Fintech will be bank, bank will be fintech
Around the corner there will be many open challenges and surprises, in the post-Covid time that still needs to be imagined. According to McKinsey & Company, in 2020 European economies shrank by 11% on average, and the most updated estimates show that there will be no return to pre-Covid levels until 2023. In this context, traditional finance has been forced to a sudden change of perspective. It was widely known that digitization would be its near future, since the demand for smarter services by Millennials and Gen Z (the new bank customers) had been growing for years. However, as everyone has already noticed, social distancing has hastened this secular change. More and more traditional banks are interacting deeply with Fintech companies, and fintech companies are turning into new entities. The first movers of this evolution are, on the one hand, colossal challenger banks and, on the other, innovative traditional banks. They have a clear advantage.
In the near future, two main aspects will influence the scenarios of an increasingly intense collaboration between banks and fintech companies. First of all, Fintech companies are growing from small to medium size – and in this process they will have to abandon the start-up fail-fast method. At the same time, traditional banks will need to abandon legacy technologies to become more agile. Each side is going more and more towards the other, until they will merge. The bank that awaits us will be increasingly technological and digital. Concepts such as open banking, digital lending, API (Application Programming Interface) and PaaS (Platform as a Service) are and will be particularly interesting.
Digital native services and regulation are the advantages of Fintech
Meanwhile, 2020 has been a good year for financial technology overall. It’s true that the general slowdown of economy has had an inevitable impact on investments, which have been penalized by uncertainty and the rescheduling of all business plans. But despite all this, Fintech companies have capitalized on their advantage: i.e., offering digital native services and modifying their offer to meet the fluctuating needs of the market. This advantage was particularly strong in 2020, when customers had to access and manage their finances remotely, which is not always so easy to do with traditional financial institutions. Furthermore, the European regulation of crowdfunding is on its way: it puts lending and equity side by side and paves the way for new opportunities.
Public assistance and Brexit
LendIt asked some questions to Fintech operators that are based mainly in the United Kingdom (33%), Poland (13%), Italy (11%), and Germany (7%). It emerged that the most disruptive thing in 2020 was government intervention. First of all, there were anti-Covid aid plans, which have had a positive impact, since Fintech companies were able to lend state-guaranteed loans to the real economy. Fintech lending proved to be effective, as opposed to the bureaucratic delays of most banks, whose loans to SMEs too often arrived late. Furthermore, anti-Covid economic measures have been important for some Fintech companies, as they have spurred a skyrocketing increase in corporate lending. Others, however, found that, overall, these measures have been insufficient.
A further element of change is Brexit, which altered Europe’s financial equilibrium, shuffling the cards on the European Fintech table. It has probably created strong demand for data hosting and management solutions on both sides of the Channel, but it has also significantly complicated cross-border trade, not to mention that it presents regulatory challenges that have yet to be assessed.
Which Fintech companies are leading the innovation?
As for the companies that stood out in 2020, the Fintech ecosystem agrees that the podium goes to Revolut, the fastest growing challenger bank in Europe, which has received most financing at a higher valuation. But what is stunning is the pace at which it launches new products, both in the UK market and internationally.
In second place, Fintech companies suggest Starling Bank, another challenger bank that might reach the unicorn status thanks to its latest financing round. It is the only neobank that was started by an experienced former banker, and it would seem that its particularly careful management approach is paying off, since at the end of 2020 it had already reached its break-even point.
Finally, Klarna, the Swedish buy-now-pay-later giant, stands out among the Fintech leaders, as it is on the verge of another monster round that will bring its value between £25 and £30 billion. Its business in the United States adds one million new customers a month to the 90 million they already have around the world.
And which banks?
Some “traditional” banks have also embraced innovation. According to Fintech companies, the most innovative one is BBVA, that has been the leader of digital transformation in the last ten years. It launched its innovation hub in 2010, to interact with the Fintech ecosystem more easily, and was one of the first banks to invest in Fintech companies with its venture capital fund, Propel Venture Partners. Mastercard, too, is considered to be an innovator. In 2020, it launched Mastercard Fintech Express in Europe, to help Fintech start-ups leverage the Group’s extensive network of partnerships. Last but not least, when Goldman Sachs launched its Marcus brand in the summer of 2018, many wondered if it would be successful. Since then, aggressive savings rates have led 500,000 customers to deposit £21 billion. What is most impressive, however, is that it is reinventing itself from solid investment bank to innovative digital bank offering cutting-edge products.
Therefore, overall, the outlook is optimistic. Fintech companies keep growing geographically, they are developing new products and services, although they find that raising capital is becoming increasingly difficult. We believe that this obstacle will soon be overcome by the general need – of banks too – to accelerate the process of digitization. A this will very soon change the world of finance for good.