2020 Retrospective - Fintech Review

At the beginning of last year, everybody made a few predictions for what 2020 would mean for the fintech industry. Obviously, at that point in time, Covid-19 was only a problem in Wuhan, China. You could see it in the distance, and it appeared well under control. That slightly changed in the following months, and the first lockdowns a bit everywhere. And the second. And the third, so forth and so on. Here we are today. It has been undoubtedly a challenging year for many around the world. However, it was not all bad, particularly for Fintech. What about Fintech Review’s top 5 trends for fintech in 2020? Did any materialise or did we get it completely wrong? Let’s look back and have a brief retrospective.

1. Robotic Process Automation (RPA)

This obviously was not top of the list of priorities for banks around the world. Most incumbents went into survival mode, having to shift massively their ways of working to remote-only overnight. So it was not really the moment when you would go through a massive digital transformation, automation drive and change all of your processes.

But not all was lost. In order for the banks to deliver on the gigantic government schemes at massive scale, a certain degree of automation was necessary. Be it in the US or elsewhere, processing thousands of loan applications in a matter of days was not going to be possible without it. And it is not over yet, as these schemes are still live. The economic environment is going to continue being tough for banks, naturally they are going to look to cut costs. Be sure that RPA will be on the menu of all of these rationalisation programmes.

2. Machine learning and Artificial Intelligence

2020 was not the year were AI changed the financial services industry forever. That’s because many innovation projects at big banks were shelved. Innovation in a remote setting is not that easy, although you can set yourself up for success: leading companies are still innovating. Banks and fintechs alike are going to continue investing and innovating in artificial intelligence. It will become more and more embedded in operations across most financial institutions.

However, logically so, there were no massive breakthrough or significant investments in the space. The story of the year in AI is probably the progress made by OpenAI and its Generative Pre-trained Transformer 3 (GPT-3), a model that uses deep learning to produce human-like text. Very exciting to see where they got to with it. Will we see it applied to banks’ customer chatbots any time soon?

3. Blockchain and distributed ledger technology

Enterprise blockchain might not have revolutionised financial services in 2020, but crypto definitely went institutional. Not completely mainstream yet though. The major announcement of the year was from PayPal, that is now allowing its customers to buy and hold cryptocurrencies. Other major players are warming up to the idea. Institutional investors, like BlackRock, started to say that cryptocurrencies were not such a bad idea and could make sense in terms of asset diversification. Consequently, Bitcoin shot up to all-time highs above $30,000 apiece. Will it last? That’s a good question, although do not ask a crypto fanatic, as for them, it can only go one way…

Of course, blockchain and crypto are not the same thing, but it does help the blockchain industry overall. After all, it is the earliest use case of the technology. There are still many potential applications in financial services, and there are interesting use cases being developed in decentralised finance (DeFi).

4. Big Tech becomes Fintech

Big Tech — Amazon, Google, etc — did pretty well during the pandemic. As everything shifted to the digital world, technology companies naturally rode the wave. Therefore, these behemoths did not slow down on their plans to expand further into financial services. There were a few big moves in the space during the year.

In November, Google unveiled a revamp of Google Pay, which ended up being a massive move deeper into banking. Unsurprisingly, this is in partnership with a few banks and credit unions in the US. It exemplifies what Big Tech companies want to do in the space: be the slick interface with customers and product origination engine. Banks in the background acting as the balance sheet. Funny enough, fintechs such as neobanks stand to lose the most in that scenario.

5. Money continues to flow in Fintech

This most certainly happened to be true. Although let’s say that the headline number is good, but scratching the surface, it is not that rosy. It was another record year for fintech fundraising, albeit we do not have sight yet of the Q4 numbers. Later stage fintechs did well when it comes to closing funding rounds. Particularly the ones that either have robust business models or have benefited from the pandemic (online payments such as Stripe).

Not all of them though, as for example British neobank Monzo that had to go through a down round. However, there was a concentration in mega-rounds, as funding for early stage ventures dried up. It makes sense, in the midst of a crisis, you are less likely to bet on this new shiny upstart.

Bottom line

In spite of the pandemic — not that it was a small event — the fintech industry was not as disrupted as one might think. Some definitely were, for instance the neobanks that have no diversified incomes yet and rely a lot on interchange and FX fees. Problem is, people were using less their secondary cards in shops and at restaurants, and obviously travelled less. We are yet to see the impact of credit losses on fintech lenders, such as Funding Circle, because government support schemes are still running at full capacity. Therefore, business failures have been muted. Make no mistake, it will come and lenders will feel the burn.

However, overall, the pandemic is accentuating incumbents foes — high cost base, rigidity, lack of innovation. While favouring some fintech niches like online payments and big technology companies. 2021 will be an interesting year for the industry, survival of the fittest for sure.