It’s fair to say that 2020 has been among the most consequential years ever for the fintech (financial technology) industry. Thanks in no small part to a deadly pandemic that swept across much of the world, consumers, households and businesses alike have all had to depend on the digital world a whole lot more than at any time previously. Demand for fintech solutions has never been more intense—and that makes 2021 a crucial year for the evolution of this flourishing industry.
Indeed, according to a September survey of more than 2,000 US citizens jointly conducted by fintech firm Plaid and The Harris Poll, 59 percent of Americans used more fintech apps to manage money than before COVID-19, 69 percent viewed fintech as a “financial lifeline” during COVID-19, and 73 percent considered fintech to be the “new normal”. As such, financial technology has been forced to step it up several gears not only to meet the sheer weight of this extra demand but also accelerate the development of new solutions that must serve a world that is now adjusting to this “new normal”.
In a recent outlook for North American and European fintech, Fitch Ratings acknowledged that the sector fundamentals should remain resilient next year, despite pandemic-related issues likely to bring significant operational headwinds to the sector in both geographical regions. “The industry benefits from positive credit attributes including secular revenue growth, strong EBITDA margins, robust FCF generation and manageable leverage metrics,” Fitch noted. “Issuers are well-positioned to manage the pandemic into 2021 due to these factors.”
And in terms of specific fintech themes, a handful of key areas are likely to feature prominently during 2021.
With people still confined to their homes more than was previously the case prior to the pandemic, demand to visit brick-and-mortar establishments has, predictably, plummeted.
And thanks to the important advancements made in artificial intelligence (AI), biometrics, open banking and cybersecurity, digital banking is more convenient than ever, with consumers now able to access a wide range of personal financial information and execute important tasks with just a few taps of their smart devices. Indeed, a Boston Consulting Group (BCG) survey across 15 countries published in May found that a hefty 44 percent of 18-to-34-year-olds had enrolled in online or mobile banking for the first time during the COVID-19 crisis.
With the rise of digital banking, moreover, we should also observe the concurrent decline in paper-based banking. The pandemic has certainly accelerated the shift towards a paperless world, and with customers increasingly comfortable communicating with their banks through apps and online messaging—as well as finalising agreements using such paperless solutions as DocuSign—it seems likely that digital banking will play an even greater role in 2021.
After more than two years of relatively sedate activity, the cryptocurrency space once again saw a resurgence of interest during 2020. And to cap off the year, bitcoin recently broke all-time highs in spectacular fashion. Of course, the trends we are seeing only beg the question of whether we will see another spectacular market collapse, which is what happened three years ago when bitcoin last reached these levels.
As Mike Novogratz, a renowned cryptocurrency investor and the chief executive officer of crypto-focused investment firm Galaxy Investment Partners, explained to CNBC recently, the 2017-18 crash was the consequence of a “global speculative frenzy” that was largely driven by retail investors. On this occasion, however, a significantly greater proportion of institutional investors who are now in the market are holding bitcoin and other cryptocurrencies as long-term investments.
Indeed, with interest rates at rock-bottom levels—and likely to remain there throughout the year—investors in search of positive yields are left with few options in terms of asset classes. As such, investor interest in the cryptocurrency space has grown in 2020, not only for bitcoin but also ethereum, which has provided a platform for many of the successful DeFi (decentralized finance) projects that emerged in 2020. Novogratz predicted that the price of bitcoin could reach $60,000 by the end of 2021.
It also seems as though central banks have stepped up their interest in exploring the issuance of national digital currencies. With the Bahamas having already become the world’s first country to issue its central bank digital currency (CBDC), the Sand Dollar, back in October, major economies are likely to follow suit in 2021—such as China introducing a digital yuan.
With interest in digital currencies as a whole clearly being exhibited by not only institutions but some of the biggest monetary authorities in the world, the legitimacy of cryptocurrencies as an asset class will only grow further in 2021.
COVID-19 has “changed online shopping forever”. That’s according to a survey by the United Nations Conference on Trade and Development (UNCTAD) and the NetComm Suisse e-Commerce Association. “The COVID-19 pandemic has accelerated the shift towards a more digital world. The changes we make now will have lasting effects as the world economy begins to recover,” UNCTAD Secretary-General Mukhisa Kituyi acknowledged in October, adding that the acceleration of online shopping globally underscores the urgency of ensuring all countries can seize the opportunities offered by digitalisation as the world moves from pandemic response to recovery.
Some countries are likely to experience phenomenal growth in e-commerce over the coming years, perhaps no more so than Indonesia, where digitisation of retail services has exploded since the onset of the pandemic. The likes of local market players, such as Gojek and Tokopedia, as well as foreign entrants into the markets, including Singapore’s Grab and Shopee, elevated Indonesia to a leading global position in e-commerce in 2020. According to management consultancy RedSeer, Indonesia’s online retail gross-merchandise value will surpass that of India in 2020 to reach $40 billion. This would put the Southeast Asian country in third place worldwide.
What’s more, e-commerce should experience significant growth across most regions of the world, as online retail becomes part of the new normal. A UNCTAD and NetComm survey of 3,700 consumers in Brazil, China, Germany, Italy, the Republic of Korea, the Russian Federation, South Africa, Switzerland and Turkey showed that online purchases increased by 6 to 10 percentage points across most product categories. “The biggest gainers are ICT/electronics, gardening/do-it-yourself, pharmaceuticals, education, furniture/household products and cosmetics/personal care categories,” the UNCTAD confirmed.
And another report of 5,000 consumers by payments company Checkout.com forecasted e-commerce surging in the Middle East, North Africa and Pakistan (MENAP) in 2021, with almost half of the consumers in the region expected to increase their online shopping activity over the next year. The September report, which is based on survey data of consumers in the UAE (United Arab Emirates), Saudi Arabia, Egypt, Jordan, Qatar, Kuwait, Bahrain and Pakistan, also showed that the region’s consumers almost universally embraced e-commerce, with 90 percent of respondents indicating that they already shopped online and 44 percent doing so at least monthly. What’s more, 40 percent of online shoppers utilised e-commerce solutions precisely because of the limitations imposed by the pandemic, while 45 percent used online shopping even more frequently than they did prior to the outbreak of the COVID-19 virus.
With social-distancing restrictions still firmly in place across much of the world, the coronavirus pandemic is driving a major global shift from using cash towards contactless digital payments. According to a survey jointly conducted by the National Retail Federation and Forrester Research, 19 percent of US consumers made a contactless digital payment for the first time in May 2020, with almost two-thirds of them using a smartphone to do so.
“Over the past six to eight months, we’ve seen the use of cash decline even further, and that’s a trend I think that we’re going to see continue,” Jodie Kelley, chief executive officer of Electronic Transactions Association (ETA), told CNBC in early December. “When the pandemic hit, people really started paying attention to how literally they were spending money and people found that they didn’t want to touch cash and exchange cash.”
PayPal’s CEO, Dan Schulman, meanwhile, believes that contactless digital payment is now evolving from being an optional capability to an essential service and that it will only become more of a necessity going forward. Clearly, such a trend will bode well for his company and others, such as Square and Apple Pay, that offer contactless payments. “I think we accelerated where we were going to be in three to five years. And in months, we jumped ahead, and I don’t think there’s any turning back from that,” Schulman recently stated.
Advances in AI
Artificial intelligence (AI) is perhaps the most significant single technology class of all. In 2021, fintech apps will continue to utilise AI more broadly than has been the case to date. Whether it’s chatbots addressing banking customers’ queries, fraud-prevention tools verifying the authenticity of KYC (know your customer) documents or analytics engines analysing large volumes of data, the potential for AI’s use in fintech will continue to grow significantly.
“In 2021, we expect AI to become even smarter, with more sophisticated chatbots and advanced functionalities—including switching utility and credit providers—as well as fraud prevention becoming the norm,” Lubaina Manji, senior programme manager of Open Up Challenge 2020, Nesta Challenges, told The Fintech Times in November. “This will improve the accuracy and personalisation of financial services and enable individuals to better access personal finance products, ultimately improving people’s financial well-being and supporting those who are keen to stay on top of their finances during these uncertain times.”
Indeed, the June 2020 “AI in Fintech Market – Growth, Trends, Forecasts (2020-2025)” from Research and Markets valued the global AI-in-fintech market at $6.67 billion in 2019 and expected it to grow to $22.6 billion by 2025 at a compound annual growth rate (CAGR) of 23.37 percent (2020-2025). “Increasing demand for process automation among financial organizations is driving the market,” the report stated. “Process automation is one of the major drivers of artificial intelligence in financial organizations. However, it is further evolving into cognitive process automation, where AI systems can perform even more complex automation processes.”