As we turn the page on 2021, it’s time to think about where financial services is going next. We’ve covered a number of future-oriented topics on our recent podcast series, including CX, digitization and data; the disruption driven by artificial intelligence; and the need to take a step back when thinking about risk and compliance.
But let’s take the conversation further. What should you be thinking about for 2022?
1. Decentralized finance (DeFi)
From trading to borrowing and lending, services that were once the sole realm of investors and their financial institutions are now being created as DeFi projects. These are powered by smart contracts on the blockchain. But DeFi is not just about disruptive technology.
These projects are supported outside the traditional financial services and fintech support structure. The balance of economic power has shifted away from centralized institutions to the participants in the network. Investors control the funds in their digital wallets, and other participants get financially rewarded for funding these new financial services for investors, playing new roles such as “crypto miner,” “proof of stake validator” or “liquidity provider.”
Simply put, the traditional financial services ecosystem as we know it is being radically transformed as this decentralization moves ahead.
I’ve written about ESG a few times this year, from the need to act now to the variety of impacts we’re seeing from the rise of sustainable investing. And the lack of standards has been a concern for some time. But it’s now clear that all institutions will need an ESG score just to attract investors – and it needs to be as strong as possible. Do you have a plan?
New technology models are coinciding with the long-term shift in remote working to open up a new avenue to a better ESG score. Historically, you’d need to power, heat and cool a data center, all of which is carbon-heavy. What if, instead, you had the same platform – but it was designed as a multi-tenant SaaS that’s based in a low-energy data center?
You just subscribe to the bit you need, so it’s a fraction of the energy requirement. Incorporate that reduction into your ESG score – and at the same time give your business the power it needs to expand.
3. Crypto and digital assets
Crypto has been in the news a lot, but the traditional institutional financial industry isn’t necessarily ready to support all of the latest and greatest advances that are generating the press. As my colleague John Omahen points out, there’s still a lot of uncertainty around custody, regulation and technology – and how it plugs into traditional financial institutions’ operations and technology platforms that have been in place for many years.
For example, although retail investors can easily trade crypto or NFTs through crypto exchanges, institutional investors have a number of other considerations that make crypto investing more complex, including KYC/AML and best execution. Then they have to integrate all of the post-trade transaction and life cycle data into their traditional books and records platforms and ensure the data is kept in sync with their digital asset wallet technology or custodians.
But despite the uncertainty and complexity, you need to be thinking about crypto and digital assets now.
4. Digital data delivery
Staying on the same theme, one of the biggest challenges facing the industry is the reporting on different asset class investments, especially with new asset classes like crypto.
The end investor typically wants to see all of their investment data in one place. Frictionless platforms, APIs and artificial intelligence can synthesize the data to make it presentable and useful to that investor across their entire portfolio. This ensures that risks are being diversified and managed holistically. And as digital assets like crypto move into the mainstream as 5-10% of investor portfolios, this consolidated reporting will be critically important.
5. Regulatory change
Of course, regulations don’t go away. And the biggest challenges are around new and enhanced surveillance, oversight and regulations around the data flow. We’re seeing greater enforcement of existing data security, risk and AML regulations, as well as expanding requirements for behavioral surveillance (such as electronics communications) and ESG-related mandates.
The digital asset explosion brings its own challenges as regulators attempt to enforce existing rules such as KYC, AML and trade surveillance to a new technology stack and market dynamics, as well as digital-specific mandates such as the FATF Travel Rule.
But there are also interesting opportunities. For instance, when it comes to regulatory reporting, authorities across the globe are shifting to demand more granular, real-time information, and towards a pull, rather a push, model. This means the industry can gain efficiencies by shifting from mechanical report production to cloud-based information management tools.
6. Lending ecosystems
Lending is not just evolving quickly, it’s transforming in multiple dimensions, from each tier of the market, to origination and servicing, and across multiple loan types.
For example, a shift of financing to the point of sale with Buy Now, Pay Later is changing the balance in consumer lending. SMB lenders are streamlining and automating cash advance, while lending origination marketplaces are giving small businesses a wider range of lenders. And for complex commercial loans, machine learning is fine tuning banks’ abilities to determine what loan products to offer, streamlining origination and improving their view of credit risk.
There are also regional variations; for instance, the lines between commercial, small business and consumer lending origination are blurring everywhere but especially in Asia, where the market increasingly prefers to use a single origination solution for all three types of loans.
Finally, something I’ve already mentioned a couple of times in this blog – digital assets. Crypto-backed loans are an easy way for mainstream banks to enter the market, and from there they can move to crypto-denominated loans. In the commercial space, we’re starting to see the first DeFi-syndicated loans, which use the traditional syndication structure to package DeFi assets. That’s definitely worth watching in the coming year.
And throughout, the digitization of the experience – driven by consumer expectations for easy and instantaneous online transactions – is even pervading the complex, traditionally high-touch lending world. That’s a theme that we’ve seen develop over the last few years and it will remain an important in 2022.
So, just when we think the pace of the market can’t get any faster, we’re proven wrong. Change continues to accelerate. In a post-COVID world that’s driven by decentralized finance, enhanced technologies and a data-hungry community with ESG sensitivity, it’s even more important to cut through the noise to create a smoother and smarter world. Do you have the technology, infrastructure and expertise to succeed?