Financial Services Top 3 Predictions for 2022
Where are you seeing things go?
1. Banking M&A: Digital and Small
Digital and Small Banks Combine to create the new competitive front in FinServ
More M&A? Bank mergers will close 2021 at historical levels – from JPMC’s roughly 30+ acquisitions, the U.S. Bancorp/MUFG Union Bank tie-up to M&T Bank/People’s United Financial regional play. We can attribute a lot to deal catch-up from 2020 and higher confidence in the economic outlook.
So what does 2022 hold? Lots more. In banking, this will accelerate and most notably at the credit union and community banking levels. While consolidation has been substantial for a while in this segment, modernization and scale are the driving forces to compete for the thousands of community banks and credit unions in the U.S. and EMEA’s large banking countries? – the UK, Germany, France. The regulatory and cost pressures only exacerbated the continued need.?
What’s different? Expect some more extensive name fintech and bank deals. Technology and innovation are business model requirements, and acquiring digital capabilities and cross-sell opportunities out of the fintech market motivate banks to buy. As for Fintechs, the regulatory hurdles to obtain banking charters for those positioned to compete with banks will be too challenging and burn rates too high to wait – this is where 1+1 can be 3.
Across the board, sorting out the technical knots that come with M&A will be paramount to maintaining pace in the market.
2. Financial Services Virtues (ESG) & Operational Risk (Cyber) Become Reporting Requirements
For G-SIBS, ESG & Cyber Reporting Disclosures Become Law
ESG (Environmental, Social & Governance) & Cybersecurity topics have dominated headlines, investment, and business model operational uptake in Financial Services for the past several years. 2022 will be no exception. These two areas have become so critical for modern financial services that regulators are moving to improve transparency the way they have with capital requirements in the past.
For ESG, Financial services have tapped into an enormous market opportunity – in the trillions and across all security types globally. As benefactors of this market, the largest banks are also rapidly working to improve their ESG profiles as scrutiny heightens.
Cybersecurity, a boardroom-level governance topic, is well known as an area of increased investment in Financial Services. That said, the very digitalization that can improve market opportunities has also become one of the most significant factors contributing to greater security risk.?
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For both ESG and Cyber, credit agencies have already started to factor these into ratings. The more they impact credit and other capital aspects for financial services, the more the sector will respond. As for regulators, they are keen to avoid another black swan event like the 2007-2008 financial crisis and would prefer to be proactive. More nation-state-level requirements may come, as we’ve seen in 2021 with the White House executive order for the federal government. Transparency is paramount, and we may see the SEC (in the US) and FCA (UK) call for reporting requirements in 2022.
To facilitate, Financial Services firms are focused on platforms that can improve environmental impacts (ex., datacenter improvements) and enhanced holistic security controls. Platform requirements increasingly call for automation, advanced data, and embedded intelligence while being resilient, open, and hybrid.
3. Several larger countries make Crypto legal tender
These actions prompt the US to introduce crypto laws into Congress
El Salvador was the first country to do this in 2021, and Brazil appears ready to follow suit. The uptake of crypto as legal tender seems to be more about when rather than if for many countries. Interest appears to be most significant for developing countries. And uptake amongst this group will be swifter in 2022, primarily as compliance and fines, for example, in money laundering, are written into law to help reduce risks. Using crypto as legal tender for developing countries is cited for fostering broader participation for unbanked, lower payment fees, and attracting more trading partners globally.
Unsurprisingly, countries whose currencies represent the world's most traded (ex. US Dollar, Euro, Japanese Yen, British Pound, Canadian Dollar, Chinese Yuan, etc.) have a much different view than El Salvador. While it may be a suitable medium of exchange, even JPMC facilitates coins; for example, crypto's volatility, let alone fraud, concerns many major countries. China is the most notable example, where once it was the largest mining country, it has banned the use of crypto and criminalized crypto mining – it's partly why you're seeing companies like US-based Foundry Digital becoming great successes.
At the heart of the matter may very well be control and trust. Central banks and governments weigh how to contend with a global decentralized monetary system that could undermine its vested interest and authority of its countries' currency. The other is trust, which is linked to stability (or perception of such) for a nation's people and its trading partners. Looking back to the mid-1900s in the US, "some 8,000 different entities issued currency, which created an unwieldy money supply and facilitated rampant counterfeiting."
Crypto and the blockchain can be a massively beneficial and efficient payment system, but it may also be disruptive to many existing monetary frameworks and participants. Crypto and its evident growth, notably as an investing asset class (ex. speculation and inflation hedge) and how crypto is defined, will move from regulator and agency conversations to a bill introduced in the US and EMEA in 2022.
One thing is clear – things are moving forward, and the technology underpinning continues to harden and improve – notably for the blockchain. Here we expect to see continued investment to build out infrastructure that integrates with the block that scales and can interoperate with other peripheral systems to make whatever crypto and its issuer lead in global markets.?
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