The pandemic has accelerated the pace of change in the banking sector, and increasingly more banks are looking beyond the infectious disease to improve their performance and profitability.

Each year brings with it unexpected challenges. It also highlights the art of the possible. The resilience demonstrated by banks to weather the pandemic and to reframe their future augurs well for 2022. So, what can we expect for the banking industry in 2022? 

Here’s what we expect for the year ahead that will impact the evolving business of banking.

 

Open banking

More than 60 countries have launched open banking initiatives, and this transformative trend is likely to continue, either regulatory-driven or market-led.

According to a Mastercard report (June 2021) titled, “Open Banking Readiness Index: The Future of Open Banking in Europe,” the U.K. and Nordic countries are best placed to make the most of open banking thanks to a high number of open banking APIs, progressive regulators, and customer readiness. In the United States, President Biden’s executive order (June 2021) directing the Consumer Financial Protection Bureau (CFPB) to prioritize Dodd-Frank Act regulations would make it easier for consumers to access their data and transfer it to other banks and fintechs.

A core principle of open banking is enabling consumers to voluntarily share their financial data with other entities. Its adoption would make it easier for neobanks to become customers' primary banks and would also help banks partner with fintechs. And while there are concerns around privacy breaches, data security and cybercrime, open banking is likely to alter the competitive landscape of the financial services industry and facilitate introduction of innovative products and services.

 

Real-time payments (RTP)

Today, more than 50 countries offer real-time payments processing and settlement, with more preparing to follow suit. This is a significant increase from just a handful of countries in 2019.

The COVID-19 pandemic rapidly accelerated the growth of real-time payments around the world. Nearly 70.3 billion real-time payment transactions were processed globally in 2020, a surge of 41 percent compared to the previous year, according to the 2021 Prime Time for Real-Time report from ACI Worldwide. The share of real-time payments across all electronic transactions was 9.8% in 2020 compared to 7.6% in 2019 and is expected to reach 17.4% by 2025.

“Countries with a robust digital payments infrastructure already in place have coped better than those without when it comes to containing the economic impact of the pandemic,” observed Jeremy Wilmot, Chief Product Officer at ACI Worldwide. “Real-time payments have enabled governments, working jointly with financial institutions, to accelerate much-needed disbursements and economic stimulus payments to their citizens.”

According to the ACI Worldwide report, nearly 1.2 billion transactions were processed in real-time in the U.S. in 2020. The forecast for the five-year 2020-25 timeframe is for a CAGR of 43.4%, or 6.2 billion additional transactions.

India led the global tally with the highest number of real-time online transactions in 2020, followed by China, South Korea, Thailand and the U.K. The United States was ranked ninth among the top 10 countries by number of real-time transactions.

Faster, accurate, secure and more efficient payments are important aspects of a cohesive real-time payments strategy, and so is payments modernization that will uncover more revenue streams for banks. With instant payments gaining global momentum and digital transactions rising, more banks will invest in real-time payments in 2022, and in doing so, they will be investing in the future of payments.

 

Buy now, pay later (BNPL)

BNPL is becoming an increasingly popular alternative for payments at checkout for consumers, with continued traction expected in 2022. In 2021, PayPal’s BNPL witnessed a 400% year-on-year rise in volumes on Black Friday.

BNPL helped drive US $97 billion in e-commerce sales in 2020, according to research from payments giant, Worldpay. The same study estimates BNPL will grow from 2.1% of 2020 global e-commerce transactions to 4.2% by 2024. In 2021, RBC Capital Markets estimated these point-of-sale loans increase retail conversion rates 20% to 30% and lift the average ticket size between 30% and 50%.

While BNPL is an important driver of retail sales, it is considered irresponsible for encouraging overspending among consumers. And with the rise in consumer debt, BNPL has drawn scrutiny from regulators who fear consumers can accumulate excessive debt. The CFPB is peering into the policies of the most notable players in the BNPL industry.

In 2022, many countries are likely to take regulatory action, including Australia and the U.K. The European Union is expected to bring BNPL products under the scope of regulation. However, as most of the concerns are related to consumer protection, it is unlikely that BNPL will face an outright ban. Better credit checks and judicious limits may be a preferred choice to rein in profligate spending.

 

Artificial intelligence (AI)

The banking sector has been one of the fastest adopters of AI technology that has enhanced fraud detection, helped discover and manage cyber threats, assisted in making more unbiased and informed credit and risk management decisions, streamlined customer service and more. 

According to research by The Economist Intelligence Unit and Temenos (February-March 2020) that surveyed 305 banking executives on themes relating to the digitization of banking, four in five (81%) reported that unlocking value from AI will be the key differentiator between winning and losing banks.

The 2021 Worldwide Artificial Intelligence Spending Guide from International Data Corporation (IDC) forecasts global spending on AI systems will jump from $85.3 billion in 2021 to more than $204 billion in 2025. The compound annual growth rate (CAGR) for the 2021-2025 period will be 24.5%.

IDC’s Spending Guide enumerates that retail and banking are the two industries that will spend the most on AI solutions over the five-year forecast period, with bank spending (13.7%) only slightly outpaced by retail (13.8%).

Over the course of the year, AI will become increasingly integrated across the various touchpoints of the consumer’s financial journey, enabling banks to acquire a more comprehensive and accurate understanding of individual customers’ relevant needs and preferences at scale. Conversational AI such as chatbots and virtual assistants will continue to make customers’ banking interactions more human-like.

AI deployment is not just a technology decision, and more business leaders in banks will begin to view it as a business decision. In 2022, it is expected that the combination of big data and AI will be one of the most important differentiators in the global financial services industry.

 

Sustainable banking

The pressure on organizations to meet environmental, social and governance (ESG) criteria is more widespread than most finance leaders might realize - 85% of investors considered ESG factors in their investments in 2020, according to research presented by Gartner, Inc., at the Gartner CFO and Finance Executive Conference 2021. “Ninety-one percent of banks monitor ESG, along with 24 global credit rating agencies, 71% of fixed income investors and over 90% of insurers,” as per Gartner’s research findings.

From green loans to banking apps with sustainability and carbon-tracking features, 2022 will be the year of sustainable banking and innovation.

In the United Kingdom, National Westminster Bank (NatWest) has taken huge strides in this area, having recently partnered with Cogo and Tink to launch a carbon tracker in NatWest’s mobile banking app to help customers instantly see and reduce the carbon footprint of their spending.

In Saudi Arabia, HSBC and Saudi National Bank (SNB) have teamed up recently to create “SNB’s Sustainable Finance Framework” that will establish a new benchmark for regional ESG frameworks. It will facilitate and focus on long-term investments in sustainable economic activities and projects.

Banks are stepping up and investing in projects that tackle climate change. In 2021, Citigroup committed $1 trillion to sustainable finance by 2030. In December 2019, Goldman Sachs pledged to invest $750 billion within the next decade to combat the climate crisis.

In 2022, financial institutions worldwide will continue to intensify their support to build a sustainable future. Ensuring that finance is tied to sustainable outcomes will not only assist corporations in growing responsibly, but will also aid in channelling economic flows toward creation of a sustainable society.

What is the one thing that these five predictions have in common? Banks that embrace a future-ready technology strategy will thrive in 2022 and beyond.