This year is threatening to be a challenging time for the planet. It is expected to be one of the hottest years on record. And while the world deals with the growing climate refugee issue, the uncertainty produced by the COVID-19 pandemic, massive supply chain disruptions and the Ukraine crisis all have combined to make a global recession in 2023 increasingly likely.
Amidst this uncertainty, the economy – specifically fintech, crypto and banking – are all coming off challenging years. While 2022 remained the second largest fintech venture funding year on record, the slowdown in the venture flow we saw in 2021, the seemingly endless wave of fintech layoffs, a few notable closures, the collapse of FTX and the tanking of crypto assets globally along with community banks and credit unions seeing customers move towards more digital competitors means the year was tough for the entire sector.
It wasn’t just financial services either. The Ukraine crisis and Russian sanctions affecting EU energy markets combined with the start of an emerging global shift away from hydrocarbon energy generation has also put extraordinary pressure on the energy sector.
Meanwhile, the pandemic reset expectations around many areas of the economy such as working from home versus in commercial office real estate around the world, something that is still playing out in the post-COVID world. One of the key issues is ensuring that digital transformation doesn’t create even greater inequality.
“An inclusive economy – in which there is widespread access to opportunity – is a stronger, more resilient economy. This crisis must serve as a wake-up call and a call to action for business and government to think, act and invest for the common good and confront the structural obstacles that have inhibited inclusive economic growth for years.”
Jamie Dimon, CEO of JP Morgan Chase
Regardless of where you fit in this puzzle, the need to innovate has never been more acute.
Innovation drives the future of business
The FIS® 2023 Global Innovation Report found that across the world organizations are increasingly leveraging advances in technology and digital distribution to disrupt legacy business models and become more future-ready. While some of these innovations are iterative – improving upon legacy processes and deliverables – the biggest innovations such as embedded finance, cryptocurrencies and the metaverse will take longer to create value.
At least three-quarters of respondents to the FIS survey expected a major or moderate impact from three key innovations including a change in business models, the potential for increased risk and increased competition. Virtually no respondent believed these trio of innovations would weaken customer relationships.
Winning organizations are building the capabilities, talent and organizational structure needed for innovation success. The goal is to provide value beyond just products and services, displaying an empathy for customer needs that will strengthen relationships throughout the entire customer journey. The importance of an innovation culture is increasingly understood by leaders across industries. Those who stick with traditional processes will be forced to play catch-up in the years to come.
Innovation requires modernized platforms, simplified applications and democratization of data. That said, outdated technology can't be an excuse for failing to innovate.
An organization’s leadership has a direct impact on the ability to create innovation and on the success of innovations already in place. This includes both the top leadership of an organization as well as those in a lower supervisory position. A culture that encourages new ideas and a challenger mindset is now essential.
Better utilization of data allows organizations to offer a more personalized and differentiated user experience to keep customers more engaged – whether in the areas of embedded finance, cryptocurrencies or metaverse solutions. Every interaction across these innovations will also provide valuable data, which then helps inform how an organization can better personalize the experience and drive engagement.
Bottom line, the entire future of innovation hinges on the availability, democratization and deployment of data, analytics, modern technologies and seamless solutions
Challenges to the innovation process
The 2023 Global Innovation Report outlined the hurdles to implementing a trio of innovations: the metaverse, embedded finance and crypto. Many respondents across industry verticals mentioned both human and financial resource availability, the lack of technical skills, an outdated infrastructure as well as uncertain business cases.
More often than not, however, legacy leadership and cultures that fight change are at the core of the challenges to the innovation process. They resist the concept of “fail fast and fail often,” which is commonly interpreted to mean encouraging short-term thinking or simply moving from failure to failure as quickly as possible. This style of innovation is instead supposed to encourage rapid iterations, learning from mistakes as companies test, tweak and reset as needed.
Organizations that encourage this iterative mindset test as much as possible with their customers, adjusting until an optimal result is achieved. Making mistakes is not taboo; it is considered simply an important component of the innovation process.
Partnership and collaboration remain key
Organizations in every industry continue to debate what the digital ecosystem of the future will look like. The majority of organizations believe that some sort of partnership or collaboration with specialty third-party providers will be needed to move forward successfully. The question is how should these solutions be integrated with existing core capabilities already in place?
Despite the perception that core technology providers should be able to deliver all the needed modern digital solutions desired by legacy organizations, it is very tough to support so many specialized digital solutions that change so rapidly. The shift to platform-based business models and an ecosystem set-up provides legacy institutions with various opportunities if they decide to enter into these collaborations.
As you would expect, there is not a single right answer. Factors to consider include financial dependencies, brand and reputational aspects, responsibilities of each party, operational dependencies (e.g. level of integration versus separation) and the level of involvement from management. Key challenges for an effective collaboration include cultural gaps, getting the back-office “ready” for integration of new solutions and scaling from a technological perspective.
The foundation of much of the potential collaborative innovation will be the increasing use of application programming interfaces (APIs) that enable the sharing and co-creation of solutions between financial institutions, non-financial players and third-party providers. These collaborations will enable the collaborative forces to explore alternative products, methods of service delivery and even revenue models while providing a vastly improved and seamless experience for the end customer.
Trends picking up in 2023 that will be more important in future years
Despite the uncertainty we face this year, we are on the cusp of major investments playing out in specific arenas of long-term investment. These are the trends we feel will take off big time in 2023 and be foundational elements for the next decade or so.
The impact of GPT and AI generated creativity
Generative Pre-trained Transformer, or GPT, is the most disruptive form of AI-based natural language processing that we’ve seen evolve in just the last few years. It is one of a set of generative models that the company OpenAI has pioneered.
ChatGPT, the latest iteration in language-based processing algorithms, has been talked about globally the last couple of months, especially with more than one million users experimenting with the tech and the recent news that Microsoft is in discussions to take a $10 billion stake in the team that created it and is already in plans to integrate ChatGPT into Office, search and other products.
But where ChatGPT (GPT-3 and 3.5) was based on approximately 175 billion learning parameters, the next iteration of the tech known as GPT-4 is said to be based on much larger datasets. GPT-4 will reportedly be able to perform tasks such as translation and summarization with high accuracy in real-time. At some point over the coming months, a generative AI will prove itself to be more accurate grammatically than most of us and will certainly be able to write prose better than most of the population.
This is a great illustration in understanding the threat that these early AI models pose, even though they aren’t “sentient” or general AI. These models essentially compress billions of examples of human creativity into a data set and generative algorithm to become a compressed, filtered, natural model of the language of millions of humans collectively.
This generative model can be applied to artwork, diagnostics, customer service, even more complex systems like protein models or the periodic table. We can extrapolate new paradigms from these models beyond human capabilities even with these early generative models. What comes after this will logically be something beyond our current capabilities as humans.
The cloud matures
More than half of Enterprise IT will move to the cloud over the next few years, according to Gartner. The European Commission is pursuing a “Green Cloud” initiative to define data center energy management standards as the demand for cloud computing rises also. There’s also a growing concern that on-premise solutions will continue to perform below required levels when it comes to cybersecurity, whereas cloud solutions are building better “immune” responses to such threats.
Crypto winter just means CBDCs get a chance to catch up
China’s launch of their e-Yuan Central Bank Digital Currency (CBDC) has been a point of contention for many US and EU-based legislators over the last 12 months, but we can expect China’s moves to strengthen their CBDC program to accelerate this year. China has an almost decade-long head start over the US when it comes to their CBDC program, and in addition, they are investing heavily in new cross-border banking and trade platforms that are designed to circumvent the likes of SWIFT, Mastercard and Visa.
The crypto winter has given central banks around the world a much-needed breather to get back to more centralized digital money pursuits instead of simply having to react with regulation and legislation for the Wild West atmosphere of the crypto market. While the FED has yet to make a formal decision in respect to issuing a US-based CBDC, they’re definitely in consultation with industry as a result of the widening gap between the US and China in this respect.
Metaverse goes augmented
In 2023, we expect both Apple and Meta to release new augmented reality smart glasses for the developer market (and early consumer market adoption). While many debate the need for fully immersive virtual worlds in the metaverse, we will have a new consumer electronics space-race start for dominance in the AR field. Tim Cook has said that it won’t be long before we wonder how we survived without AR smart glasses.
“Zoom out to the future and look back, and you'll wonder how you led your life without augmented reality. Just like today, we wonder how did people like me grow up without the internet. And so I think it could be that profound, and it's not going to be profound overnight…”
Tim Cook, CEO of Apple
While 2023 is going to be a challenging year, and while there has been a slowdown in venture capital investment in emerging technology and areas like fintech and crypto, traditional players should not see this as a reason to take the foot off the gas pedal. The pandemic revealed that many institutions were grossly underprepared for the digital demands that will be commonplace over the next few years. This simply means now is the time to close the gap in innovation between new market entrants and incumbents.
Now is not the time to relax. There will be many new innovations threatening the leading sectors and corporations over the next few years with entirely new sets of competitors and innovation requirements emerging, too. Innovation needs to be part of your organization’s DNA now more than ever, and that requires ongoing commitments and investments in technology, people and experiences.
2023 is not the end of the fintech and crypto boom times – it’s just a chance to catch up for those who started slow.
Jim Marous is the co-publisher of The Financial Brand, the owner and publisher of the Digital Banking Report and the host of the top-five banking podcast, Banking Transformed. As an author and recognized industry futurist and authority on disruption in the financial services industry, Marous has spoken to audiences in over 50 countries on how individuals and organizations must respond to the digital transformation of financial services.
Brett King is an author, world-renowned futurist and media personality. He hosts the world’s number one fintech radio show and podcast, Breaking Banks, which has 6.5 million listeners, and is the founder of the mobile start-up, Moven.