FinTech trends in 2020: have we seen a black swan?
The pandemic of Covid-19 has caused the transition from a record low unemployment rate and booming economies to job cuts in millions and sharp falls in the financial markets in a matter of two months. Governments across the globe started to implement measures to protect their economies. The European Central Bank has announced a € 750 billion bond-buying program, looser collateral requirements, a new refinancing program for banks, and an expansion of existing “quantitative easing” programs. The Federal Reserve has announced unprecedented measures, including up to $2.3 trillion in lending to support households, employers, financial markets, and state and local governments. Taken the potential financial crisis into consideration, we are all wondering what are implications for FinTech and FinTech trends in 2020 that should be followed.
It is too early to claim that the course of the economic downturn is due to the pandemic and lockdown. Most likely the new recession was just triggered by Covid-19 and it was a long time overdue, and we can confidentially say that we reached the highest point of this rollercoaster of economic procyclicality. However, is the situation that gloomy as it looks from the first glance? Not necessarily, let us not forget that disturbances to the business-as-usual are disruptive by their nature and together with the hardships they often bring opportunities. For instance, we can look at the emergence of the FinTech companies that occurred a decade ago after the financial crisis and collapse of hundreds of banks worldwide, people became concerned about the financial stability of the large banking groups, and dissatisfied how many high street banks were bailed out with taxpayer money. Soon afterwards, the challengers have seized the opportunity by offering better products and services that were mobile-ready.
FinTech startups versus conventional banks
When they appeared, most FinTech startups were poised to transform the way that people imagined the financial sector. It was both in terms of the accessibility and underlying idea behind the product offering. In the beginning, most startups have concentrated on the retail sector. They promised users an unforgettable customer-centric experience by highlighting their strive to resolve the pressing problems faced by day-to-day users of financial services.
The rapid digital transformation allowed FinTech startups to gain a foothold and steadily grow their customer base. However, with the time, more and more such challengers understood the inevitable truth – by serving solely the retail sector it is difficult to create a sustainable business model. As a consequence, most retail centred startups have transitioned to serving a wider sector, specifically tapping into SMEs. Simultaneously they have created a broader scope of products and benefited from diversification of portfolios.
The innovative companies will continue to fight for retail and business customers, albeit not aggressively as they did before COVID-19. One of the main trends for FinTech in 2020 is careful budgeting and forecasting. Currently, many companies are firing employees and cutting down costs. The cash-burning activity, such as affiliate programs where users and their invitees are given money for opening an account will decrease while other more customer-based approaches will be trending in 2020.
FinTech companies will try to win users by listening to their needs and monitoring changes in their behaviour. Furthermore, there won’t be that much pure in-house development. Challengers and innovative financial service providers will try to win the battle for customers by continuing integrations with other services. You can see how some banks already use IFTTT to help their customers saving money.
Transition to all digital
Today, instead of relying on conventional high street banks, people already became accustomed to trusting humble and less known players that are entering the market. All-digital solutions offered by the FinTech players became even more attractive for customers during the times of pandemic and social distancing. The conventional banks are employing all of their resources to keep operations going undisrupted. They have already realised that to survive in these times of change, they need to redesign their operational framework. Regulators too are advocating transition to distant working arrangements and remote verifications.
On 31st of March, the FCA reiterated the possibilities of relying on remote customer identification as is enshrined in the JMLSG guidance. But it is easier said than done for those that were relying on face-to-face verifications and provision of services. The legacy systems, policies, procedures, and even attitude that is rooted inside of the management will play a substantial role while deciding who will lose a chance and who will prosper.
The FinTech startups that were originally centred on offering a seamless user experience without any need for personal contact have much higher potential to succeed in these troubling times. We can even say that they were specifically built for situations like the one with the pandemic where in order to stay safe, people must prioritise their wellbeing and avoid social interaction. The demand for all digital solutions has skyrocketed and it will remain high even after the end of the lockdown. Such impersonal services as Zoom and Amazon saw an exponential increase in demand.
The same goes for the financial sector. People have started to realise that going to the branch of their bank whenever you wish to open an account or need to change your password is not only inconvenient but also brings risks that could be easily avoided. The legacy approach that is held by high street banks fosters transition to the digital solutions that are offered by FinTechs.
If you tried to open a bank account in a reputable financial institution for your company, you know the pain of the process. There is a big chance that you had a face-to-face meeting. In 2020 one of the trends for FinTech oriented companies to make even the business account opening process as digital and as fast as possible. To find the balance between risk and convenience, they are seeking integration with services helping to onboard clients (e.g., ID verification services such as HelloSoda) and calculate risks (e.g., ComplyAdvantage).
Growth of e-commerce
Electronic commerce was steadily growing for the past couple of years adding by around 8% in sales in the European countries for the past decade in a year-to-year comparison. The expected economic slow-down will affect the e-commerce sector much less because of the transition of people to online shopping, which remains the only alternative in the current setting. According to the report published by PYMNTS in a matter of month online shopping for groceries has increased four-fold and shopping for non-grocery items has tripled.
The trend presents an opportunity for both e-commerce merchants and FinTech startups engaged in payment processing services. The demand for remote solutions in terms of underwriting and serving the merchants poses an opportunity for companies that are online-first.
Market opportunities and trends
Moreover, new opportunities will open up with the closure of physical stores and reorganisation of operations from the side of high-street retailers. Lockdowns that were instituted as a response to Covid-19 presents a market opportunity for those who will align their operations to the current setting.
For instance, it is possible to start an electronics drop-shipping business in Europe with deliveries taking place from China. To capitalise on this opportunity, the acquirers would need to implement robust screening procedures and consider whether the merchant will be able to cover the credit risks (which can be substantial with such business model, especially considering possible disruption of the supply chains). You can read our article that detailed considerations for successful merchant risk management. The proper risk management will help you to gain the most during these unsettling times.
Relationship with counterparties
On another note, for each FinTech business, it is essential to ensure that it has a reliable infrastructure to provide services in an undisrupted manner. Banking and financial systems are complex and often fragile interconnected ecosystems. In this regard, we can look at the counterparty risk that is faced by payment service providers who are strongly reliant on the partner credit institutions. Banks all across the globe are seeing unprecedented losses of revenues as the recession is looming over our heads.
Therefore, it is essential to thoroughly asses the credit risk exposure to the banking counterparties and in order to minimise such risk by skipping intermediaries and working directly with the payment clearing and settlement schemes and institutions. For example, a FinTech company that is a direct participant of FasterPayments and all customer funds are held and cleared with the Bank of England is much safer than the one, connecting to FasterPayments via commercial bank. We also see a trend that Electronic Money Institutions and Payment Institutions try to minimise reliance on their banking partners by opening more safeguarding accounts and using insurance.
How to use the opportunities and operate the business according to FinTech trends in 2020?
There are many FinTech trends and opportunities in 2020. However, the opportunity in itself does not bring any benefit without a concise plan of implementation. Whenever thinking about starting a new venture there is a prerequisite of outlining a step-by-step plan that will allow you to turn your idea into reality. Furthermore, the risk-return analysis must be undertaken with the utmost care.
If you wish to learn how to establish a FinTech startup and successfully grow your new business venture it is advisable that you would seek qualified advice. Thankfully, you’re in the right place. PSP Lab can assist you throughout the whole cycle of business growth– from procuring the license, choosing suitable software, finding partners to optimising your processes, and raising the revenue. Reach out to us today to learn how to turn your ambitions into reality and become a FinTech that follows trends in 2020.