5 Predictions For Banking And Fintech In 2023
OBSERVATIONS FROM THE FINTECH SNARK TANK
It’s the beginning of a new year, which means it’s predictions/trends/forecast season for industry pundits (like me).
I always look forward to seeing what people have to say about what’s in store for the upcoming year, but, to be honest, I’m usually disappointed by most of the lists.
A list that basically says “things that started this year will continue into next year” isn’t very enlightening. Then there’s the confusion between “prediction” and “trend.” Saying “things that started this year will continue into next year” doesn’t really qualify as a prediction, does it?
I recently received an email that contained someone’s “open banking” predictions for 2023. Number three on the list: “The search for value continues.” That’s a prediction? I don’t even know what he means by “value.”
Back in the early 2000s, pundits would predict that each upcoming year would be “the year of the customer.” Still waiting on that one.
Five Predictions for Banking and Fintech in 2023
With hopes that I don’t fall into the traps that other pundits have fallen into, here are my banking and fintech predictions for 2023:
1) Big banks will get into BaaS
Conventional wisdom holds that BaaS (banking as a service) is a small bank’s game because of the favorable interchange rates sub $10 billion (in assets) banks have.
For large banks, making a 70/30 revenue share deal (fintech to bank, versus the 50/50 offered by smaller banks) is just a margin decision for a big bank like JPMorgan Chase or Bank of America.
If the potential partner—who is more likely to me a major retailer or merchant than a startup fintech—promises a high volume of payments or, better yet, loan volume, the large banks will be more than willing to take the hit on the interchange margin.
The large banks won’t necessarily get into BaaS by partnering with consumer-facing fintechs, however. They’ll focus their BaaS efforts on the commercial, or small business, side by partnering with vertical SaaS providers who have existing relationships with businesses in various vertical markets (for a good example of this strategy take a look at Maast from Synovus Bank).
2) Embedded fintech will be a bigger trend than embedded finance
Consulting firms like McKinsey and Bain estimate that embedded finance will grow to trillions of dollars of revenue in the U.S. over the next few years. In a recent LinkedIn post, I wrote that by 2025 there would be no more than 300 banks providing BaaS services. Most of the commenters thought I was overestimating by a factor of three.
So, if only 100 banks are going to be in the BaaS business, what are the other banks and credit unions going to do? Pursue an embedded fintech strategy.
Embedded fintech—the integration of fintech products and services into financial institutions’ websites, mobile apps, and business processes. Cornerstone Advisors’ research found that more than 50% of consumers want their banks to integrate services like identity theft protection, data breach protection, subscription management, and bill negotiation services bundled with their checking accounts.
This strategy will be particularly important in 2023 as many banks will be looking at a downturn in loan volume.
As platforms like Square, Amazon, and Shopify diversify their service offerings (often into, but not limited to, financial services), they deepen their relationships with their small business customers. A small business-focused embedded fintech strategy will be needed for banks to counter this trend.
3) Buy now, pay later will make a comeback at banks’ expense
Buy now, pay later (BNPL) providers will evolve from financing individual purchases to financing lines of credit. In other words, BNPL will become the new entry-level offering for credit cards. While there are providers helping banks offer BNPL services, very few banks show any interest in this service according to .
With fewer banks and credit unions focusing on credit cards in 2023, mid-size financial institutions are potentially positioning themselves out of future credit card growth. Many people—not just bankers—misunderstand the BNPL space. Firms like Klarna and AfterPay aren’t “BNPL companies”—they’re merchant enablement platforms. They help merchants sell more—with payments being just one small piece of the offering.
4) The Supreme Court will uphold the constitutionality of the CFPB
If bankers think the CFPB is a thorn in their side now, just wait until they see what 2023 holds for them. In a blow to the banking industry, Roberts and either Barrett or Kavanaugh will side with the left-leaning judges in upholding the constitutionality of the Consumer Financial Protection Board.
Overall, the regulatory environment for banking in 2023 is going to be nasty. Recently, the FTC told Mastercard that it must provide other debit networks with the keys needed to convert tokenized card account information—encoded for security purposes—back to the original account number for online transactions. Apparently, to the regulatory bodies in Washington, merchant and retailer revenue is more important than fraud prevention and consumer security.
5) 2023 will be the “year of the chatbot” in banking
After a number of years of hearing pundits and futurists tell them how disruptive AI is going to be in banking, 2023 will finally be the year that bank executives do something about it.
Not because they’re heeding the calls of the pundits, but instead because their kids and friends will show them how cool ChatGPT is.
Financial institutions also need to make investments in conversational AI to accelerate their digital transformation efforts, and many—credit unions, in particular—appear to be ready to do so. In Cornerstone Advisors’ What’s Going On in Banking study, one in four credit unions said they plan to deploy a chatbot in 2023.
Although I’m predicting that 2023 will be “the year of the chatbot,” I’m not predicting that the quality of a lot of chatbot interactions will be particularly good.
Looking past 2023, banks will require more than just “chatbot” deployment.
Responding to the need for a higher caliber of digital service and engagement, financial institutions need to implement intelligent digital assistants (IDAs). What’s the difference between a chatbot and an IDA?
Chatbots can be defined as rule-based systems which can perform routine tasks with general FAQs. IDAs are fully equipped with natural language understanding and can support a wider range of use cases with greater ease of deployment and onboarding, and a higher quality, more sophisticated conversation capability.
Want to hear more about what 2023 will hold for the banking and fintech industries? Please join Ron Shevlin on January 18 for the What’s Going On In Banking webinar. To register, click here.