Unlike any other sector during the COVID-19 pandemic, fintech has experienced significant growth.
An increasing number of consumers are taking advantage of the solutions offered by fintech due to their ease of use and lower transaction fees. We’re going to take a look at the challenges that the fintech sector will have to face as well as how they’re going to shape the tech trends in 2021 and beyond.
According to the Global COVID-19 FinTech Market Rapid Assessment Study, the total number of digital transactions and new customers in the UK and Europe has increased by 17% and 21% respectively, year-on-year. It seems like there is a bright future ahead of fintech companies.
Main factors that will shape the fintech technology trends in 2021
Let’s take a look at the main challenges that the fintech sector will have to tackle in 2021.
- COVID-19 and recovery. Without a doubt, the pandemic has put a lot of stress on the financial sector – particularly on banks, which were less prepared for digital operations than agile fintechs. The economic uncertainty brought on by COVID forced institutions to offer lower interest rates, implement remote work, and – as a result – ensure higher cybersecurity standards.
There is, however, a silver lining to this revolution, with banks likely to come out of the pandemic with more effective, digital-first operating models. Meanwhile, equity markets thrive. With hefty recovery programs in sight, we should expect more opportunities for fintech growth in the coming years. Economic rebound among creating new micro- and small companies is also likely to boost payment and banking solutions providers operating in these areas.
- Customer experience. COVID forced millions of tech laggards to switch to digital banking. They primarily included more senior clients, who were used to face-to-face interactions. This brings more focus to making digital solutions more accessible and inclusive. While the WCAG design standards have been around for a while, creating a good customer experience requires understanding the user perspective, in this case shifting the focus to more senior digital users.
- Compliance & cybersecurity. Boosted digitalization raises more challenges in a globally connected world. Regulators expect market players to adapt, and this means more pressure on Know Your Customer (KYC) and Anti-Money Laundering (AML) policies. The same goes for digital currency exchange, which is now controlled by the EU’s 5th Anti-Money Laundering Directive (5AMLD). In the long run, digital currencies will also help push for more advanced AI and smart automation seems like a relatively low hanging fruit.
- Open banking. It was already a hot topic prior to the pandemic – with banking API’s delivered in the EU according to PSD2 regulations at the end of 2019, we expected innovations to kick off. While 2020 has put focus elsewhere, it means that business and technology could peacefully work with cretated API sandbox environments. Experiments fuel progress - soon we should expect to see more in open banking solutions and a more vivid discussion considering the next set of regulations (PSD3 or in a wider context).
- Operational efficiency. The COVID-19 pandemic has strained the global economy and has also taken its toll on financial institutions. In the words of Ran Cohen, CEO at BridgerPay, “this means that in 2021, each and every successful transaction will translate into revenue and you can’t take the chance to lose out on it”. McKinsey’s Global Banking Annual Review points out several steps that financial institutions will need to take to restore stability. These include instilling agility in the team, and eliminating underperforming workflows and reinventing entire business models to sustain throughout many potential zero percent interest months as the economy struggles to prevail.
With all of the above challenges in mind, here are the top 7 fintech technology trends worth knowing about in 2021.
The rise of mobile-only banks
Banks which lack physical locations and can only be accessed via phone are growing in popularity. Some of the most well-known brands include Revolut, HelloBank, and Moven. These institutions frequently offer global payments, P2P transfers, and contactless credit cards with no transaction fees. It’s an attractive option for consumers who can take care of their finances within the comfort of their homes, skipping the queues and unnecessary bureaucracy. All their finances can be easily managed with a mobile app.
It’s expected that visits to brick-and-mortar banks will decrease by 36% between 2017 and 2026. The number of digital transactions performed is rising, and will continue to do so, especially considering the pandemic. According to Global Market Insights, the digital banking market is expected to grow at over 6% CAGR between 2020 and 2026.
For the fintech spector, this enforces a new approach to the tech stack, environment, product strategy, and design, meanwhile creating great opportunities for fintechs which are already focused on simple, app-based solutions.
Blockchain as an industry disruptor
Blockchain is disrupting the payment industry, and it’s expected to become even more visible in the financial sector, especially in fintech. Blockchain technology enables ultra-secure payments and transactions while eliminating any intermediaries, which significantly reduces costs. The World Economic Forum report states that by 2025, blockchain technology will be responsible for storing 10% of global GDP.
Professor Ahmed Banafa says that “unlike other traditional businesses, the banking and finance industries don’t need to introduce radical transformation to their processes for adopting blockchain technology. After it was successfully applied for the cryptocurrency, financial institutions began seriously considering blockchain adoption for traditional banking operations.”
Blockchain can provide the following benefits for the financial sector:
- Fraud reduction,
- Trading processes automation,
- Independent client verification,
- Smart payments,
- Secure payment processing.
Among the most popular fintechs which leverage blockchain technology are IBM-developed We.Trade, Stellar, Ripple, and Robin Hood (widely discussed in early-2021, amidst the Game Stop scandal).
Robotics facilitating operations & customer service
Another fintech technology trend we are likely to see widely adopted in 2021 is robotics for internal process and customer service automation. Robotic Process Automation (RPA) leverages machine learning & AI to automate a variety of tasks, including:
- Identity verification,
- Fraud detection & AML,
- Regulatory compliance,
- Online loan processing.
As far as client service is concerned, we’re seeing more robo advisors used to boost the CX and efficiency of customer-facing teams. These assistants are used both online and at physical locations. For instance, German savings bank Stadtsparkasse Düsseldorf uses a robo-assistant to help customers invest in the right ‘green’ investment, while Sparkasse KoelnBonn has used a physical robo advisor, Ivy Pepper, to guide visitors to its stall during a live event, Fitnetz-Wochen.
Wider adoption of APIs
Simply put, APIs (short for Application Programming Interfaces) serve as ‘shortcuts’ to building new fintech apps or implementing new features and services to existing ones. While, according to a McKinsey study, 91% of bank-developed APIs were privately held back in 2018, we are seeing a continuous rise in partner and open APIs on the market year over year. This can be partially attributed to various open-sourced APIs for PSD2 compliance. This creates a new world of opportunities for fintechs, banks, and other service providers to join forces, “share technology, and expand their networks”.
Initiatives such as the Open Bank Project only further reassure us that APIs will help shape the future of finance. As of early-2021, the initiative has over 11,000 software developers on board and over 350 different APIs available for use.
Customer intelligence as a revenue predictor
Another trend in fintech worth paying attention to is using customer intelligence for predicting revenue. Back in the day, customer-related data was gathered based on focus groups and surveys. However, the results were rather vague, and it was hard to draw any conclusions. Currently businesses have access to large volumes of data. They can use Machine Learning to analyze it, and reveal significant insights about what customers need and value, which in turn helps financial institutions to provide more personalized experiences.
For instance, Capital One has introduced the Capital One Second Look program which can track expenditure patterns. It might reveal if a customer paid twice for the same product or service and let them know about it. This makes customers feel taken care of.
Another, highly relatable example of how customer intelligence is leveraged by banks is how banks including ING and BGL Paribas assess the predicted earnings and risk levels of a prospect applying for a loan or mortgage online. By analyzing the applicants’ past purchases (for instance, whether the person spends on entertainment) and income, they are able to generate the borrowing power amount and the minimum/maximum number of months they are willing to offer the loan for.
Fintech-as-a-Service & Banking-as-a-Service platforms
Banks are continuously exploring the benefits of partnerships and open APIs. A natural outcome of this market demand is another fintech trend on the list – the rise of “fintech-as-a-service” platforms.
In his piece for Forbes, Ron Shevlin predicts that fintechs will prioritize integration with banks in their 2021 business models. There are even startups, such as Synctera, entirely dedicated to bridging this technology gap. However, according to CurrencyCloud’s Co-Founder Stephen Lemon, fintechs might also go a step further and extend partnerships well beyond the traditional financial sector:
“Fintech will become embedded in the technology stack of the next-generation companies. While the big tech companies like Apple, Google and Uber are currently leading the charge in the development of this space, we need more competition to ensure that this new paradigm will live up to its promise of delivering a better customer experience”.
We are also seeing the emergence of the Banking-as-a-Service model, with more and more companies offering the ability to build other brands their own financial products. One example is Solarisbank, which functions as a banking ecosystem for fintechs, banks, and digital-based companies. By using it, partner companies can make use of lending, digital banking, and instant credit modules, among others.
Innovations in payments
Cashless transactions are on the rise. In 2020, the value of the mobile payments market stood at $1.449 billion and it’s expected to reach $5.399 billion by 2026. People’s lifestyles are changing, and businesses must adapt. We’re constantly on the move, attached to our phones, and fewer of us carry cash.
Banks and financial institutions no longer hold a monopoly over the payments ecosystem – customers have a choice.
Mobile payment applications such as PayPal, Apple Pay, and Samsung Pay are growing in popularity especially among younger generations. It’s predicated that mobile wallets will further replace physical wallets – in 2019 alone, there were around 2.1 billion mobile wallet users.
The technology trends dictate the rules of fintech & banking game
Without a doubt, 2020 was both a tumultuous and game-changing year for the financial sector. Due to the pandemic and the global economic uncertainty it evoked, we’ve seen a variety of new trends emerge on the horizon. Fintech experts particularly emphasize the need for operational efficiency. This entails creating recession-proof business models, updating the pre-COVID-19 tech stack, and finding ways to automate tedious work and make savings.
Other important trends to watch out for in 2021 and beyond include bank-fintech collaborations, open APIs, blockchain, and the adoption of robotics. It is our prediction that these and other trends featured in this article will dictate the rules of the fintech and banking game.