Fintech in 2021: Embedded Finance, Sustainability and more
Fintech, along with the rest of the world, has had an extraordinary 2020. Major scandals have rocked the industry, but at the same we’ve marked significant advances that will help to point the way to a better future of finance.
As 2020 proved, predicting the future is always a difficult proposition. But, in the spirit of bravery, here are my things to watch for the year ahead.
Impropriety in the fintech sector during 2020 dented hard-won trust. We will have to work hard to repair that trust, and to demonstrate the sustainability of fintech. Compliance is obviously vital. But when things do go wrong, we must also learn lessons and take concrete steps to ensure that our industry is secure. In particular, proactive cooperation between regulators and industry players is crucial. The UK’s FCA is the gold standard for regulation, and the Fintech Review is a very positive example of regulator-industry collaboration. By fostering goodwill and cooperation, rather than adversarialism, we can ensure sustainable trust.
PayPal’s entry into crypto grabbed headlines in 2020, and it’s a move that could be a major step towards mass adoption among consumers. But the news that Kraken had become the first US crypto company to secure a banking licence could be far more important. The cryptocurrency space is no longer just about what’s happening on the exchanges. Instead, the leaders are going upstream, for example by gaining access to federal banking infrastructure and building out new payments and accounts products that will help them address much broader markets. Not every exchange wants to be a bank, so we’ll see exchanges and other crypto companies making more use of BaaS integrations to build better products and customer experiences, with a particular focus on fiat on- and off-ramps and wallet management.
Challenger banks have changed the consumer landscape, but they’re only the first step in what is set to be a true fintech revolution. Embedded finance is the future of financial services. Over the last 12 months we’ve seen an explosion in embedded finance/BaaS use cases, and the extraordinary potential in this space is becoming clear. During 2021 and beyond, we’ll see an increased focus on very specific segments, such as marketplaces and remittance, where the use case is most clear. BaaS providers will develop new, more bespoke products that help new and existing brands achieve big things in niche spaces. The successful BaaS players will be the ones that transition from offering broad products to delivering highly targeted integrations to solve specific needs.
Winners and losers post-COVID
The effects of COVID-19 have not been evenly distributed and, however unfair, that will remain the case. Lenders will continue to suffer as unemployment rises and global economies contract. But some winners will emerge. Fintechs offering products geared towards financial prudence are likely to do well, as consumers look to tighten the purse strings. More generally, the fintechs that already had a secure business model, and have innovated beyond simply charging for premium services, will fare well. Those that have used the pandemic time wisely to redouble their efforts on product and viability, rather than simply waiting out the storm, will be well ahead as we emerge into a post-COVID world.
Payments market consolidation
While there is a great deal of opportunity in the payments space, not every business will thrive. Payments players that have not prioritised building a solid and secure business model will be swept up in the tide, along with those that are insufficiently differentiated from dominant competitors. But those that are precarious are more likely to be acquired than fail—in fact, the global consolidation in payments has already begun. One significant trend here is the growing number of acquisitions of offline payments businesses by big online players, and vice versa. PayPal’s acquisition of iZettle is the perfect example, but there are many others and more will follow. Expanding from offline to online, or vice versa, will remain extremely challenging through non-M&A routes—although, as Adyen and Square have proved, it can be done. But why build something new when you can simply acquire it?
Open Banking businesses will succeed in 2021 if they specialise and focus on specific segments and use cases, rather than attempting to be everything to everyone. The future for these businesses is in customer-centricity and agile, iterative development processes that allow for the creation of tools that solve specific problems in specific niches. Open Banking products will mature significantly in 2021, moving beyond simple account aggregation and into things like PISP embedding and integration. Crypto, remittance and marketplaces will be able to use PISP to top-up wallets and make payments within their ecosystem with no need to login to a bank account.
Like everyone else, I hope against hope that 2021 will bring more positive than 2020 has. But, pandemic aside, the coming year will be another exciting one for fintech – and a key milestone in the ongoing financial revolution.