As 2022 rolls to a close, we turn our eyes to the New Year and try to prepare for 2023. Based on my experiences and observations, these are the trends I see playing out next year.
1) "As a Service" (aaS) solutions will continue to grow and gain in popularity
2) Real-time payments will become more common in the US (but not gain ubiquity until 2024)
3) Embedded finance use cases will continue to expand
4) Security concerns will continue to grow in visibility and importance (but 2024 will be the year of passwordlessness)
As-a-Service
Technology grows increasingly more complex, and the required pace to deliver better, and more streamlined, and integrated experiences continues to accelerate in order for businesses to stay competitive. In order to keep pace with the change, businesses' technology resources have to continue to learn, while continuing to deliver. Businesses rarely have the money or capacity to keep up to the level that is required with the rate of change. As such, they are increasingly going to rely on third party "as-a-service" providers to help them keep pace with the change.
As-a-service providers offer many benefits. They are more cost-effective, rely on less overhead costs (technical and personnel), they come with technical support, and they enable businesses to quickly scale.
These subscription services allow businesses to quickly expand their capabilities and offerings to their customers, focusing on meeting the needs of their customers, and letting "the experts" manage the technical component.
Examples of as-a-service (and this is not a comprehensive list):
Software-as-a-service
Platform-as-a-service
Infrastructure-as-a-service
Banking-as-a-service
Payments-as-a-service
Processing-as-a-service
Authentication-as-a-service
Network-as-a-service
Real Time Payments Adoption
Real-time payments have many benefits for consumers and businesses who are used to immediacy in their transactions - money is moved in seconds, there is certainty that the payment has been received by the target individual, they are irrevocable, and the payer has full control over the payment with the transaction being a "push payment".
Real-time payments continues to grown in adoption, with more than 72% of countries "real time ready". The United States is still behind the curve here. The Clearing House (TCH) real-time payment rails have been in place for more than 5 years. There has been steady growth and adoption, with more than 275 banks on the network today, and more than $18B in transactions in Q2 of this year. However, this only represents about 6% of us banks (there are 4771 financial institutions per the September 22 FDIC report[1]), so still huge opportunity for growth. Most of these banks are only set up to receive real time payment, with only a small fraction even enabled to send payments. The fact that The Clearing House is owned by the tier one banks has been a big impediment to adoption. Many smaller financial institutions have been waiting on the Federal Reserve to deliver the FedNow Instant Payment rails.
FedNow is currently slated to launch between May and July in 2023, but just because the rails are delivered, doesn't mean that banks and transactions will magically manifest themselves. Banks will need to have had the funding and roadmap approved to implement, and then they will have to get in queue to get their connection to the FedNow rails established. I foresee that the adoption of the FedNow rails will go much quicker than the adoption of The Clearing House rails, but I can't see banks really seeing any value from this network until 2024 at the earliest. The two rails are going to function very similarly.
Once FedNow launches, there will be two main rails for real-time payments. These rails will NOT be interoperable, and it will be on the TPSPs (Third Party Service Providers) like FIS, Jack Henry, etc to provide that user experience that will seamlessly direct traffic through the appropriate rails. Banks that aren't yet on real-time rails are missing the opportunity to serve their customer base and increase depository assets from sources like gig economy worker payouts (16% of US population participating in Gig Economy[2]), small business merchant processing/cash flow, invoice payments, and other B2B transactions. Right now I don't see a big incentive for companies using today's real-time rails to do the technology investment to switch to FedNow (at best they might add this as a service), so the TCH rails will continue to provide a lot of value for many years to come.
Since there won't be much of an overlap between the two networks for awhile, what I recommend for banks interested in offering instant/real-time payments to their customer base, and who are interested in maximizing their offering to their customer base, is to work with their TPSP to join the TCH real-time payment network and then as FedNow becomes available, to add that to the portfolio of service. The actual selection of real-time payments rail in a payment transaction is more of an infrastructure choice and should be transparent to the end user.
Embedded Finance
According to McKinsey: "Embedded finance is the placing of a financial product in a nonfinancial customer experience, journey, or platform. In itself, that is nothing new. For decades, nonbanks have offered financial services via private-label credit cards at retail chains, supermarkets, and airlines." [3]
The next generation may never know the traditional banking experience. The ability to open accounts, make payments or meet financing needs will be done outside of the traditional banking channels in the future. Businesses and tech providers will continue to partner with banks to offer a single embedded, seamless experience. According to McKinsey, embedded finance experiences have already reached $20B in revenue in 2021, and this number is expected to double in 3-5 years.
The advance and ubiquity of real-time/instant payments will open even more doors for embedding financial experiences in day to day business environments as it uses standard (ISO 20022) payment message formatting. The sending and receiving messages are relatively simple, but because only banks can participate in the real-time/instant payment networks, Businesses and FinTechs will need to partner with their financial institution partner to design the user experiencces, and security controls will need to be top of mind in the design.
Examples of places where financial experiences can be embedded:
shopping cart platforms
online marketplaces
loyalty apps
software providers
accounting software
OEM
AP/AR
Payroll
Security
As you can see by the above predictions, our financial ecosystem is changing incredibly rapidly and getting ever more complex. These changes introduce many security vulnerabilities, and the ecosystem is only as strong as the weakest link. Security requires increasingly complex algorithms via machine learning and artificial intelligence to detect and prevent bad actors from committing fraud.
Since fraud vectors of attack are constantly changing, the tools available to combat fraud have grown increasingly sophisticated to keep up with these attacks. Most companies do not have the training or level of knowledge to understand how they work or even the mathematical knowledge to be able to suitably assess the tools. Companies rely heavily on brand reputation, advice from trusted partners, and providers. Many of the technologies out in the market are relatively new entrants and their technology unproven.
Whenever new companies or technology is introduced to the marketplace, the bad guys are all over it trying to understand where the vulnerabilities are (new entrants are typically unaware of their level of exposure) and will find ways to exploit the newly introduced business or service.
As-a-service solutions are also a potential element for risk. These XaaS solutions often themselves are cobbling together components from other service providers, and their security will only be as strong as the components they are bringing together in their offering.
Realtime payments also introduce their own vulnerabilities, as the payments are irrevocable, and if a bad actor has managed to take over an account and direct funds to another account, those funds may not be recoverable.
As such, I predict that we will continue to see a lot of these attacks and vulnerabilities exposed in the news, and that businesses that do not pay attention to security as a key element will find themselves going out of business.
In conclusion, we rely on all the stakeholders in the ecosystem to keep security top of mind when delivering customer-focused experiences that can be trusted. I expect the marketplace to continue to evolve in creative and exciting ways with the use of as-a-service tools, adoption of real-time payments and embedding of these services into our everyday interactions transforming our day with more holistic experiences.
Looking forward to a dynamic 2023.
#2023predictions #fintech #emergingpayments #realtimepayments #instantpayments #financialservices #embeddedfinance #rtp
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