By Miron Lulic
There is little doubt rapid innovation is occurring in the financial technology space. While a paradigm shift in financial services was already well underway, the COVID-19 pandemic is likely to exacerbate that shift. In my role as CEO at SuperMoney, I am afforded some insight into how things are evolving in the fintech space. Below are some of my predictions for the future of fintech.
An acceleration of branch closures.
Banks have been pruning branch locations for years. We will see that net loss of branch locations accelerate.
While most bank services are more conveniently accessed from our phones, branches have historically been an important part of bank customer acquisition and retention as many people prefer to open an account and seek financial advice in person.
The COVID-19 pandemic will change consumer behavior and shift account openings online. We will also see the adoption of AI and tele-advisory services replace branch-based advisory services.
A new model for advisory services.
The trend to digital is not limited to banks or other brick and mortar financial institutions. All sorts of financial professionals will see more of their business shift towards a digital remote experience.
Real estate agents, independent financial advisors, financial planners and wealth managers are being forced to take their business digital. These are services where in-person interactions are the standard way to acquire customers and fulfill services.
These professions were already under attack. The COVID-19 pandemic is accelerating the need to adapt.
Contactless payment adoption.
When you hand over cash or a credit card, you put yourself and the person accepting your payment at risk.
A survey from early March shows that a growing number of people in the U.S. consider contactless payments a basic need after the spread of COVID-19. These tap-and-go payments don’t require any physical contact between your phone or payment card and the sales terminal while being more secure than traditional cards.
Germs aside, it’s pretty wild to me that in American restaurants we still hand our credit cards over to strangers who then walk away out of sight to process our bill.
This is going to change. Various forms of contactless payments will gain traction but ultimately, mobile wallets will broadly replace physical wallets.
Accelerated adoption of artificial intelligence.
A world with fewer in-person financial service interactions means a world with more cybercrime and financial fraud. Fraud prevention is a key area where AI’s ability to recognize patterns is proving valuable and will expand.
Automated customer service interactions via AI chat bots are already being adopted but will expand to include more tailored financial advice. In the future, increasingly personalized AI advisors may be perceived as more trustworthy, objective, and reliable than in-person advisors.
The use of machine learning to improve credit decisioning models isn’t new to the financial service industry. The applications of this technology will expand to new applications, such as monitoring borrower spending behavior post-funding to identify risk patterns for default so a financial institution can proactively take steps to intervene.
Banks and other financial service providers were early to adopt AI broadly. AI allows for faster transactions while giving customers the convenience they demand and significantly reducing operating costs. Adoption of AI will accelerate to broaden existing implementations and expand into new ones.
A return to bundling and financial intermediation.
Over the last decade, financial technology upstarts scrambled to digitize specific product categories that had been traditionally bundled into a diversified set of product offerings by traditional banks. LendingClub for consumer loans, OnDeck for business financing, Chime for deposits, Wealthfront for wealth management, and the list goes on. The underlying idea being that disaggregating the components of traditional banking would result in targeted solutions with better experiences for both retail consumers and businesses.
With billions of venture capital dollars going to startups building an app for every specific financial service, you inevitably end up with a customer base that is overwhelmed. Consumers can’t keep up with 10 different applications to manage their finances.
At least a few firms who touted disintermediation and disaggregation of traditional banks in their early days have shifted their strategies in the last couple years towards aggregating an ever-growing set of product lines, often as intermediaries to banks or other financial partners. It seems in the end that bundling financial services makes a lot of sense for both businesses as well as customers, and we can expect that trend to continue.
The resurgence of banks.
Many fintech companies who positioned themselves as challengers to or disruptors of banks ironically ended up building on top of the business or technology rails of the banks they were supposedly disrupting. Some built front-end skins on top of the technology backbone of existing banks, such as Chime’s relationship with The Bancorp Bank. Others built an entire technology stack of their own but used partner banks to address licensing requirements, such as LendingClub’s partnership with WebBank for loan originations.
We’ve seen a gradual shift towards these companies attempting to become banks themselves. For example, SoFi filed an application to the Federal Deposit Insurance Corp. to charter an industrial loan company unit called SoFi Bank. It later decided to back out of the process in the wake of sexual harassment allegations. LendingClub recently went so far as to acquire Radius Bank.
Behind the scenes, banks have kept busy and are moving forward with new or improved direct to consumer online offerings in lending verticals, deposits, and mortgages. By launching Marcus, Goldman Sachs disproved the idea that banks are too slow moving to compete against Silicon Valley online. Other incumbents like Chase have invested heavily into their digital experiences and typically offer a more unified experience than the competing upstarts.
The economic fallout of the COVID-19 pandemic has hit many fintechs hard bringing significant liquidity and demand shocks. Pandemic aside, a wave of fintech companies were reaching mid-stage, and are at the point that they must raise a mega venture capital round, become profitable, or sell. All three options have become more challenging due to the pandemic. I expect we are going to see considerable consolidation as banks with ambitions for digital expansion swoop in and buy up these companies to extend their own platforms.
The return of personal finance management apps.
Both banks and fintechs trying to be banks face the same problem – consumers like choice.
Google and Amazon gained monopolistic positions within their respective industries by enabling consumer choice, not by focusing on selling their own products.
Regulatory, technological, and financial market constraints have mostly kept financial products undifferentiated. Some entrants believed customer experience would help them differentiate and win market share. While customer experience is hugely important, financial service providers are primarily differentiated on their rates, fees and other key terms. A lender can build an awe-inspiring digital experience, but at the end of the day if a competitor offers a competing loan at a 5-point APR reduction, that competitor is likely to win the business. So, I can’t see a scenario where any one of these direct financial service providers achieves a monopolistic position in the market.
Personal finance management (PFM) apps are a neutral intermediary that can help consumers bundle a variety of financial service providers into one financial picture. The PFM tool Mint showed promise of becoming a major player. But after getting acquired by competitor Intuit in 2009, Mint has largely withered away ever since.
Credit Karma managed to bring on a sizeable userbase by offering free credit reports, but the core product offering remains surprisingly unchanged (not to mention that you can get a free credit report just about anywhere these days). Credit Karma was moving towards a more unified personal finance experience with the launch of Credit Karma Tax. However, they were treading too close to Intuit’s TurboTax business and Intuit has gone forward with a $7.1B acquisition of Credit Karma. It remains to be seen whether Credit Karma will follow the same fate as Mint.
The opportunity to develop an Amazon-like financial services marketplace intermediary with accompanying personal finance management tools remains wide open. The SuperMoney financial service marketplace aims to capitalize on that opportunity.
Growth in embedded finance.
Acquiring financial service customers is getting more expensive. A challenger bank or a new fintech must build a customer base from scratch in an incredibly competitive market. Rather than slog it out, some of the most exciting fintechs are opting to build platforms that enable embedded finance for brands that already have customer loyalty. Brands with mindshare are leveraging these platforms to integrate financial services and make their product or service easier.
We’re seeing that with Uber Money, which includes a digital wallet and upgraded debit and credit cards. We will likely see that trend continue and expand with big brands that you wouldn’t typically associate with financial services. We will almost certainly see major tech companies like Amazon and Google make a more focused run at your wallet.
Digital layaway will disrupt credit cards.
In the 1930s Great Depression era, retailers nationwide came up with an innovation to make it easier for people to shop. It was called layaway. Customers placed a down payment on the goods they wanted so that the store would hold them for a set amount of time. The customer would then pay off the purchase over the course of a few weeks or months until the full purchase price had been paid.
In the 1980s, credit cards came around and reversed the order of operation – allowing the customer to buy now and pay later.
In the 2020s, an emerging trend in e-commerce is the adoption of a new breed of digital layaway companies like Klarna and Affirm. These firms combine the instant gratification of credit cards while giving the customer a more structured way to pay it all off in a short installment period.
The COVID-19 lock downs undoubtedly broadened the usage of e-commerce into new product and service categories while igniting a recession to rival the Great Depression. The combination of an expanding addressable market with the need to be more financially conscious will likely accelerate the use of digital layaway services and take a significant cut of credit card transactions.
This trend is not limited to e-commerce. Any small business will be able to offer financing without having to pay additional fees or discount rates to do so. Financing will be available for anything that is consumable.
Bitcoin may face a day of reckoning.
At the height of COVID-19 panic, pretty much every asset in the world fell in value, even supposed safe haven assets such as gold and bitcoin. This was bitcoin’s time to shine as the digital currency is supposed to be completely uncorrelated with the rest of the market.
With central banks globally adding many trillions to their balance sheets, significant fiat currency inflation is expected to occur. There is a non-trivial risk of collapse of confidence in the monetary system. In this scenario, the real test for bitcoin will occur.
Bitcoin will either show that it can succeed as a global, apolitical store of value and medium of exchange. Or, given that bitcoin does not have any real industrial or consumer value in the way that precious metals do, bitcoin will go to zero as investors flood to an asset-class with an underlying intrinsic value.
Regardless of the performance of bitcoin as an asset class, blockchain technology adoption will grow as we continue to apply the technology where it is best suited.
America will become a nation of savers.
America is facing the biggest economic recession since the Great Depression and it’s all happening as about 30 percent of Americans have zero emergency savings, and only one-fifth have savings sufficient to last six months. The consumer financial pain that comes out of this will have long lasting behavioral effects.
As Americans emerge from this financial crisis, many people will start saving, not for a rainy day, but for years to come. This change in behavior will be enabled by fintech services that make savings easy and automated. For example, savings apps that round-up the pennies from your purchases and allocate them to an investment account.
These are interesting times for the financial services sector. Fintech startups have revolutionized what we expect from financial institutions. However, this has not been a wipeout for the old guard of financial institutions. On the contrary, some are riding the fintech wave and coming out as market leaders. Often it is a marriage of necessity between startups and major financial institutions in the pursuit of faster, simpler, cheaper, and more transparent financial services. We are on the brink of major technological changes that will change the way we manage money. However, transforming all this potential into reality in these challenging times will require resilience and partnership from all stakeholders.