Fintech Predictions 2021

Welcome to our Fintech predictions 2021

As we emerge blinking from 2020, there is no better time to look forward to what 2021 and beyond holds for Fintech. The future path of Fintech has no doubt been indelibly shaped by COVID-19, but, as the global grip of the pandemic starts to loosen, there is much more to talk about than the virus.

Our Fintech partners give their forecasts on what they see are the 12 biggest trends, innovations and shifts emerging on the Fintech horizon. As you'll see, there's plenty to get excited about.

1. Fundraisings will be more selective, with big prizes for the most profitable. Fintech fundraisings in 2021 are shaping up to become more discerning, with a renewed emphasis on profitability. This is driving greater focus on later stage investments: start-ups and scale-ups will face tougher market scrutiny to raise new capital. We also expect to see consolidation across some of the more fragmented Fintech offerings. Overall, it will be seen as an opportunity for the funding community to invest in profitable Fintechs at more attractive prices, with the successful Fintechs becoming serious acquisition targets for private equity and larger industry incumbents.
2. With great collaboration comes great scale. With Fintechs (and their technologies) now more established, banks and financial firms are actively pursuing collaborative partnerships. Given the funding community's sharper focus on later stage investments and consolidation, this is an attractive option for Fintechs too in order to offset the anticipated drop in private capital and to help build scale. Collaboration, rather than disruption, will continue to grow in 2021, with incumbent industry players looking to access Fintechs' technologies and agility to expand their own customer appeal.
3. Open Finance starts to take hold, globally. Open Finance has the potential to revolutionise retail and wholesale financial services. While current consultations on broadening open banking standards are relatively narrow, they are an important first step towards a much wider open data environment whereby consumers can choose who has access to their data. Those who win consumer trust and confidence in this space have much to gain. 2021 will only be the start of this sea-change, and it will permeate throughout major economies.
4. (Physical) cash is no longer king, embedded finance promises to usurp its crown. We will continue to see an expansion of digital/mobile payments becoming widely adopted. COVID-19's social distancing environment has only reduced the time until cash becomes obsolete – although we see this is still some way out, given regulator expectations around access to cash and certain demographics relying on it more than others. Linked to this is the rise of embedded finance within social media and other digital aggregators, who will soon be offering financial services directly through their brand channels to compete with traditional banks and payment firms.
5. Self-driving finance. AI is already used in several financial services applications, such as risk/fraud management and (in combination with advances in behavioural science) hyper-personalisation of customer service. However, banks and other financial institutions will increasingly rely on AI and Robotic Process Automation to do more, as they refine their automation strategies and scale from pilots to implementing solutions at greater pace. A driver for this is the predicted efficiency gains AI and RPA offer – they are projected to reduce operating costs by over a fifth within the next decade. This means that banks and other firms will be focused on ensuring that they have the right talent in place; and we could well see a global land-grab for these capabilities emerge.
6. Fintech increasingly recognised as a horizontal, rather than vertical. Disruption and innovation in the financial services industry has seen seismic shifts in the composition of the finance ecosystem. New players and types of businesses continue to challenge incumbents and evolve the infrastructure underpinning the industry. This has created a virtuous circle of innovation, with many other industries piggybacking off of these market dynamics to bring Fintech innovations into their own ecosystems. The ultimate result of this has been the shift of Fintech from a vertical market phenomenon to a horizonal one.
7. Getting serious about sustainability. Declared Europe's "man on the moon moment" by Ursula von der Leyen, the path to zero carbon will be paved with new ESG regulation, new green finance structures, new green fintechs and new impact focused investors. Navigating the moonshot will be complex, and it may yet still be difficult to separate sustainability theatre from substance. The intersection of Fintech with the energy, transport and other sectors will become an increasingly important place to be.
8. Beyond bitcoin: DeFi in 2021. While the rising price of bitcoin continues to grab headlines, few understand the underlying dynamics driving these increases. Although institutions have yet to "go all in" on crypto, growing familiarity and confidence is buoying the price as more and more mainstream players eye up and enter the space. For those paying attention to the wider industry, decentralised finance or DeFi came into its own last year with no signs of slowing.
9. All about the stablecoins, baby. The announcement of Libra (now Diem) in 2019 made stablecoins a watercooler hot topic, and in 2021 we expect to see the next generation of contenders for global stablecoin dominance finally emerge. While the world eagerly awaits this momentous event, central banks are looking ever more seriously at how to digitalise money whilst regulators are driving stakes in the ground. It remains to be seen whether regulation will enable or slow adoption, but one thing is certain: stablecoins are here to stay.
10. The CBDC Strikes Back. As regulators do their best to hold back stablecoins' march, more and more Central Banks will adopt or advance plans for Central Bank Digital Currencies. These will almost certainly involve collaborations between the private and public sector in many economies, meaning CBDC and stablecoins (and other digital currencies and assets) will co-exist and interoperate in a new digital only capital market and e-commerce environment.
11. Digital banks become more… digital. There is a new wave of digital banks seeking to provide a more complete or niche service than the majority of digital incumbents. They are seeking to differentiate by offering a wider range of digital banking services, and/or more innovative financial products than just a digital current account and cost effective use of spending abroad. We are likely to see these new digital banks capturing market share from more traditional users of banking services and so may not end up competing for the business of existing digital banking customers who are with the digital incumbents.
12. Regulators will target more killer acquisitions. As open banking and over the top payment providers look to create new payment models and customer journeys, we have seen some incumbent giants looking increasingly to acquire nascent competitors. This is raising questions as to whether these investments are just "tactical eliminations", such as the US justice department's recent action against Visa's acquisition of Plaid. This is likely to drive a change in how such deals are made – moving from full acquisitions to sizeable investments. The reality is that global regulators are now fully awake to these concerns. So expect them to keep an ever watchful eye on how this develops. We are already seeing the regulators adapt, such as the proposals in the UK and Australia to require digital companies that have ‘strategic market status’ to inform regulators of all intended acquisitions, regardless of whether any thresholds are met. These wheels will continue to turn in 2021.