The last decade has seen explosive growth in the fintech sector. Financial technology has become embedded into the lives of consumers and businesses, and a number of vanguard fintech companies have significantly changed the financial services landscape.
But, in the first year of a new decade, what will the next ten years bring for fintech? Here, we’ve outlined some predictions for the future of fintech in the 2020s.
1. Financial services will fragment further
Disruption will continue to be the watchword for fintech, and for the financial services sector at large. The growing pool of expertise and innovative thinking in fintech will change finance even more dramatically over the coming decade.
But not everyone will be able to keep up. The legacy institutions, and in particular the incumbent banks, do not have the agility or skills to leverage the new advances being made in the constantly-moving world of fintech. As a result, financial services will fragment to an even greater degree than we’ve already seen. Consumers will continue to shift away from legacy banks towards newer service providers. Crucially, consumers will also become more comfortable trusting smaller providers to fulfil specific needs, such as savings and investments. The dominance of the legacy banks will therefore continue to be eroded.
2. …but partnerships will become more important
But we definitely shouldn’t write off banks yet. The incumbent institutions will remain important, not only for consumers but also for fintechs themselves. Securing banking licences will remain a complicated, costly, and time-consuming process for fintechs, and most will continue to rely on partnerships with existing bank institutions. This trend will continue throughout the financial pyramid, with Tier 1 banks remaining the foundation of the industry. While partnering with Tier 1 banks will continue to be a holy grail for many fintechs, most will deepen their relationships with providers further down the pyramid, who in turn of course rely on their own relationships higher up that structure.
3. The regulatory landscape will change
For fintech, evolving regulation has been one of the defining characteristics of the decade just gone. Regulators have struggled for years to understand fintech, and to come to grips with its impact on the world. The legal landscape has been defined by a knowledge gap, in which regulators have often simply not understood the activities they are trying to regulate. The result is a hugely complex tangle of laws and obligations, both within and between territories, that has both held back innovation and paved the way for several high-profile scandals.
Thankfully, that situation is likely to change over the coming decade. Regulators are beginning to understand fintech, and there is greater collaboration between industry and states. We should expect this trend to continue, especially in the wake of scandals such as the Wirecard collapse, which dramatically underscore the necessity for prudence and oversight.
There are already sensible moves being made to rationalise and simplify regulatory frameworks. Countries including the UK already have relatively advanced arrangements, including so-called ‘sandboxes’ in which startups can test products under regulatory oversight. In the United States, several state governments have begun cooperating in order to reduce the burden of the interstate licensing regime. This positive trend will continue in the coming years.
4. Personalisation and automation will explode
In Europe, Open Banking will be a crucial factor in the future of fintech for the coming decade. The second wave of Open Banking (PSD2) will open up new possibilities for innovative fintechs looking to solve novel customer problems. Personalisation will be amongst the most important tools to help fintechs do this. The wealth of data made available by PSD2, along with the increasing consumer trust discussed earlier, will enable fintechs to offer automated, instant, highly granular personalisation across a range of different product types.
This trend has already been started by startups like Plum, who use Open Banking to build highly personalised savings plans for customers. But increasingly, personalisation will be expected across every element of financial services. In addition, the availability of data, and the decreasing resource burden associated with dealing with it, will enable fintechs to leverage techniques such as ‘nudges’ to encourage specific customer actions that are beneficial both to the customer themselves, and to the fintech.
5. …but changing consumer behaviour will remain a challenge
As we’ve just explored, fintechs will continue to solve new customer problems. But startups that break new ground will have to contend with the challenges associated with changing consumer behaviour. In a recent article we discussed the problems faced by Movenbank, the groundbreaking challenger bank in the US. Movenbank built a compelling product but, amongst other problems, they seem to have suffered from a ‘first mover disadvantage’ - that is, they went to market too early, and before consumers were comfortable enough to switch from established financial institutions.
This problem will continue over the coming decade. Iit is clear that it is already being eased in some product types; highly successful challenger banks such as Monzo and Revolut, for example, have paved the way for fintech adoption. But startups bringing entirely new products or services to market will continue to face challenges associated with risk-aversion amongst consumers and B2B clients. Finance is, of course, an area in which people tend to stick with what they know, and encouraging behavioural shifts will require not only great product offerings but also excellent marketing and brand activities.
6. Fintechs will rely on team augmentation
Fintech startups have great ideas, but they often lack the in-house development skills required to make those a reality. The costs involved in acquiring and training talent, securing office space, and dealing with outlays such as benefits and perks, are often prohibitive.
As a result, we expect to see an increase in the use of augmented teams for fintech development. This technique sees fintech startups use the services of dedicated fintech development consultancies such as DashDevs, who can help turn their great ideas into great fintech products. The advantages of using team augmentation are significant. Consultancies can eliminate the cost of hiring and training talent, dealing with ancillary costs such as benefits, and the additional overheads associated with growing an in-house development team. Instead, startups deal directly with DashDevs or another consulting company, embedding them within their existing teams and collaborating closely to build world-class products.
7. COVID is still to be reckoned with
Finally, the impact of the pandemic is still yet to make itself clear. In a separate article on our site, to be published shortly, we’re going to examine the rounds of layoffs endured at several prominent fintech startups, some of which are letting people go despite record growth. It is perfectly possible that this trend will continue as the industry recalibrates itself around the ‘new normal’.
More generally, though, fintechs in almost every area will be impacted by the continuing downturn in public spending and consumer confidence. This looks set to continue even as the pandemic eases, and smart fintechs will need to reposition their offerings to reflect it.