As 2021 draws to a close, it’s safe to say that this year has been full of ups and downs. With the world very cautiously emerging from the global pandemic, one thing has remained constant: the innovation and growth the fintech industry continues to bring. While the year has been a whirlwind for most, the fintech sector has seen many challenges and opportunities that will no doubt continue into the next 12 months.
This December, The Fintech Times is asking industry leaders for their ‘View from the Top’ to gain an insight into the decisions behind the last 12 months. Today, we hear from Rolands Mesters, Stefan Auerbach, Nikolai Hack, Emma Kisby and Charles McManus on their 2021 thoughts, plus a look ahead to 2022. Will there be a Happy New Year? Read on…
Rolands Mesters is the co-founder and CEO of Nordigen. He said that “2021 has been the year of open banking.”
He continued: “It started with Visa and Plaid announcing their breakup, continued with Visa’s acquisition of Tink and followed with Mastercard’s acquisition of Aiia. Among waves created by the new strategic acquisitions, open banking adoption has continued to grow, despite growing negative sentiment from banks. With over 4 million open banking users in the UK and over 518 entities in the UK and Europe licensed to provide regulated open banking services, the adoption is steadily rising.
What is more, open banking has increasingly been establishing itself as the bridge between other big trends such as BNPL and crypto. Mastercard’s new BNPL product includes their newly acquired open banking capabilities and Klarna has promised to use open banking to protect shoppers. Meanwhile, open banking payments have started to gain popularity among crypto enthusiasts as a low-cost alternative to other payment methods to allow people to transfer money from their bank accounts to buy crypto. Open banking is increasingly becoming the “on-ramp to web3” and – who knows – it might just be the catalyst for the next crypto revolution. It’s about time we had a BNPL for NFTs.
“Experts have big hopes for open banking – McKinsey expects its value to reach 1.5% of Europe’s GDP by 2030. It had a rocky start with the initial implementation and the transition from screen-scraping to secure bank APIs has taken longer than some had hoped, however the regulated open banking model established in UK and Europe has proved to be successful and is now being replicated in other countries such including Turkey, Georgia and Saudi Arabia.”
“There’s a growing tension between traditional banking and crypto. The rise of crypto is hard to ignore. We’re seeing the first countries accepting crypto as an official currency. We’re also seeing crypto startups raising mega-rounds at jaw-dropping valuations. This tension will continue to grow next year, as crypto becomes more energy-efficient and more widely accepted by regulators, retail investors, and merchants.
“The killer feature of crypto is the ability to ‘program money’ and it serves as a honeypot for developers and tech enthusiasts – they are attracted to the ability to build their own future of finance. This is an area where traditional banking has been the opposite of a honeypot and open banking is likely its best shot to attract the developer audience and make regular banking exciting.
“What I expect to see next year is that traditional banking will start to embrace more open banking to build applications inspired by the flexibility of crypto. In its essence, open banking is a way to make regular bank accounts ‘programmable’ as it allows developers to link bank accounts to applications and smart algorithms that can understand money movements and execute payments on behalf of account holders. The idea of ‘fully autonomous finance’ has been discussed for ages and I believe 2022 is the year we will finally get to see it in action.”
Stefan Auerbach, CEO, Utimaco, discussed the rise of cybercrime during the pandemic.
He said: “The first would be how fintech companies have fully embraced cloud technology to provide the infrastructure for their products. We are seeing so many companies, both established and start-ups, move significant parts of their functionality to cloud-based platforms rather than operating them from expensive, difficult to scale self-hosted servers.
“This doesn’t just have implications for cost and time-to-market, but for our area of expertise, security. Cloud-based Hardware Security Modules (HSMs) are one way in which, for example, a small fintech startup could achieve the kind of security that would have previously only been available to legacy companies. Given the level of involvement we have with helping companies to define the security they need, integrate it into their software and maintain it, this also allows smaller companies to lessen the impact of the skills shortage in the cybersecurity space. That said, self-hosted HSMs are still extremely important in a huge variety of industries, especially when blockchain technology and post-quantum cryptography are both rising to prominence in fintech.”
On 2022, they said: “We have seen at the end of 2021 that post-quantum cryptography has gone from a theoretical computer science problem to a matter of urgency. Within the space of a week the US Department of Homeland Security announced that quantum-safe encryption was a priority and a Chinese laboratory demonstrated a quantum computer that is tens of millions of times more powerful than the fastest conventional supercomputer. This, and the developments that are going to follow, will hopefully spur more organisations to look into what post-quantum security means for them and develop plans around it.
“We will see more discussion around this topic from within the security industry, and this will hopefully spread to our customer base and to companies around the world. Over the next year, we and our peers will be looking to push the conversation around post-quantum cryptography forward, showing how it’s something that needs to be addressed this year, not when quantum computers become a commercial reality. We will hopefully also show how this isn’t an insurmountable problem, but that updating cryptography is a task that existing cybersecurity companies can address.”
Nikolai Hack, Head of Strategy & Partnerships at Nucoro, said:
“What started in 2020 as a result of government-mandated lockdowns has now truly become the new normal for most, if not all, financial services. Product distribution happens online or it simply won’t happen for much longer. While I am sure there are some people who miss their bank branch, most customers seem to be ok with their good riddance.
“In 2021 we saw once again record numbers for global fintech investment as well as volume of mergers and acquisitions. The previous year was definitely an outlier – but many initially feared that VCs and institutions could suspend their funding and M&A activities for a while. The pace at which things picked up and accelerated over the last months means that fintech is again front and centre for anyone looking to deploy funds.
“With the acceleration of technological innovation, specialisation is also increasing rapidly. A major shift in the product mindset of many fintechs has been the result: instead of putting new functionality on their own roadmaps by default, they first scan the ecosystem for solutions that complement their offering. A combined effort then allows everyone to further deepen their core expertise instead of trying to outcompete each other on fringe parts of the respective propositions.
“In 2022, Inflation won’t be transitory. Despite the assurances from policymakers and central bankers: inflation has entered the mainstream of media and consumer attention and is here to stay. The unfettered balance sheet expansion of central banks worldwide has started to find its way out of highly elevated asset price pockets into everyday purchases and supermarket shelves. Facing an accelerating loss of purchasing power, more and more individuals and institutional investors will expect fintechs and incumbents to help them preserve their wealth.
“Consolidation will return. Despite record-breaking funding rounds and valuations, the hard cold facts of business model fundamentals still matter. It is natural that an all-around booming sector will also produce some excesses in overestimated expectations and underestimated risks. However, consolidation within and across some fintech sectors will be inevitable. 2022 might see the beginning of some of these revelations.
“Finally, for a long time, especially in the banking sector, digital innovation was understood to be an all or nothing play. It meant throwing out everything that’s in place and replacing it with fresh infrastructure end-to-end. Core system replacements with year-long timeframes and multimillion-dollar budgets were accepted as the dreaded yet only way forward. Going forward, more players will realise quicker wins by building solutions that run in parallel with their convoluted core architectures and will then move operations, clients and revenue streams to the new systems in manageable phases and tranches.”
Emma Kisby, UK CEO of Cogo believes green finance and ethical banking have been huge trends this year.
She said: “It has become apparent just how great a role the financial industry has to play in helping the UK move towards a ‘net-zero economy’. Customers too are also looking to use their spending power for good, so the past twelve months have felt like a key inflection point.
“There have been some good responses from banks so far – from alternative options hitting the market to established players trying something new. Open banking has certainly enabled greater innovation and collaboration, such as the work Cogo does to bring carbon tracking features into NatWest’s customer app. The potential impact is huge when customers’ collective power is harnessed.”
“In 2022, I am expecting to see a surge in solutions and tools that come to market, helping to measure carbon footprint, manage impact, labels on clothing etc. These will need to be founded on principles of transparency and collaboration – meaning open banking will continue to be hugely important. In the realm of ethical and sustainable finance, we’re also likely to see this wave of innovation lead to more pressure for regulation and standardisation.
“There is likely to be a need for some ‘carbon literacy’ education as both businesses and consumers try to catch up. But ultimately, I can see this leading to even more innovation, as more layers of questions emerge and are tackled. This will be the case particularly in solutions that put positive change at the heart of their business model. You can also expect to see more fintechs and established banks release incentives and rewards linked to sustainability.”
Charles McManus, CEO at ClearBank, believes open banking will feature prominently in 2022.
He said: “In the last year we’ve seen the collapse of cash and cheques, the rise of contactless, and a surge in Faster Payment volumes and account to account bank transfers. While it might be a truism, I think it’s important to remind ourselves that we’ve seen 10 years of change in banking and payments in just 10 months because of the pandemic. After all, necessity is the mother of invention.
“And as we exit 2021, we’re seeing this necessity at play once again. As the economy reopens, firms are looking to reduce the cost of payments to counter tightening margins – Amazon’s decision to stop accepting Visa credit cards issued in the UK from January could prompt more firms to explore and adopt Open Banking payments to reduce the costs and friction associated with credit card transactions and reap the benefits of faster payments.
“Looking towards 2022, as domestic digital payments are being transformed and Open Banking takes off, I expect the industry’s focus will shift across borders and take aim at international payments. Despite the efforts of both banks and fintechs in recent years, moving money across borders remains grossly inefficient and effectively a tax on doing business abroad. This is not something that can continue if the global economy is to bounce back from the pandemic.
“At the same time, we’re going to hear a lot more about Embedded Banking in 2022 as both financial brands and non-financial brands look to embed third party regulated banking services and capabilities to reduce the cost and complexity of offering financial products. Embedded Banking has the potential to dematerialise financial services and make them accessible to all, and we’ve already seen its success in business banking and retail and consumer savings.
“Moving forward, I expect to see it extend to card products and through to insurers and pension providers. Ultimately, with De-Fi and digital asset firms, Embedded Banking has to potential to create the bridge between digital currencies and fiat.”
This article is part of our 2021 December series, View from the Top, to see others like it and our special edition from December 2020, please click here.