Rapid evolution or creeping stagnation?

We all know that 2020 was a highly unusual year – the Covid pandemic not only impacted the global economy, it also accelerated ongoing changes and developments in the Fintech and Payment industry.

Lockdown measures and an economic downturn have increased cost pressures mounting on industry players, strengthening their push for digital innovation and transformation to stay competitive. As the last weeks of 2020 are approaching, we take an outlook at what trends 2021 could have in store.

The competition between established banks/financial institutions and fintech startups has generally been seen as a winner-takes-all-dynamic, as e.g. the term “challenger banks” entails. However, the philosophy in the industry is gradually shifting from competition to collaboration and fusion as actors realize their strengths and shortcomings. 

Established players boast big pockets, distribution networks and experience with regulators while burdened by a lacking culture of innovation and outdated legacy systems. Fintechs have lean structures and innovative systems but often struggle with the implementation of constantly increasing compliance regulations.  

Industry giants like VISA, Mastercard, Barclays, Raiffeisen, ING have set up venture funds and accelerator programs to acquire and onboard innovative fintech startups. Deloitte suggests that fintechs should also seek partnership opportunities with fintechs, bigtechs, and nonfinancial services firms.  

As nations locked down, clients shied away from non-urgent bank visits – despite them being open as considered “essential service providers”. “Digital-only banks” like Revolut and N26 have shown that smartphones are all it needs to provide clients a seamless banking experience. Already in 2017, a 36 % decline of bank branch visits to 2022 was forecast, the Covid pandemic is likely to aggravate this trend further.

The leading challenger bank Revolut increased new account growth by 45 % between October 2019 and August 2020, boasting 3 million new signups between March and August 2020 alone. The market research institute ResearchAndMarkets projects challenger banks to grow between 2020 and 2027 by 48,1 % YOY.

While Fintechs are regulated by national financial supervisors, their low-cost-structure allows them to quickly expand regionally or globally. Financial watchdogs are challenged to review existing regulation, such as requirements for in-person contact, and update or complement them with digital alternatives to enable smooth banking and payment transactions in the digital age.

The Covid pandemic might have made some temporary changes in regulation necessary, yet it is plausible that these adjustments will be adopted and remain beyond this time frame. Financial regulators recognize that in areas where jurisdictions have similar compliance requirements, a harmonization could be helpful to allow for and foster secure innovation.

Artificial intelligence (AI) is expected to massively disrupt the financial industry in the coming years. Potential applications of AI solutions in financial services are legion, the most prominent one being the prevention of fraud and data breaches.

The PWC Global Fintech Survey 2019 revealed that the biggest concern facing banking and financial institutions are “security, compliance and data-privacy risks”. AI-powered algorithms can help early on to detect illicit activity, e.g. by monitoring credit card and loan applications or spending and deposit patterns, helping to prevent money laundering or identity theft.

In 2021, consumers no longer need their wallets or debit cards to make payments. Instead, their smartphones hold mobile wallets containing their debit and credit cards. Mobile payment services like Google Wallet and Apply Pay are rapidly gaining traction. While not all consumers are comfortable with using such services yet, already in 2019 there were 2.1bn mobile wallet users – a number that is set to grow quickly.

Research from Mordor Intelligence forecasts that in 2021, mobile payments will come closer to beating debit cards as the most common payment method worldwide. In China, where more than 81,1 % of smartphone owners make mobile payments, this has already been the case since 2018.

Cryptocurrencies and their crypto-wallets – which are a special form of digital wallet – will further contribute to the growing adoption of digital wallets by end consumers.