With the FinTech industry growing, businesses need to stay on top of the latest developments in the market. Nick Aronson, VP Capital Markets, APAC Country Management, FIS, speaks to us about the latest technology in the financial services space and how companies can capitalise on them this year.
2023 is predicted to be a difficult year for businesses and consumers alike. Continued inflationary pressures and the global economic slowdown are impacting Australia’s growth prospects for the year ahead.
Economic uncertainties present particular challenges, but it is also an opportunity for businesses to gain a competitive edge. We’ve learnt from past recessions that those who manage costs while simultaneously counter-cyclically investing in innovation can often emerge stronger. The right financial technologies can not only enable firms to become more efficient in cost, resource and process, but they can also deliver new value propositions to help meet evolving customer expectations.
From virtual and embedded experiences to digital assets and decentralised finance, potentially disruptive innovation is appearing faster than ever. How can businesses in Australia find their feet on a ground that’s constantly shifting? Here are three key FinTech trends to watch this year.
Embedded finance empowering brands
Australian consumers are well used to the speed and convenience of paying for goods and services in an app, with just a single click. However, embedded payments are not the only example of embedded finance. New use cases across banking, lending and investing are emerging and these financial flows are becoming embedded into different industries at the point of need, from travel to healthcare and many others.
This trend is becoming so prevalent that nearly half (46%) of non-financial businesses – including retail, restaurants, travel, gaming and online content and technology providers – in Australia said they are already offering or developing embedded finance services, according to our 2023 Global Innovation Report.
They rely on technology that operates in the background, processing the communication and exchange of data – making the experience so seamless to the end-user as to appear almost invisible. Banking-as-a-Service (BaaS) is one of the main models that empower this, by allowing third-party software providers to access bank functionality through application programming interfaces (APIs).
The same study found that 39% of financial services firms in Australia will significantly invest in embedded finance products within the next 12 months. With new technological advancements, it will become even easier for firms to layer financial capabilities to their products and enhance their offerings.
Betting big on DeFi technology
Decentralised Finance (DeFi) and the technology behind it – the distributed ledger – sometimes incur negative connotations because of their association with cryptocurrency. So why do half of financial services firms (50%) that we surveyed in Australia say DeFi is a major growth opportunity for their organisation?
Because DeFi has much wider uses than just the speculative trading of cryptocurrencies. DeFi brings together blockchain, digital assets and financial services and plays a much larger role than just enabling crypto. For digital assets alone, the Tech Council of Australia’s latest report estimates that there will be US$15-$20 billion in investments and up to 1,000 start-ups in the digital asset space by 2030.
The attraction of DeFi is that its technology can be used to build markets that are highly automated, faster and open 24/7. Whether tokenising existing asset classes like stocks or bonds, being used to create liquid markets in real estate, artwork and private equity or managing title and payment flows in global trade, DeFi is attracting serious attention, funding and brainpower.
Test cases are moving out of the lab and into the real world. Examples include the development of digital fiat currencies, the settlement of FX transactions using DeFi protocols, and the issuance of digital bonds over a blockchain. The Reserve Bank of Australia has recently released its report on the future of stablecoins in the country and noted that ‘stablecoins have the potential to enhance the efficiency and functionality of a range of payment and other financial services’. While it is still early days, we are heading towards a future where a part of international payments, currency transfers and equity investment may be done in part or completely on a DeFi model.
Playing the long game with ESG
A KPMG survey found that global executives are putting Environmental, Social and Governance (ESG) goals on hold as they anticipate a recession. However, ESG is a critical imperative that should not be sidelined. Companies must think long-term. Based on our Global Innovation Report, financial services firms believe ESG is an opportunity to improve their competitiveness in the market. And they’re developing new products and services to take advantage.
However, ESG is complex. Companies are trying to analyse data from multiple sources and what’s even more challenging is that there’s very little standardisation of data collection, calculation and metrics. Couple all of this with regulatory requirements that aren’t completely clear and constantly changing and it’s no wonder that many firms are unsure if they have the right technology or practices in place.
While Australia is yet to see any major developments in terms of mandatory reporting, now is the time for businesses and financial services firms to prepare themselves before these are inevitably introduced. Our study also found that 59% of financial services firms in Australia are already investing in technology to improve their ESG reporting and disclosures and 66% of firms are giving clients more transparency into ESG scores. Companies that make the right investments will be in a better position to capture ESG opportunities now and beyond the recession.
Australian businesses have always been early adopters when it comes to advanced technologies, but now more than ever it’s crucial to prioritise what’s going to give the biggest returns. It’s easy to cross innovation off the list when economic pressure is high. But in tough times, it is all the more important for businesses to invest in innovation focused on short-term strength and resilience, and longer-term growth. We believe keeping a finger on the pulse of these key areas, as well as investing in the right new technologies, will put firms in a stronger position to unlock new potential and compete.
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