These technologies have the potential to transform the FinTech industry in the coming year fundamentally.
The dramatic ups and downs in fintech stock earlier this year showed that new financial technologies could have a massive impact on actual market events. In 2023, the course will again be set for this. The following technologies have the potential to change the FinTech industry in the coming year fundamentally.
FinTech trend 1: Decentralized Finance (DeFi)
Blockchain-based currencies have been widely known since the first Bitcoin boom at the latest. The advantages of cryptocurrencies are also clear: They are independent of central banks and governments, can be easily transferred worldwide, and are – the essential feature – well protected against hacker attacks due to the decentralized structure. However, the development history of blockchain technology continues after Bitcoin but is only beginning.
The core of this development is the so-called Decentralized Finance (DeFi), an entirely new world of crypto banking. So far, cryptocurrencies have been traded on central exchanges just like classic currencies. However, their central feature is lost in the process: the decentralized network structure.
In 2022, DeFi was still a topic for financial nerds. In 2023, the trend will reach the broader masses. At the same time, the chaff and the wheat will be separated, i.e., the reputable from the dubious providers.
Decentralized financial systems are made possible by so-called smart contracts. These are computer programs in which the actors involved write their desired transactions. Central control authority is no longer necessary. The stored data is located in a decentralized blockchain network, so later changes are no longer possible.
There are basically three ways to use DeFi: staking, lending, and liquid mining. All processes are based on the fact that cryptocurrency owners make a certain percentage of their computing power available to the system. For this, they receive rewards.
However, it is essential to have a trustworthy provider. Since this is a relatively new technology, dubious companies are unfortunately also on the move. Without legal regulation, it doesn’t work in the DeFi area either. Trustworthy platforms have recognized this and undergo the process despite their fundamental independence from state institutions. For example, Cake DeFi, a platform for decentralized financial services, meets all the regulatory requirements of the Monetary Authority of Singapore (MAS).
The combination of decentralized network structure and legal regulation allows people worldwide to find out about crypto solutions and use DeFi safely.
FinTech trend 2: Open banking is conquering payment transactions
In 2018, the European Union gave fintech a massive boost with the PSD2 directive. But the far-reaching changes will be visible in 2022, four years later. PSD2 obliges banks to set up open data interfaces for third-party providers.
In the first phase, fintech used customer account information and create apps, for example, into which accounts from a wide variety of banks could be integrated. This is followed by payment processing, a highly lucrative model for fintech, very pleasant for customers – and very threatening for traditional banks.
Because Open Banking enables the immediate and secure networking of different players, intermediaries are no longer necessary in contrast to traditional financial transactions. A company, for example, an online shop, can establish a direct connection to the customer’s bank account – without the service of a card or other payment provider.
This not only makes the process easier for the customer since they do not have to type in a long account number. It’s also beneficial for the merchant because the process is faster, which means lower transaction fees, less fraud, and lower error rates – and, therefore, more revenue or lower operational costs. However, for established banks, there is a great danger of ending up as pure money custodians, cut off from many lucrative services.
FinTech trend 3: All-in-one finance
No one really likes doing it: managing personal finances. What sounds like “tax returns” and “Excel spreadsheets” to many people often requires working in the evenings or at weekends. And for many companies, bookkeeping is a significant pain point. Start-ups and freelancers in particular, have to spend valuable resources to keep their documents up to date.
It’s about more than just the legal requirements: Well-founded business decisions are only possible with an up-to-date and precise picture of the financial situation. But the offers were fragmented for a long time. For example, there was tax software for billing and several different tools for bookkeeping.
What needed to be added were solutions enabling financial organization from a single source. In the meantime, start-ups have developed exactly this offer. The various financial tools are no longer separate from each other but are integrated into one solution. While pioneering work was done in 2022, the technology is poised to win the market with momentum in 2023. The aim is not to add up as many programs as possible but to create automated financial management that noticeably reduces the workload.
FinTech trend 4: crowd investing in real estate
Given growing concerns about inflation, ongoing low interest rates, and volatile markets, the trend toward alternative investment forms will continue. In 2022, there will be a particular focus on real estate investments that have long been reserved for institutional investors. Real estate crowdfunding, which also allows small investors to participate in real estate financing, is particularly popular.
The application of the topic of environmental and social governance, or ESG for short, to investments is also being examined. Crowdinvesting investors can participate in construction projects with amounts starting at $500 and build up real estate assets.
Digital technologies make it easier for investors to manage, track or learn about these contributions. Many modern investors are digital-savvy, self-decided, and independently look around for information. No property is purchased, but the development and construction of a real estate project are co-financed.
The risk in financing real estate projects is that, for example, a construction project still needs to be finished and is sold at a much lower price than calculated. In such cases, the bank is served first and only then the crowd so that crowd investors can get nothing in the end.