Looking ahead to 2021, here are five of our predictions for the future of this sector.
1. Challenger banks won’t need to be everything to everyone to win
With more than 250 digital banks now launched globally, the obvious question is whether they will all be able to scale successfully. The banks likely to come out on top are those that solve for significant pain points, many of which might not be widely obvious. Take for example Daylight, which addresses significant service gaps in financial services for transgendered people.
Prior to Daylight, the transgender community was generally forced to use their birth name on their cards instead of their preferred name, and the Know Your Customer (KYC) process, which assesses the identity of a new user, often produced false alerts due to its rigidity in reviewing a new user’s documentation. Daylight is aiming to ease these processes and provide a host of additional features specifically targeted to the unmet needs of the LGBT+ community. More banks that are focused on smaller segments and serving them well will likely succeed.
2. Traditional players’ partnerships with big tech will provide another source of competition and innovation in the space
With big tech dipping its toes into digital banking via partnerships, legacy banks may have found a way to level the playing field against challenger banks. Legacy financial institutions will be able to continue to remain relevant by partnering with digital-savvy, data-savvy players to future-proof their businesses.
The Google Plex initiative is a great example of how partnerships between traditional banks and big tech can benefit both sides. The 11 banks that will partner with Google to launch checking accounts will have a gateway to a larger set of consumers, pairing their banking infrastructure with Google’s powerhouse analytical capabilities.
And like many fintechs, Google can build its presence in financial services while avoiding the compliance and regulatory complexities of becoming an actual bank. Expect to see more partnerships in the future that give traditional players access to far reaching, digital acquisition channels.
3. Digital banks could help make plastic disappear
This prediction will last well beyond just 2021, but COVID-19 has certainly accelerated its trajectory. Due to health risks, COVID-19 persuaded millions of consumers to adopt digital payment methods that minimized physical contact, adopting contactless payments en masse and moving away from cash and plastic.
Without physical branches, digital banks are heavily investing in seamless onboarding experiences, and many will embed these types of experiences across their overall offering including payment cards. Think virtual card numbers and digital wallet options such as Apple Pay and Google Pay that can be used just as securely and issued instantly versus plastic cards that can take days to arrive.
However, digital banks won’t make plastic disappear on their own. Merchants need to participate as well, and more retailers are adopting digital and contactless payment methods at the point of sale and online to accommodate customers. With multiple advancements in payment technology and the changing expectations of consumers, physical wallets may soon become a thing of the past.
4. Credit cards will become the focus of many product roadmaps
Most challenger banks have focused their initial offerings on innovation around the bank account and debit card, but with a need to expand their product portfolio and diversify revenue, credit products will start to dominate many fintech product launches.
Credit cards serve as a cornerstone of daily spending habits, making up 55% of purchase volume in the U.S. And there’s also more opportunity to differentiate with credit card features such as rewards when compared to debit cards that tend to earn a lower interchange rate. The key for fintechs will be having the right technology partner that enables them to create customized credit products for their user base.
5. Cryptocurrencies will become more accessible via digital banking
Cryptocurrencies have typically been thought of as an investment play for a very niche audience. But more fintechs are starting to look at how they can incorporate cryptocurrency into day-to-day banking offerings.
Square now allows its users to easily buy and sell bitcoin via Cash App and earn bitcoin on purchases. PayPal also announced plans to add crypto to its Venmo app. And Coinbase introduced a debit card allowing users to spend their crypto by converting their balance to dollars when their card is swiped. More fintechs will start to innovate around crypto currencies and incorporate them into everyday digital banking, bringing them to a mainstream audience.