Digital Transformation of Financial Services Expected to Continue in 2023, as Fintech Ecosystem Matures

The financial services sector has evolved considerably during the past decade, with many new Fintech startups and banking challengers raising substantial funding to fundamentally improve how consumers perform transactions. Individuals and business organizations across the globe have been moving their activities online, a digital transformation trend that has accelerated following the COVID-19 outbreak. As we look back at the key developments in Fintech during 2022, it becomes clear that consumers and businesses are still looking for flexible payment options, including BNPL, contactless transactions, and more affordable cross-border transfers.

According to Akash Sinha, CEO & co-founder of Cashfree Payments, this year, we will “witness an increased collaboration between banks, NBFCs, and payment networks, giving access to credit to a largely underserved market and creating a new customer base.” While Sinha’s comments mainly reflect the key Fintech trends in India, it has become evident that Buy Now Pay Later or pay later payment options have become quite popular throughout the world.

In fact, the fast-growing alternative payments landscape in Latin America is being shaped by diversity, with account-based transfers, such as Pix in Brazil and PSE in Colombia; digital wallets, like Ualá in Argentina; cash-based transactions, like OXXO in Mexico; Buy Now Pay Later (BNPL) solutions, such as Sistecredito in Colombia, and others. This is according to Beyond Borders 2022/2023, a recent study by EBANX, a Brazilian fintech that processes payments for global players in rising markets.

Nearly 40% of American Consumers have Permanently Changed How they Make Payments

In addition to pay-later options, consumers are looking for contactless payment methods in a post-COVID world. Notably, more than a third (39%) of American consumers have “permanently” changed how they pay since early 2020, when the Coronavirus pandemic began, according to the latest research by payments Fintech Paysafe (NYSE: PSFE).

The research study also reveals that contactless payments have “gone mainstream.” The consumer research, which was performed by Sapio Research on behalf of Paysafe, surveyed 2,000 U.S. consumers during April 2022. Paysafe’s data on the state of in-store payments signals to merchants and SMBs the importance of providing a wide range of payment choices for their customers.

Modern consumers are also increasingly looking for more affordable ways to complete cross-border payments. But for businesses operating in different jurisdictions, the cost and delays associated with FX and cross-border transfers are still a “major pain point,” according to an update from Banking Circle.

Cross-Border Transaction Fees Still Too High

Banking Circle‘s study into SME attitudes to banking services found that over 40% of respondents thought their bank’s fees for cross-border transactions were too costly, with 25% saying that the FX rates offered were fairly “poor.”

Because of this, nearly 50% of SMEs surveyed had already started using non-bank service providers to access more competitive FX rates and affordable, frictionless cross-border payments, the Banking Circle report revealed.

While Non-Bank Financial Institutions (NBFIs) entering the market have enabled improved access to reasonable FX and cross-border payment services, there are still many opportunities for greater optimization, especially for bank institutions and payments businesses serving SMEs. This may be achieved by teaming up with organizations like Banking Circle.

In addition to convenient international payment options, consumers and businesses also use virtual spending cards instead of physical debit and credit cards.  Since 2020 and the recent global pandemic, digital commerce has also seen “exceptional growth,” according to an update from Juniper Research.

Online Shopping, Digital Commerce are Now Permanent Fintech Trends

While the impact of COVID forced an increase in online shopping and e-commerce usage, it is clear that it is a continuing/permanent Fintech trend, the Juniper Research team noted in their comprehensive report. Meanwhile, a study by McKinsey & Co found that digital commerce has grown two to five times faster than before the pandemic.

Along with the rise in online commerce activities, the adoption of virtual cards, where digital-only cards are used for purchases, will increase the usage of alternative payment solutions, as they only require merchants to accept card payments – overcoming previous limitations on growth.

The report from Juniper Research further noted that the advancement of virtual cards enables flexible payment schemes to effectively compete with traditional credit cards; especially in-store, where single-use payment cards may be used within a virtual wallet to carry out cashless transfers.

In order to do business in this competitive landscape, online vendors need to differentiate their services: including providing virtual cards, browser extensions that automatically facilitate frictionless payment services, and digital loyalty schemes.

Barriers to Affordable Financial Services: Billions of Dollars Still Being “Lost” in Global Transactions

In a world with rapid advancements in telecommunications technology and the rise of globalization, millions of consumers are also providing financial support to friends and family members residing abroad. But when it comes to getting those (remittances) to the intended recipients, it is a lot more costly than it should be, according to an update from Fintech Wise (LSE:WISE).

Due to the exorbitant costs associated with cross-border transfers, the United Nations (in 2015) set a Sustainable Development Goal, which is focused on reducing overall remittance costs to merely 3% or even lower in the coming decade.

During the past year, G20 nations had sent well over $200 billion in the form of remittances; however, almost $11.6 billion was reportedly “lost” to high fees needed to finalize transactions.

As mentioned in the update from Wise, if more substantial progress was made on effectively lowering the cost of remittances to the intended 3% target set by the UN, then consumers on the receiving side may have actually received $5 billion more in funds. Clearly, this is a large amount that’s being lost, and by making this money available to people who really need it, we can take a step toward enabling greater financial inclusion.

Fintech Should Be About Serving as Many Consumers As Possible, Regardless of their Background

Ideally, Fintech should be about serving as many consumers as possible regardless of their background. By allowing more consumers and businesses to enter the formal economy, we can be well on our way to becoming a more progressive and inclusive society. In line or consistent with these objectives, Daylight, a digital bank designed to build the financial products and services to help queer people live their best lives, had (earlier last year) announced $15 million in new financing led by Anthemis Group, with participation from CMFG Ventures, Kapor Capital, Citi Ventures, and Gaingels, among others.

The company said it would use the proceeds to further expand its services to support LGBTQ+ people looking to start and grow their families. While approximately 3.8 million LGBTQ+ millennials are planning to expand their family within the next few years, queer people in the US tend to face considerable logistical, legal, and financial challenges.

Along with its first offering, Daylight Money, which provides consumer finance and payment services to LGBTQ+ people, the firm introduced a new subscription service, referred to as Daylight Grow – a financial and family planning product designed specifically for queer families.

Daylight Grow is undergoing research and development of the product with a pilot program, with plans to launch it to the public in early 2023.

Underbanked/Unbanked Consumers Still Remain Financially Underserved

In other parts of the world, such as Pakistan, the majority of consumers still do not have access to modern financial services and remain largely underbanked. To address this issue, Pakistan-based Fintech firm OneLoad, which aims to serve micro-retailers, secured $11 million in funding (in August 2022) in order to support a growth phase as it focuses on tapping one of the world’s largest unbanked/underbanked nations.

The investment round has been led by Sarmayacar and Shorooq Partners, along with contributions from the Bill & Melinda Gates Foundation’s Strategic Investment Fund, which is notably its first investment in Pakistan.

OneLoad’s Android app, which is used by smaller merchants/shopkeepers, is among the largest nonbank digital transaction platforms in the Asian country and currently serves millions of clients every month. These types of Fintech apps have become quite popular because they make it easier for Pakistani consumers to conduct transactions. It’s worth noting that Pakistan has one of the world’s largest freelance economies, and a large percentage of the country’s workforce is quite young.

But nearby India is clearly leading when it comes to overall Fintech adoption. As reported recently, Bengaluru-headquartered Fintech lending platform KreditBee has extended its Series D funding round with a $100 million investment from private equity firm Advent International.

The Advent funding has now topped up the first tranche of the Series D investment round, which also netted $100 million and included contributions from Japan’s Mitsubishi UFJ Financial Group as well as existing investors Premji Invest, Motilal Oswal Alternates, NewQuest Capital Partners, and Mirae Asset Venture Investments.

Established in May 2018, KreditBee primarily focuses on full-stack digital lending services for young professionals. The Fintech company has around 7 million loan customers, of which 3 million are currently active, and expects to reach $1 billion in assets under management within the upcoming nine months.

In one of the most notable funding rounding rounds of 2022, India’s consumer lending Fintech, EarlySalary closed its Series D funding round of $110 million led by TPG’s The Rise Fund and Norwest Venture Partners. This is EarlySalary’s largest fundraise to date, following the firm’s last financing round in 2019.

The latest investment will allow EarlySalary to expand its business significantly in the next 24 months. Founded in Pune in 2015, EarlySalary claims that it provides accessible financial lending solutions of up to Rs. 5 lakhs to working professionals. The company expanded into the affordability segment and introduced Buy Now Pay Later (BNPL) services to its customer segment with a clear focus on education, health and consumer product financing.

Digital Banking Platforms Expecting Many More Users in 2023

It’s now expected that these Fintech trends will continue to develop during 2023. The past few years have also made it clear that digital banking platforms are a lot more suited to meet the requirements of the 21st century consumer, instead of the typical physical branch locations.

As covered in 2022, Bank of America (NYSE: BAC) clients are increasingly relying on the company’s digital solutions to manage their finances. Clients logged into the company’s digital platforms almost 1 billion times in July of 2022, which is the highest month ever. This followed a record 2.8 billion digital logins in the second quarter, up a substantial 11% YoY. As of August 2022, the company has a record 55 million verified digital clients, up a considerable 5% YoY.

Notably, over 72% of Bank of America households are actively using digital channels for more of their daily requirements and to plan for what’s ahead. Since its launch in 2020, around 8 million customers have reportedly engaged with Bank of America Life Plan® in order to set and track progress toward short and long-term financial goals (all in an online environment).

Meanwhile, in the United Kingdom, virtual banking services have also become quite popular.  As covered recently, UK’s Starling Bank expects to more than quadruple its pre-tax profits in its Annual Results for the year ending 31 March 2023.

The bank recently revealed that it managed to generate annualized pre-tax profits of over £250 million on the back of around £600 million of annualized revenue for the month of December 2022. As of the end of December 2022, total deposits stood at a substantial £10.7 billion.

These results were published on January 6, 2023, by Anne Boden, founder, and CEO at Starling Bank. Boden wrote in a blog post that nothing surprises and delights her “as much as the ability to change.”

She added that she begins the year excited by the opportunities for change and for good that she believes “lie before us in 2023, but mindful also of the very difficult circumstances we find ourselves in.” According to Boden, in many organizations, change is “seen as something to wrestle into submission, to contain and to fear.” But to view change “as an enemy stifles innovation.” At Starling, they “like change” – it’s why they actually exist, Boden explained.

In other notable Fintech-related developments from Europe, Crowdfund Insider reported that Germany accounts for 6% of European blockchain/DLT funding. CV VC published an inaugural German Blockchain Report following its newest and fourth ecosystem hub opening, CV Labs Berlin. The report provides a structural overview of Europe‘s top-ranked blockchain country, and its publication highlights CV VC’s commitment “to building sustainable and connected global ecosystems since 2016.”

Digital Identity/Onboarding Now a Critical Part of Online Platforms

As noted in the report, German blockchain businesses have raised $217 million across 20 deals YTD (as of November 2022), 90% to Berlin Infrastructure and Defi received 55% and 27% of all funding, respectively. Remarkable utility achievements are “found in digital identity and data protection for many industrial and service industries.” Indeed, digital identity solutions are increasingly being adopted as governments realize their benefits, according to another new report.

Driven by vaccination certificates, the need for identity checks in financial services, and the potential of the metaverse, governments across the world are acknowledging the benefits and the importance of digital identity, enabling the technology to really take off in 2023 and beyond, says GlobalData, a data and analytics company.

While digital identity / ID verification is not purely a Fintech trend, these types of digital onboarding services are critical and complementary to the safe and mass adoption of all-digital financial services. It’s now the responsibility of service providers as well as tech-savvy and conscientious consumers, to conduct transactions in a secure online environment. This involves taking appropriate measures to avoid phishing scams and other types of fraudulent activities, which have increased at an alarming rate these past few years.

Retail Investors Now Have Many More Options

As we look ahead to 2023 and beyond, it’s become clear that the modern consumer is interested in making their financial services and overall online experience as frictionless as possible. Part of this now also involves becoming more active as an investor. There are now many options focused on democratizing access to lending and investment services. Some of the companies and platforms that continue to focus on this area include Bondora, Robo.cash, EstateGuru, October, Mintos, Debitum, among many others.

Based on these long-term developments, it’s evident that Fintech is no longer just a buzzword in 2023. Although there was a great deal of hype and ridiculous company valuations that have come crashing down (to reality) this past year, the fundamental value proposition of seamless financial services, enabled by innovative Fintech solutions, cannot be understated. We can expect many more large investment rounds this year, many more mega-rounds ($100M or more), and even a lot more Fintech Unicorns.

In fact, venture capitalists invested a record $41.0 billion into the retail fintech vertical in 2021, representing a 78.6% increase compared with 2019’s $23.0 billion, according to an update from Pitchbook. VC investments into the banking and credit and Wealthtech segments led this surge.

Neobanks Now have Over 200M Customers

The report from Pitchbook also mentioned:

“Over the last several years, neobanks, also referred to as digital banks or challenger banks, have become increasingly popular among consumers. Based on our estimates, neobanks have over 200 million customers around the world. Unlike incumbent retail banks, neobanks do not operate physical branches and thus offer banking services through websites or apps. Often, this results in financial services that are more convenient, faster, and more accessible than those provided by traditional banks.”

It can now be expected that these more agile neo-banking/Fintech platforms can continue to attract more funding in 2023, because they provide a more viable/accessible option for individuals and businesses.



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