The coronavirus pandemic forced many banking customers to use online and mobile services for the first time this year, in a shift similar to most people being obliged to work from home during lockdown.
Young adults and new customers in particular favour swift, reliable, low-friction experiences from their devices, and the pandemic has forced more reluctant demographic groups to join them.
But like the shift to remote, mobile workflows that has pushed workers out of our city centres, this change in banking and payment fulfilment behaviours was largely an acceleration of longstanding, observable trends, rather than an overnight transformation. Either way, it is here to stay.
According to research organisation Statista, which has tracked online banking penetration in the UK since 2007, 2020’s uptick in adoption was merely the latest predictable peak in an ongoing incremental increase. Online banking penetration now stands at 76 percent of customers, up from 73 percent in 2019, with mobile phones being the preferred access devices.
In 2021, customers will increasingly look for trust, reliability, and added value from digital services, alongside speed and convenience. Meanwhile, the deepening post-COVID economic crisis and risk of negative interest rates will push many users towards apps, platforms, and services that help them better manage their finances, spending, debts, and investments – and plan them for the future.
So what else did 2020 bring – apart from the increased adoption of low-friction services and collaborative tools, which was boosted by a doubling of Open Banking adopters this year?
While High Street customers have been pushed towards mobile or online banking and money-management services, business customers have also looked to new digital solutions for payments, banking, and asset management, either to enable business continuity or to offer new services to their millions of (now) home-based customers.
However, in the Spring the Financial Action Taskforce (FATF), the global body that sets international anti-money-laundering (AML) standards, warned that fraudsters were taking advantage of the COVID-19 pandemic to carry out financial scams, creating a perfect storm of threats against fraud prevention, AML, and counter terrorist financing (CTF) initiatives.
But there is some good news, added the FATF. As well as helping to combat financial crimes, the increased use of financial, regulatory, and supervisory technologies (FinTech, RegTech, and SupTech) may help to prevent the spread of the virus, via contactless payments and digital onboarding – in other words, via app-enabled social distancing.
There was further positive news from global bodies this year. Governments’ efforts to stimulate national economies helped financial markets and central banks to brace for the impact of the coronavirus, according to the World Economic Forum (WEF).
A WEF report in the Summer found that central banks had learned tough lessons from the 2008-09 financial crash. These helped them address large-scale funding market impairment “in a matter of days”, as opposed to the months it had taken in the previous crisis.
Swift remedial action prevented these stresses from “propagating into market-wide disruptions”. At the same time, central banks announced plans to expand their asset purchase programmes, with the goal of reintroducing liquidity.
Yet 2020 was still a tough year for the FinTech sector overall, despite the increased business and consumer uptake of digital services. Q1 2020 was one of the worst quarters in recent memory for FinTech investments worldwide, and while funding rebounded quarter on quarter in Q2, overall deal activity continued to fall.
In the middle of the year, glimmers of hope could be seen in an upsurge of FinTech IPO filings, perhaps taking advantage of the calm between two storms: the first coronavirus wave and (at that time) a feared second, plus the economic fallout from Lockdown One. Those fears certainly came to pass, with local and national lockdowns fanning across Europe in the run-up to Christmas.
However by the end of Q3, investments in FinTech were surging again, if largely at the high end of the market. Market analysis firm CBInsights found that venture capital mega-rounds (deals worth $100M+) accounted for 60 percent of all FinTech funding worldwide in Q3 2020 – the highest percentage share since Q2 2018.
Q3 2020 mega-round funding increased by 24 percent quarter on quarter to $6.4 billion. However, non-mega-round funding declined by 16 percent – further evidence that the space is consolidating, with investments primarily going to more established, heat-seeking ventures.
This impression was reinforced by another finding: overall FinTech deal activity declined for the fourth consecutive quarter. That said, angel/seed investment increased in Q3 by 20 percent sequentially, suggesting that early-stage ventures are still attracting supportive capital.
CBInsights also published its FinTech 250 rundown for the year, highlighting what it saw as the most promising companies that are using technology to disrupt financial services. According to the firm, $10.3 billion was raised in 120 deals in 2020 alone. The US dominates the ‘hot 250’ list, with 54 percent of selected companies, followed by the UK, which is home to 38 of them.
China is also a major force in FinTech, thanks to its growing economy and ability to mobilise over 1.5 billion customers locally. Most are obliged to use certain payment and chat platforms as part of a compulsory citizen monitoring scheme that came into force this year.
But its success in technology has created tensions within the world’s second largest economy, pitting an authoritarian government – which has managed China’s greater openness to the capitalist world – against the growing personal wealth of a handful of tech titans.
These simmering issues came to the boil in November, when the planned IPO of Ant Group, the world’s highest-valued FinTech company, was suspended by Beijing, citing regulatory concerns. Among other holdings, the company runs digital payments platform Alipay.
The $37 billion listing of the Hangzhou-based FinTech, which is backed and one-third owned by Jack Ma’s Alibaba group, was halted on 3 November – two days before go-live. Ma is China’s wealthiest man, and the move was widely seen as a government show of dominance over him.
Less than a fortnight later, another Chinese FinTech, Lufax, listed in New York, stealing Ma’s thunder. In 2021, the standoff between governments/regulators and Big Tech companies is likely to intensify. The one to watch will be Facebook, which plans to launch a scaled-back version of its digital token next year.
Other FinTech companies faced problems this year. For example, Germany’s Wirecard was declared insolvent in the last week of June, in the wake of a €1.9 billion accounting fraud. Wirecard has roughly €3.5 billion in debt, with its creditors including 15 major banks.
In 2020, several international banks stood accused of allowing more than $2 trillion in illicit cash to be laundered through the West from 1999 to 2017. The sensational claims were made in the so-called FinCEN Files – documents leaked from the US Financial Crimes Investigation Network (FinCEN) to journalists.
December research from financial services software specialist Fenergo revealed that problems remain rife in the industry. In 2020, 198 fines, totalling $10.4 billion, have been issued to financial institutions for breaches of AML, Know Your Customer (KYC), data privacy, and MiFID regulations, a year-on-year increase of 26 percent by value and a troubling 141 percent by volume.
But moves are afoot worldwide to better regulate the financial system for the digital age. For example, the UK’s Financial Conduct Authority (FCA) is among 23 regulators from across the world taking part in a cross-border FinTech sandbox in the coming months.
The programme is designed to allow innovators to test their products and services in a controlled international environment, under regulatory supervision.
Meanwhile, Tech Nation, the network for UK technology entrepreneurs, announced the launch of another new initiative for the financial services sector, the FinTech Pledge, with support from the government.
The Pledge is a voluntary code that aims to support more effective collaboration between banks and FinTech companies, to ensure that the UK remains one of the leading places in which to found and scale a FinTech startup.
Look out for more such initiatives in 2021 – not least because the UK’s regulatory position remains uncertain post Brexit, with signals from the Treasury that Britain may diverge from EU rules wherever it is able to do so.
The challenge will be in retaining established banks’ confidence and tech innovators’ desire to stay in the country to develop their products. Investors, too, will need to be confident that the UK is still a safe place to do business, with ongoing access to international partners and markets.
At TheCityUK conference in November, International Trade Secretary Liz Truss highlighted the critical importance of financial and other digital services to the UK economy.
She said, “From robotics to FinTechs, to computer games, to green finance, we are the second largest exporter in the world, totalling £318 billion. […] We are the top FDI destination in Europe, with more investment in technology than Germany and France put together, totalling more than £10 billion.
“What I think we can do with our own independent trading policy is we can help shape the future of the global rules in areas like digital, in areas like services, that haven’t seen the level of reform that they need to at the World Trade Organisation.”
Everything to play for, then, with mounting evidence that the UK intends to set a different course to the EU in regulating digital and financial services.
Customers are certainly eager for change, but they need to be confident in the long-term viability and financial resilience of the new platforms they choose. Any further collapses among well-funded startups or challenger banks may tip the market back towards more established brands – as long as they are able to innovate convincingly at start-up speed.
Artificial intelligence (AI), machine learning (ML), and natural language processing (NLP) will be among the key technologies at play in new service offerings, boosted by the surge in Open Banking numbers brought about by the coronavirus.
Expect a flurry of major tech acquisitions throughout 2021 as traditional banks buy in the technology and expertise that their customers are demanding in droves. A fast-consolidating market is one where major buyers will stop sitting on their hands and reach for their wallets.
Thanks for reading, from everyone at Transform Finance – we wish you a happy new year and a jolly festive break.