Financial services: 5 trends to watch in 2022

February 21, 2022 10:01
Image: Reuters/HKMA/EJI

As we turned the page on 2021, it’s time to think about where financial services is going next. Here are some big trends that will shape the space in the year ahead.

1. Decentralized finance (DeFi): Look out for Southeast Asia

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.”

Southeast Asia is seeing explosive growth, with tech startups operating in the region’s DeFi ecosystem raising close to $1 billion in equity funding last year.

2. Growing institutional interest in crypto & 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. 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.

Despite the complexity, nearly a quarter of corporations are investing in blockchain or digital currencies in the coming year, according to the 2021 FIS Readiness Report. As more and more investors look to add crypto to their portfolios and more corporations add it to their balance sheets, we’ll start to see the emergence of more mainstream technology and services platforms to support this infrastructure.

3. 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 investors 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.

4. Ever-expanding regulatory mandates

Of course, regulations don’t go away, and we can expect the demand for RegTech to continue. The global RegTech market is forecast to grow from US$6.3 billion in 2020 to US$16.0 billion by 2025, a rate of over 20% per year, with APAC expected to have the highest growth rate over the period.
The biggest challenges today 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.

5. Evolving 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. SME 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.

Additionally, 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 important in 2022.

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.

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Group Managing Director, APAC and MEA, Capital Markets at FIS