With COVID-19 transforming consumer behaviour, Global Leader for Fintech, Tim Aman, takes a look at the top three trends driving Fintech advancement across the globe and how these are being realised
There’s no doubt, the future of Finance is tech enabled - with Fintech expected to grow to a market value of $305b by 2025.
Fintechs have been moving across all verticals in the Financial Services market – creating wide spread disruption on traditional business models, particularly for incumbents – with COVID-19, being the tipping point for Fintech growth.
Across the globe, there’s a common acceptance that COVID-19 has transpired the rapid adoption of Fintech – transcending geographical boundaries and new demographics – including the underbanked or unbanked regions of the world. This has been observed in BDO’s country-by-country snapshots, with these consistent themes across regions.
BDO Rethink Fintech Country Snapshots: Download BDO’s latest Fintech Reports, including global perspectives from Australia, America, the United Kingdom and soon-to-be released reports from Africa, South East Asia, Israel and Argentina.
While the uptake of Fintech is driven by many factors – such as crypto assets, open banking and artificial intelligence to name a few – it is the convergence of technologies that is driving the way. In the underbanked and unbanked regions, mobile use is fundamental to its rapid penetration, and in more developed countries the Internet of Things (IoT), Artificial Intelligence (AI) and other technologies are giving consumers seamless and intuitive services.
However, in a world of disruption and uncertainty, it is the mature Fintechs who are the winners today, with start-ups in the early-stage being the hardest hit by COVID-19. Access to funding continues to be critical for survival, with many Fintechs propped up by government stimulus around the world. There’s also the added challenge of varying regulatory conditions as those based in supportive environments – such as open banking and regulatory sand boxes which can help them establish and grow more rapidly. The results of these regulations will bring transformative societal impacts like never seen before as Fintechs put consumers in the front seat when it comes to their finances.
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While COVID-19 froze activity in the Fintech market, we are now seeing a rebound with an expectation of mass consolidation on the horizon. IPO data also shows that significant change is coming our way. For Fintechs, it’s expected that they will go through a considerable cycle of change – becoming part of other verticals, and wider use cases than what was first intended – with Information Communication Technologies (ICT) shaping the way we use Fintech.
But, what will all this change today mean for the future of Fintech? To give you a taste of what we expect to come, we’ve broken down the top three trends in Fintech arising from COVID-19.
The top three trends in Fintech
Consumer behaviour has shifted drastically since the beginning of COVID-19 with lockdowns and social distancing measures, giving rise to Fintechs who can provide new and innovative forms of banking. With the closure of many brick and mortar facilities, businesses and individuals around the world turned to Fintech applications – moving swiftly from early adopters to an early majority using digital service to complete their banking and other financial services in a short space of time.
Overall, COVID-19 has superseded three areas of Fintech, seen across our country-by-country perspectives, including:
- Disruption in the payments sector
- Banking as a Service (BaaS)
- Demand for digital banking solutions
While these trends were slowly occurring prior to the crisis, we predict that their acceleration and proliferation will continue, and this is supported in our market data insights.
1. Disruption in the payments sector
This is being seen across all locations and is thriving as a result of COVID-19 in multiple forms.
- Across all our snapshots, we saw contactless payments skyrocket – driven by more cautious behaviour due to social distancing, as well as the need to still be able to access critical financial services despite lockdowns. In some countries, governments have even turned to Fintechs providing these services in order to quickly and effectively distribute stimulus.
- For the underbanked and unbanked regions, payments have proven to be a way to attract this segment, wet their appetite and drive engagement to this unserved market - with plenty of room for growth in re-bundling other products. There has also been a rise in prepaid credit growth in these regions given economic uncertainty.
- With global economies slowing, we have also seen a rise in prepaid card growth, as well as Buy Now Pay Later (BNPL) apps as people are becoming more cash conscious, want greater certainty, and are looking for ways they can stretch their dollar, or get a short term loan – without the high interest rates that incumbents offer.
For the BNPL model, the biggest debate is – will it continue to grow? Or is it a bubble that is about to burst? These Fintechs are paving the way to a new form of payments – the BNPL model is ahead of regulation with some believing it’s on a tightrope about to be cut. While it may be less risk averse for consumers, from the business perspective, there are still concerns about bad debt. While Afterpay is a Tech Unicorn, it’s still yet to turn a profit (which is not a surprising revelation, in terms of the establishment of a business).
However, the overall market has remained strong and we are seeing new players with slight differentiations in their offerings coming in. In Australia, the larger BNPL companies are getting on the front foot by working together to come up with agreed upon self-regulation – and at this stage as long as the customer happy, the regulators are encouraging the innovation and competition. BNPL really is being driven by consumer demand right now as consumers love the ability to spread their payments.
2. Digital Banking solutions have been catapulted by COVID-19
Through social distancing and lockdowns, we’ve seen access and demand grow for fully digitised end-to-end customer experiences to meet personal and business financial needs – as found in our Australian, US, UK and global reports.
Fintechs are moving in on the Financial Services market – creating widespread disruption for traditional business models – rivalling incumbents’ abilities to service their evolving consumer markets and digitally adapt. Those who fail to adapt to changing consumer needs and behaviours through digital transformation will likely find themselves left behind, or serving a shrinking market segment.
This was a key theme in our UK report, where they found that even though brick and mortar banks were on the decline pre-COVID-19, the crisis intensified online behaviours – a trend that is likely to continue. Challenger banks could be more agile in meeting the needs of consumers as well as in a position to quickly scale up their services to accommodate the sudden influx of new consumers. It’s expected that the future of banking will rely on closer collaboration between Fintechs to enable incumbents to service their strong customer base in the way they now expect.
Overall though, there are challenges for digital banks including access to capital and differentiation – including getting consumers use to new players by gaining trust and overcoming an overcrowded market by broadening their services.
3. Banking as a Service (BaaS)
Banking as a service is growing at an exponential rate with BaaS to the small-to-medium business (SMB) market and embedded tech in non-bank verticals to meet consumers’ needs signalling key areas of growth. This embedded tech trend has grown in both deals and funding (which was the only segment to do so) and was a key trend identified in the US report.
- In the SMB market, Fintechs offering banking services has had considerable growth and demonstrates the heightened innovation, and the ability to dovetail BaaS. This has included back-of-office functions such as bookkeeping, expense-tracking, insurance, invoicing, payment processing and payroll through the cloud – not only creating efficiency, but helping small business scalability. This has been evidenced in our global Rethink Fintech report, as well as our US, and Australia snapshots and upcoming SE Asia report.
- We are also seeing non-bank businesses – namely tech giants – embedding banking services into non-bank verticals, especially in e-commerce and payments. This intersection of e-commerce and transactions makes it a trend which we are likely to see continue. We’ve seen the emergence of tech giants beginning to offer these services –think, Apple Pay, Samsung Pay, Amazon loans and Shopify merchant accounts.
- Non-bank businesses are moving into banking services because they offer their customers seamless end-to-end experiences, which, with the help of Fintech and the advance in technologies has become relatively ‘simple’, and allows businesses to gain a competitive advantage. The outcome of this, is a reshaping of business models, distribution models and leveraging new tech that has reshaped the way finance is provided. We will see this boom in the e-commerce sector, especially as more people become comfortable with shopping this way. This aligns with the Banking as a Service trend and makes perfect sense, given that the tech giants already have the infrastructure available, and require only a ‘bolt-on’ of a third party service provider – or, an acquisition.
Overall, it is still an uncertain time for Fintechs, with access to capital being a big risk for them right now. While there will be consolidation in the market, the realm of Fintech will continue to grow, as all types of businesses harness the innovation and digitised experiences that only Fintech can offer.