and less of a risk of cyber-crime.
- Potential for “Payment for Order Flow” to go away.
Follow the entire ICR 2022 trends series on the ICR Insights blog.
