In the past five years, investment in financial technology has rapidly increased — by 2021, more than $118 billion will be invested in this sector alone. Most of this money is being pumped into the Silicon Valley area, notably Palo Alto and San Francisco. Last year, a Fintech startup’s average valuation was around $77 million.
A record-breaking 16 companies went public via traditional initial public offering (IPO) and 21 via special purpose acquisition company (SPAC) transactions. These numbers are likely to be difficult to exceed in the coming year. However, even with these booming metrics, there could be challenges ahead.
For the rest of 2022, investors will become more selective as regulations around public transactions evolve.
As the Federal Reserve plans to raise interest rates this year, access to capital for Fintech and other emerging technology companies is expected to become more difficult.
Despite all the turmoil, Fintech is going strong, alongside the number of capital market transactions. That said, the industry is seeing an influx of technology-enabled innovations that bring its services within reach of every consumer.
Here are the top fintech trends to keep an eye on.
5 Fintech Trends to Watch Out For
Embedded Finance is Just a Starting
Embedded finance is only beginning to make a splash. It is the future of financial services. With developments such as blockchain, the future of finance is closer than you think.
Big Tech has blurred industry lines and enabled the concept of embedded finance to become widespread.
Customers increasingly expect to find everything they need in one central location. This trend incentivizes companies to provide financial services products through partnerships and white-label programs.
Companies in health care, technology, consumer products, and other sectors can embed a loan, a line of credit, a checking account, or a payment option into their platform.
PitchBook estimates that by 2030, the market potential for embedded finance could reach $7 trillion.(Compare that to its market value of $43 billion in 2021, according to Juniper Research.)
The potential for large-scale ecosystem disruption presents a unique opportunity for companies that focus on offering customized customer experiences. By catering to the needs of a niche, these companies can gain a competitive edge in a constantly changing market.
This also means offering distinct groups personalized services uniquely tailored to their financial situation will be possible.
A Super App to Rule All Other Apps
Along with the growth of embedded finance, we anticipate the rise of the “super app,” which essentially pulls together many apps with different functionalities into one ecosystem.
WeChat is used in Asia for messaging, restaurant orders, payments, shopping, and booking doctors’ appointments. The adoption of super apps is slower in Canada, but Square, Stripe, Moneris, and PayPal are working on their functionalities.
QR code payments, debit accounts, peer-to-peer transfers, checking accounts, stock trading, direct deposits, and crypto trading are typical features of these super apps.
DeFi to Gain Further Acceptance
Fintech companies raised a total of $118 billion in 2021, with around 30% going towards blockchain and cryptocurrency projects.
The Block reports that $1.9 billion was invested in decentralized finance (DeFi) platforms in 2020. This figure represents a significant portion of the total capital investment in the cryptocurrency space.
The current financial system is centralized and controlled by governments and financial institutions. DeFi is a decentralized alternative that relies on blockchain technology. It is open and global, and does not need a central governing body.
The potential for DeFi to radically transform the financial services industry is massive. It could bring about huge structural changes that would seriously disrupt the status quo. This makes it a lucrative investment, despite being a small percentage of the total fintech investment last year.
By using decentralized apps, users can trade, lend, borrow and exchange assets directly with each other instead of relying on an intermediary.
Most current DeFi projects use the Ethereum network and various cryptocurrencies.
The value of digital assets locked in decentralized finance (DeFi) protocols has surged in recent years, reaching $101.4 billion in 2021, according to data from The Block.
As digital wallets such as Apple Pay and Google Pay become more popular, people use them more often as an alternative to cash, debit cards, and credit cards. This trend will continue in the future.
Digital wallets account for 45% of e-commerce and mobile transactions, according to Bloomberg, but their use accounts for just 26% of in-person point-of-sale payments.
A recent study by WorldPay shows that digital wallets are expected to become increasingly popular in the next few years, with 33% of in-person payments being made using them by 2024.
As more and more countries consider digital currency, the use of cash could drastically be reduced.
In recent years, China, Mexico, and the United States have all piloted programs that would make digital wallets more widely accepted and used. If these programs are successful, it could mean significant changes in how we use money in the future.
Regulators are Catching up to Fintech
Regulators are starting to understand the potential dangers of disruptive technologies, such as virtual currency.
As the popularity of buy now, pay later (BNPL) services continue to grow, the Consumer Finance Protection Bureau (CFPB) has signaled its intent to regulate the space.
Fintech companies can expect to see more regulation in the near future as the CFPB continues to step up its enforcement of consumer protection laws. Of the 18 enforcement actions issued by the CFPB so far this year, only one has been directed at a fintech company.
The Securities and Exchange Commission’s chair, Gary Gensler, signaled the agency’s intent to regulate cryptocurrencies during its last investor advisory committee meeting in 2021. This move is no surprise, given digital currencies’ growing popularity and value.
The acting chair of the Federal Deposit Insurance Corporation has similarly acknowledged the risks posed by crypto-assets merits that the agency prioritizes regulation of such assets in 2022.
Other agencies are also closely examining the potential applications of cutting-edge technologies such as artificial intelligence and machine learning within the financial services industry.
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