5 predictions for banking and fintech in 2023

by James · January 11, 2023

Picture of Ozzy OSBOURNE; posed, at home, with crystal ball (Photo by Mick Hutson/Redferns)

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OBSERVATIONS FROM THE FINTECH SNARK TANK

It’s the start of a new year, which means it’s prediction/trends/forecasting season for industry experts (like me).

I always look forward to seeing what people have to say about what’s in store for the coming year, but to be honest I’m usually disappointed with most lists.

A list that basically says “things that started this year will continue into next year” is not very informative. Then there’s the confusion between “prediction” and “trend.” Saying “things that started this year will continue into next year” doesn’t really qualify as a prediction, does it?

I recently received an email containing someone’s “open banking” predictions for 2023. Number three on the list: “The search for value continues.” Is it a prediction? I don’t even know what he means by “value”.

Back in the early 2000s, pundits would predict that each coming year would be “the year of the customer.” Still waiting for it.

Five predictions for banking and fintech in 2023

In the hope that I don’t fall into the traps that other pundits have fallen into, here are my banking and fintech predictions for 2023:

1) Big banks will enter BaaS

Conventional wisdom holds that BaaS (banking as a service) is a small bank’s play because of the favorable exchange rates sub-$10 billion (in assets) banks have.

For big banks, doing a 70/30 revenue share deal (fintech to bank, versus the 50/50 offered by smaller banks) is just a margin decision for a big bank like JPMorgan Chase or Bank of America.

If the potential partner – which to me is more likely to be a large retailer or merchant than a fintech start-up – promises a high volume of payments or even better loan volume, the big banks will be more than willing to take the hit on the exchange margin.

However, the big banks will not necessarily enter BaaS by collaborating with consumer-facing fintechs. They will focus their BaaS efforts on the commercial, or small business, side by partnering with vertical SaaS providers that have existing relationships with businesses in different vertical markets (for a good example of this strategy, take a look at Maast from Synovus Bank).

2) Embedded fintech will be a bigger trend than embedded finance

Consulting firms such as McKinsey and Bain estimate that embedded finance will grow to trillions of dollars in revenue in the United States over the next few years. In a recent LinkedIn post, I wrote that by 2025 there would be no more than 300 banks providing BaaS services. Most of the commentators thought I overrated by a factor of three.

So if only 100 banks are going to be in the BaaS business, what are the other banks and credit unions going to do? Follow a built-in fintech strategy.

Embedded fintech – the integration of fintech products and services into financial institutions’ websites, mobile apps and business processes. Cornerstone Advisors’ research found that more than 50% of consumers want their banks to integrate services such as identity theft protection, data breach protection, subscription management and bill negotiation services with their checking accounts.

This strategy will be particularly important in 2023 when many banks will see a decline in lending volume.

As platforms like Square, Amazon, and Shopify diversify their service offerings (often into, but not limited to, financial services), they deepen their relationships with small business customers. A small business-focused embedded fintech strategy will be necessary for banks to counter this trend.

3) Buy now, pay later will make a comeback at the banks’ expense

Buy now pay later (BNPL) providers will evolve from financing individual purchases to financing lines of credit. In other words, BNPL will become the new entry-level offer for credit cards. Although there are vendors helping banks to offer BNPL services, very few banks show any interest in this service according to Cornerstone Advisors’ What’s Going On in Banking study.

With fewer banks and credit unions focusing on credit cards in 2023, mid-sized financial institutions are potentially positioning themselves outside of future credit card growth. Many people – not just bankers – misunderstand the BNPL area. Companies like Klarna and AfterPay are not “BNPL companies” – they are platforms for merchant activation. They help sellers sell more – with payments only a small part of the offer.

4) The Supreme Court will uphold the constitutionality of the CFPB

If bankers think the CFPB is a thorn in their side now, just wait until they see what 2023 holds for them. In a blow to the banking industry, Roberts and either Barrett or Kavanaugh will side with the left-leaning justices to uphold the constitutionality of the Consumer Financial Protection Board.

Overall, the regulatory environment for banking in 2023 is going to be nasty. Recently, the FTC told Mastercard that it must provide other debit networks with the keys needed to convert tokenized card account information — encoded for security purposes — back to the original account number for online transactions. Apparently, merchant and retailer revenue is more important to Washington regulators than fraud prevention and consumer safety.

5) 2023 will be the “year of the chatbot” in banking

After years of hearing pundits and futurists tell them how disruptive AI is going to be in banking, 2023 will finally be the year bank executives do something about it.

Not because they follow the advice of the pundits, but instead because their kids and friends want to show them how cool ChatGPT is.

Financial institutions also need to make investments in conversational AI to accelerate their digital transformation efforts, and many—especially credit unions—seem poised to do so. In Cornerstone Advisors’ What’s Going On in Banking study, one in four credit unions said they plan to deploy a chatbot by 2023.

Although I predict that 2023 will be “the year of the chatbot”, I am not predict that the quality of many chatbot interactions will be particularly good.

Looking beyond 2023, banks will demand more than just “chatbot” distribution.

To respond to the need for a higher caliber of digital services and engagement, financial institutions must implement Intelligent Digital Assistants (IDAs). What is the difference between a chatbot and an IDA?

Chatbots can be defined as rule-based systems that can perform routine tasks with general FAQs. Fully equipped with natural language understanding, IDAs can support a wider range of use cases with greater ease of deployment and onboarding, and a higher quality, more sophisticated conversational capability.

Do you want to hear more about what 2023 will bring for the banking and fintech industry? Join Ron Shevlin on January 18 for What is happening in banking webinar. To register, click here.