Remember when the pandemic hit us as soon as we welcomed the last new year? 2020 saw everything from frontline workers running the show to U.S banks suffering a loss of billions in credit write-offs. 2020 became the year that witnessed the worst economic downturn since the Great Depression. However, this turmoil also brought the fintech industry to the forefront and saw some significant developments in the industry. Here’s to 2020!Â
Table of Contents
- Fintech Eased Payments for Frontline Workers
- Banking Preferences Changed, Use of Mobile Wallets Surged
- Startups Saw a Significant Growth
- U.S. Banks Suffered a $320B Credit Loss
- Some Major Fintech Companies Took the IPO Route
- Payment Companies Suffered Due To Travel Restrictions
- The Demand for Real-Time Payments Skyrocketed
- 2020 Saw Some Exciting Product Launches
- It Was a Successful Year for Embedded Finance
- Major Partnerships, Mergers, Acquisitions, and Fundings in 2020
- Several Countries Exercised Open Banking Regulations
- There Was a New Wave of Retail Investors
2020 can be labeled as â€œthe year of adversities and uncertaintiesâ€ as it showed the worst economic downturn since the Great Depression. The turmoil brought the fintech industry to the fore. Startups and unicorns of the industry have grasped this opportunity to demonstrate their reach and expand their services along the digital lines, thereby emerging as clear winners amid hardships.
COVID-19 brought about a cultural shift in people’s lives as they spent a chunk of their time online. The mandatory pandemic norms, such as quarantines, travel restrictions, and work-from-home practices, only forced people to stay homebound and further facilitate online traffic. Many businesses are yet to come to terms with the losses incurred due to the global pandemic. However, fintechs managed to accelerate their growth even during these difficult times.Â
By the first half of 2020, 82% of hourly workers were worried about the loss of pay, according to a PayActiv Hourly Worker survey conducted in May. The fear of financial insecurity resulted from less or no access to paid sick leave, leaving workers economically vulnerable.Â
To reduce the financial pressure on frontline workers, Visa partnered with Earned Wage Access (EWA) technology vendors such as DailyPay, PayActiv, ZayZoon, Instant Financial, and FlexWage and merchants to make EWA a reality for hourly workers. This digital partnership enabled faster and secure payments to the needy frontline workers during the crisis.
A survey conducted by Capgemini and Efma titled World Retail Banking Report 2020 revealed statistics that unveiled the changed preferences of people after the COVID-19 pandemic. The report stated that pre-outbreak, 49% of people preferred internet banking, whereas afterward, the number had risen to 57%. The report also revealed that 55% of people today prefer mobile banking applications â€“ up from 47% pre-COVID.
Mastercard also conducted a study of payment preference of the public across e-commerce and in-store payments in various markets. The study found that with COVID-19, online payments were the most preferred mode of payment. The first quarter of the year witnessed a rise of 20% in digital commerce revenue. 75% of respondents said they were most likely to keep using digital payments even after the pandemic ends.
Another study by Strategy Analytics Consumer Insights revealed the changing payment patterns across the U.S., U.K., Germany, and China. The results showed that 30% of U.S. consumers chose contactless payments as their preferred method of payment.
With banks allowing limited in-person visits to minimize the spread of the virus, more users turned to online and mobile banking to avoid the exchange of paper money as per a survey by FIS. The survey reported that in the wake of the COVID-19 pandemic, 45% of consumers changed their interaction methods with their banks.
Bigger fintech companies such as Square and Stripe set the benchmarks for the younger pay tech startups. The priority for these firms was to build a real-time payment infrastructure. Startups like Openblocks opened newer avenues for the PayTech industry by normalizing cryptocurrencies for transaction purposes through a universal payment solution that can be adopted for the mass-market. The company turned cryptocurrencies into real usable currency and converted credit cards into cards with â€˜digital currency’ enabled on them.
Another fintech venture that was in the news was Amaryllis Payment Solutions. The fintech company provided a payment infrastructure platform for enterprises, independent software vendors (ISVs), and SaaS companies. Amaryllis gave enterprises the facility to define their unique business framework and assure flexibility to support their ever-evolving commerce models. The company also provided necessary support to alternative payments (including PayPal), wallet (stored value accounts), virtual currencies, and locally preferred disparate payment methods. Amaryllis further promoted rapid global commerce by providing currency pricing and conversion with dynamic currency conversion (DCC).
InsurTech Consolidated and Saw a Significant Growth
InsurTech companies showed a similar overall growth curve as the fintech industry. According to a CB InsightsOpens a new window report, InsurTech almost tripled funding from Q1 to Q3 ($978M to $2.56B), citing five mega deals ($100M+) that contributed to this figure, which accounted for just under half of the $2.56B in total funding. Bright Health, a Minneapolis-based company offering health plan products and clinical care delivery services, raised $500 million in Series E funding. In another impressive round, Next Insurance raised about $250 million in Q3.
This pattern demonstrated that the insurance industry consolidated amidst the changing habits of the overall market â€“ which goes hand in hand with growth in the fintech industry. This is also apparent because tech giants like Google and Amazon are now engaging with these industries through subsidiaries and partnerships.
COVID-19 took the world by a storm leading to a global economic imbalance across financial institutions. The burden to keep the economy up fell on private lenders, as governments started to lessen the public stimulus and nudged people toward the private-led debt.Â
As a result, U.S. banks faced up to $320 billion in credit write-offs, according to a report from Accenture. European banks, on the other hand, lost up to $460 billion. According to Accenture’s analysis, many banks entered the pandemic with the financial resilience to absorb considerable credit losses, with the world’s largest banks holding capital reserves well above what regulators required.Â
Many companies were seen eyeing IPOs in 2020, including Robinhood, Affirm, Marqeta, AvidXchange, and Flywire. This can be attributed to the aggressive growth plans of the companies, which require a significant amount of capital. While the option of availing loans of venture capital is always open, it is accompanied by specific interest rates and regular repayments. In such scenarios, going public is the most suitable resort for companies.Â
Countries across the halted international travel since the onset of the COVID-19 pandemic, which led to a significant slump in the profits earned by credit card companies. As American Express, Mastercard, and Visa faced the heat of the virus-led travel slowdown, 2020 saw a double-digit drop in the profits compared to that of the previous year. The companies blamed travel curbs for the drop in profits.
The rapid growth of contactless payments and digital banking due to the emergence of COVID-19 put constant pressure on the finance industry to modernize payments and banking solutions. 82% of people globally found contactless payment as the cleaner and safer way to pay, whereas 74% of people globally will continue to use contactless payment after the pandemic is over.Â
2020 saw a lot of companies launch solutions to make payments easier. Facebook-owned messaging application WhatsApp brought digital payments for users in Brazil, which allowed users to view the catalog of a store and make payments using Facebook Pay. However, the Brazilian government suspended the feature in less than a week, owing to an order by the Central Bank of the country to Visa and Mastercard to close the project due to anti-competitiveness.
Financial technology giant, FIS Global, launched a wealth management platform to empower wealth managers to help clients better understand the needs of multi-generational clients. The company also announced ClearEdge, a new subscription-based model for delivering a core banking solution to simplify access to the advanced technology banks need to better serve the changing needs of their customers.Â
Samsung Electronics, in partnership with SoFi and Mastercard, launched Samsung Money by SoFi: a mobile-first money management experience, while Mastercard unveiled a new Central Bank Digital Currencies (CBDCs) testing platform. The platform enabled companies to assess and explore national digital currencies. The platform is completely customizable according to the needs and use cases of a particular region and country.Â
2020 was also the year when Amazon Pay, Alexa, ExxonMobil, and Fiserv rolled out voice purchasing technology to nearly 11,500 U.S. ExxonMobil gas stations. Amazon PayCustomers who have the Alexa app installed on their phone, users with Alexa-enabled devices in their car, like Echo Auto, or vehicles with Alexa Built-in, can now pay for fuel using their voice.
U.S. tech giants like Google, Amazon, and Facebook’s WhatsApp took up major financial projects in 2020 while some fintechs, such as ZelfOpens a new window and PayKeyOpens a new window , turned messaging apps and phone keyboards into banking apps. Startups such as Klarna, AfterPay, Checkout.com, Affirm, and Fast utilized the ecommerce boom to their advantage with billion-dollar valuations and some successful inroads into initial public offerings (IPOs).
Varo and Chime, two of the top players in the online banking space, grew considerably in 2020. Their growth allowed them to offer a comprehensive set of financial services to their customers. These services include early pay access, high yield savings, and cash advances, to name a few. Another venture named Lili made a strategic moveOpens a new window by offering mobile banking services for freelancers in a vertical-focused offering.Â
Embedded finance is projectedOpens a new window to be worth $7 trillion in ten years. It will offer a profitability route for many upcoming fintechs struggling to stand the pandemic stricken volatile consumer market.
In September 2020, Australia’s Volt Bank announcedOpens a new window its banking-as-a-service (BaaS). U.S. fintech Moven, on the other hand, announcedOpens a new window a strategic shift to focus on enterprise growth in March. Global new aged fintechs solarisBank, Railsbank, Modulr, Marqeta, and Societe Generale also embraced BaaS in 2020.Â The global expansion of BaaS platforms is just a spark for the future.
Robinhood Co-founders Vlad Tenev (left) and Baiju Bhatt posing at company headquarters in Palo Alto, California in 2015
Source: The Wall Street JournalOpens a new window
Along with stronger M&A, startups also garnered significant fundings in 2020. Fintech startup, Robinhood, announced $660 million funding in series G. After this investment, the company raised $2.2 billion, raising its total valuation to $11.7 billion. Similarly, Lili raisedOpens a new window around $15 million in seed funding in June 2020.
Brazilian fintech startup, Neon Pagamentos, closed its Series C funding round with $300 million, while Fintech startup, Thunes, closed its $60 million Series B funding round led by Helios Investment Partners. Cross-border payment platform dLocal, invested $200 million, after which the company reached a valuation of $1.2 billion and became the highest-valued Latin American financial technology company.
Affirm announced a $500 million series G round of funding, which brought the company’s total funding to $1.3 billion, while Clara Analytics raised $25 million in Series B funding led by growth equity firm Aspen Capital Group.
This year, Oracle Banking Payments partnered with SWIFT to make global cross-border payments fast, easy, predictable, and frictionless for small and medium enterprises (SME) and consumer markets. Visa joined hands with Stripe to provide Visa Payables Automation to allow users to pay suppliers who are unable to accept digital payments through a virtual Visa card.Â
U.S.-based installment payment platform, QuadPay entered into a partnership with Australian Buy Now Pay Later (BNPL) platform Zip Co to expand merchant and consumer reach globally, drive scale, and increase brand awareness. Norway-based smart payment company, Vipps, entered into a strategic agreement with Visa to aid European banks and card issuers to deliver smarter and simpler solutions to their customers.Â
Visa and PayPal also expanded their partnership to extend the Visa Direct payout services through PayPal and its Braintree, Hyperwallet, and iZettle product solutions. Microsoft and Finastra, on the other hand, announced a strategic multi-year cloud agreement to accelerate the digital transformation of financial services. Mastercard and Marqeta extended global partnerships to new locations to provide open access to new products and launch additional card programs together.Â
HSBC signed a cloud agreement with Amazon Web Service (AWS) to make AWS technology available to all the bank’s lines of business, starting with customer-facing applications and modernization of its Global Wealth & Personal Banking business.Â
Mergers & Acquisitions
Among major acquisitions in 2020 was the acquisition of Openbucks by Paysafe and Fincity’s acquisition by Mastercard for $825 million. The acquisition strengthened Mastercard’s open banking platform by enabling a more significant suite of financial services.Â
2020 saw some major mergers and acquisitions (M&A) in fintech. The year kick-started with Visa’s $5.3 billion acquisition of data aggregator Plaid in January. This was followed by SoFi’s Â£1.2 billionOpens a new window purchase of BaaS provider Galileo in April 2020.
The global payment world also drew attention this year, when Worldline bought rival Ingenico for $8.6 billionOpens a new window in February 2020. Europe’s largest payments processor (by volume) was created by an Italian firm Nexi that merged with SIA in October and later bought Copenhagen-based Nets in November 2020.
In June, the U.S. Department of Justice (DOJ) approved Mastercard’s acquisitionOpens a new window of Finicity with a deal of more than $4 billion. However, the deal was less than Visa’s open banking bid, and the DOJ went against the deal.
The second payment services directive (PSD2) came into action back in January 2018 in the U.K. However, 2020 saw a surge in the number of open banking users, with the U.K. hitting 2 million open banking users in September, up from a million in January 2020.Â
According to the October 2020 Business Insider reportsOpens a new window , the Consumer Financial Protection Bureau (CFPB) was seeking guidance on providing consumers with access to their financial records in the U.S, which hints towards the development of open banking rules in the U.S.Â
Other countries that exercised the open banking regulation this year included Australia, Brazil, and the United Arab Emirates.
COVID-19 has worked in favor of the retail investors, who now make up 25% of the stock market â€“ a significant jump from 10% in 2019. Another stream of startups â€” namely WealthTech and trading â€”Â showed great revival despite the pandemic-led slowdown. According to the CB Insights reports, Q2 and Q3 of 2020 both had $1.36B and $1.49B of VC-backed financing, respectively. This has marked the improvement of just $275M and $477M in Q4 of 2019 and Q1 of 2020, respectively.
Robinhood pioneered the idea of commission-free stock trading a few years ago. This year, Robinhood added 3 million users, thereby encouraging many retirement planning startups to focus their attention on differentiating product offerings and specifying their target market.
Financial Frauds Spiked Due to Digital Dependency
Top Banks like HSBC Filed SARs With the U.S. Department of Treasury’s FinCEN Between 2000 and 2017
The 2008 financial crisis brought about a significant change in compliance and regulations that the financial companies needed to comply with to ensure safer deployment of financial services.Â It encouraged several companies to look for options such as cyber and biometric measures to safeguard themselves against fraudulent events. Several regulation tech companies banked on big data and machine learning algorithm-based solutions to pull out illegal and fraudulent financial activities such as cyber-attacks, data breaches, and money laundering.
Oracle has been contributing to the race to help combat financial crime. This year, the tech giant announcedOpens a new window a new cloud service to help smaller banks integrate anti-money (AML) laundering protections via its Financial Crime and Compliance Management Cloud Service. Oracle has been working with large financial institutions for years and now intends to bring those same capabilities to small banks to streamline compliance and fight illicit fraudulent activities.
World’s top banks such as HSBC, JP Morgan, Deutsche Bank, Standard Chartered, and Bank of New York Mellon filed suspicious activity reports (SARs) with the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) between 2000 and 2017. These reports were leakedOpens a new window and revealed that the banks had let criminals move $2 trillion in dirty money across the globe, thereby exposing the $2 trillion dirty money scandal. Another shocking story of 2020 was that of Wirecard, which was once Germany’s fintech star.Â
In June, Wirecard admittedOpens a new window that the 1.9 billion euros that auditors said were missing from the providers’ accounts most likely did not exist. This was one of the biggest financial frauds of recent years that 2020 witnessed.Â
China Led the Race for CBDC
As the pandemic restricted access to finance in 2020, the race to create the world’s first central bank digital currency (CBDC) was seen along the horizon. China led the troops in this race in 2020. The central bank’s deputy governor, Fan Yifei, revealed at Sibos 2020 that until â€œlate Augustâ€, the bank had processed about 3+ million transactions, leveling up RMB 1.1 billion ($162 million).
Rishi Sunak, the U.K.’s chancellor, announced that the Bank of England was putting together a CBDC discussion paper â€“ however, it was too premature to conclude on the same at the time. In the U.S., the Democrats opted to use digital dollars and digital wallets to expedite emergency funds to unbanked consumers during COVID-19.
Although the U.S. and the U.K. are lagging behind, a reportOpens a new window by the World Economic Forum, Deloitte, and McKinsey suggests 10% of total GDP will be stored on the blockchain (tokenized) by 2027. CBDC still seems to be in the infancy stage. However, China has already covered 6,700 use cases, including bill payments, transportation, and shopping. The stats open up the debate on to what extent will CBDC change what money fundamentally is.
So, where’s fintech headed in 2021?
Despite all the disruptions that were thrown its way, the fintech industry lived on and wriggled its way through innovation and creativity. The tough circumstances have brought out the best in fintech.Â
Traditional finance went for a toss in 2020; however, fintech companies saved the day by making valuable ground on collecting market share in their potential client bases. As new startups continue to pop-up and fintech grows and adapts as it did in 2020, we have lots to look forward to in 2021 and the years to follow.
Do you think the fintech industry fared well in 2020? Comment below or let us know on LinkedInOpens a new window , TwitterOpens a new window , or FacebookOpens a new window . We’d love to hear from you!