Estimated reading time: 10 minutes

 

The digitisation of financial services continues to unleash innovation in the space. So will 2023 be the year of ‘softPOS’? Or super apps? Or central bank crypto? Let’s look ahead…
 

Over the last ten years banking has changed more than for the previous 100. For millions of customers, the bank branch is now located in the pocket – on a smartphone app. They don't need to go somewhere to ‘do’ banking any more. 
The capabilities of banking apps have improved so much that there are very few reasons for customers to visit a bank ‘in person’.

Meanwhile cash has been eclipsed. Contactless payment is flying. A report by Juniper Research predicts that contactless transactions will have a collective value of around $10 trillion by 2027, up from $4.6 trillion in 2022. 

And there is still room for innovation in this space. Most contactless cards lack security features for example. But even this is changing. In 2021 the industry launched its first biometric contactless payment card. The product includes a fingerprint sensor on the card body, which makes payments safer and supports transactions of any amount. No upgrade is required on the POS, as the biometrics check takes place locally on the EMV biometric card and not over the air.

App-based banking and contactless payments are, of course, just two symptoms of a wider revolution, which is being driven by the digitisation of financial services. The disruption that changed music, photography, newspapers and more is now transforming banking, payments, lending, saving and every other facet of global finance.

Investors have responded by pouring money into the space. According to CB Insights’ State of Fintech 2022 Report, global fintech funding hit $75.2 billion in 2022. While that was down 46 percent on the record-breaking 2021, it was still up 52 percent on 2020. 

So where might the investors place their bets next? Which fintech areas are exciting the most interest? Let's look ahead to the trends to watch in 2023...

•    #1 - Growing demand for mobile wallets

It's less than a decade since Apple dematerialised a bank card and turned the phone into a contactless payment device. Google followed soon after. But it didn’t take long for consumers to embrace the concept. 

 

Today, paying with a phone is normal. According to Marqeta’s 2022 State of Consumer Money Movement report, the number of US consumers who used a mobile wallet increased from 64 percent in late 2020 to 71 percent in 2022. All the indications are that this trend will continue to spike upwards in the year to come.
 

•    #2 - Turn your phone into a card reader: the softPOS

Thanks to contactless payments, demand for in-store mobile POS market has exploded. Even micro-merchants and street traders can now take card payments with small mobile readers. As a result, there has been huge growth in the market for supplying these specialist POS devices.

Now, a new technology is threatening to disrupt this market: the softPOS. This lets retailers use a phone rather than a dedicated reader to receive a card payment. It might seem like a minor update, but in fact it could be the trigger for more profound change. POS readers do only one thing. They are pretty dumb. Phones can support all kinds of advanced features. As a result, smaller retailers might be able to embed payments more deeply into their management systems and offer loyalty schemes, benefits and discounts. 

SoftPOS products are already present on Android and reports say Apple might soon be ready to support them on iOS too.

•    #3 - Cross border payments to go real time?

Until fairly recently, payments were slow. It might take many days to process a check, but this was accepted as a fact of life. Then came the internet and people's expectations changed. They began to think: if I can send a text instantly, why not a payment?

Well, obviously moving money is a bit different. It requires multiple checks and balances to ensure the payment is legitimate and accurate. This can slow things down. Still, huge progress has been made. Today, dozens of countries now support near-instant electronic payments. 

However, this change is almost entirely taking place in the domestic payments space. Cross border payments remain stuck in the old days; transfers can still take more than a week thanks to multiple time-zones, local compliance checks and incompatible domestic banking infrastructure. 

Finally, though, there are signs of change. New market entrants – from PayPal to Wise to Ripple – all now offer real-time alternatives in specific market niches. These disruptors are putting pressure on central banks to tackle cross border delays. The results have mostly been seen at the regional level in the form of projects such as P27 (pan-Nordic) and Buna (Middle East). Experts believe the momentum will build in 2023.

•    #4 - Time for super apps (outside of Asia)?

Since 2007, consumers have downloaded billions of apps. The app has been an extraordinarily popular invention. But for the most part, an app does one thing well: dating, navigation, photo editing etc. This is not the case in Asia. Here, there are super apps that are so multi-featured they function a bit like the internet itself. There's little need for consumers to use anything else. Users of Grab in South East Asia and WeChat in China, for example, can stay in the app for shopping, dating, banking, healthcare, gaming and more.

So far, the progress of super apps has been slower in other regions. But maybe financial services could be the start point for building some momentum. In 2021, for example, PayPal announced plans to create a super app that will put payments, shopping, savings, investing, budgeting, crypto and identity into one place. 

And then there's M-Pesa. This African mobile money product transformed the Kenyan economy by letting millions of citizens move money conveniently without using cash or opening a bank account. In 2021 M-Pesa launched its own super app with around 30 mini apps for services like ticketing, insurance and various government functions. A year later it had 8 million downloads and 3 million active customers.

•    #5 - Central bankers take an interest in crypto

2022 was a bad year for crypto thanks to high profile company closures and collapsing valuations. But millions still believe in the underlying promise of crypto currency. They just think it has yet to find its best real-world application. They still believe it has the power to change the fundamentals of money and payment.

Maybe central bank digital currency could be a killer use case. CBDC makes central bank money available in virtual form. It is essentially digital banknotes. In a world of unstable 'private' crypto currencies, CBDCs promise to wrest back control of digital money to the nation state. They could also make it easier for governments to distribute money (via a smartphone wallet or even a smart plastic card) to citizens. Today, there are more than 70 CBDC pilots and task forces in place.

•    #6 - A continued boom in embedded finance and BNPL

If you can use an API to embed a map or a social media window into your application, why not use an API to offer a financial service? Well, you can. Today, any regulated entity can code open APIs and use them to connect non-finance companies to banking service platforms. In consumer-facing terms it means, for example, that a user can access his or her own bank account without leaving a shopping app.

This is embedded finance, and it's driving big changes in the world of retail. Consumers love the convenience. Providers love the ability to create new value-added products inside their own domains. It’s already happening. Take BNPL (buy now pay later). These micro lending solutions have taken over online checkout baskets all over the world. According to WorldPay research, BNPL accounted for eight percent of Europe’s e-commerce sales in 2021. From 2019 to 2021, the total value of BNPL in the US grew by more than 1,000 percent, from $2 billion to $24.2 billion. 

Although, BNPL endured a difficult 2022 (with valuations down), the market is still buoyant not least because of the potential that exists in relatively untapped regions such as Middle East and Africa. 

•    #7 - Banking as a service 

Banking as a Service has been hyped for a while. BaaS describes the provision of banking products and services by third-party distributors. These specialists provide the banking license and back end cloud-based IT infrastructure and operations. The model enables non-financial companies (NFCs) to launch products quickly. And gives existing banks a secure, reliable, and scalable platform that reduces costs, 
improves efficiency and mitigate cybersecurity threats.

After years of expectation, this market is finally gathering some momentum. In 2022, for example, the UK challenger bank Starling launched a BaaS product called Engine. 

As a wholly digital bank, Starling had built its entire tech stack from the ground up. While this took three years and required significant investment, it left Starling very strong in cloud and open banking – and therefore able to licence its core platform. 

Businesses can use BaaS products to do everything from on-boarding and identity verification to card issuance and management. They can also quickly add mobile banking features. Meanwhile non-bank organizations can integrate all financial components (including compliance and regulatory requirements) into their business operations.