The Fintech Review: 2020
FinTech Futures’ 2020 Fintech Review is breaking down the trends that dominated the year. From valuations that are climbing exponentially, to major consolidation plays that are happening across the payments and open banking industries.
We explore why investors are showing a keen interest in “embedded finance-focused” start-ups, and evaluate the progress being made by various government bodies across the globe that are advancing their implementation of central bank digital currencies (CBDC).
Whilst the economic effect of COVID-19 have thrown challenges at fintechs – particularly at neobanks, whose business models still, by and large, rely heavily on interchange fees – it has also acted as an accelerator for fintech adoption.
A case in point is Monzo. Despite losing more than a quarter of its value this year, the challenger is still enjoying the most account switches of any other UK bank between January and September 2020, according to Buy Shares data.
Investors are also flocking to Banking-as-a-Service (BaaS) products, bringing down the barriers for newcomers, and assisting incumbents with their hefty digital transformations. 
Embedded finance
US Big Techs Google, Amazon, Uber and Facebook’s WhatsApp are all embarking on financial projects. Fintechs such as Zelf and PayKey are turning messaging apps and phone keyboards into banking apps. Whilst start-ups such as Klarna, AfterPay, Checkout.com, Affirm and Fast are capitalising off the e-commerce boom with billion-dollar valuations and impending – or successful – initial public offerings (IPOs).
PayKey’s CEO, Sheila Kagan, says that “rather than allowing the Big Tech companies more access to consumer data”, she hopes “to see greater support for the traditional financial institutions who are already regulated”.
“I believe banks will have the advantage – consumer trust in Big Tech is declining and people will turn to trusted financial institutions to handle their financial data.”
A survey by the National Research Group suggests the contrary. In April, a month into the coronavirus-induced lockdowns, nine in ten Americans had a “better appreciation” for the role of technology in culture and society.
Sarah Carver, Delta Capita’s digital head, thinks “social media companies may well be one of the most interesting areas for embedded finance” and are “the ones to watch”.
She cites Statista, which shows 72% of the UK population uses social media every day, spending a staggering 102 minutes daily on social channels. “To allow them to complete purchases without leaving the app will have a huge impact.”
As for Tim Coates, head of digital for APAC at Synechron, he thinks firms will be able to create “a larger, stickier revenue base by offering bundled services that reduce friction for both consumers and the ecosystem”.
“Firms that can produce application programming interface (API)-based service offerings will look to extend into other firm’s ecosystems and allow those platform firms to re-bundle internal and third-party services into their own packaged offerings.”
Projected to be worth $7 trillion in ten years’ time, embedded finance also offers a route to profitability for many consumer-facing fintechs struggling to break even.
Their self-built tech can translate into new revenue streams. Australia’s Volt Bank announced its BaaS play in September. Whilst US fintech, Moven, shuttered its consumer offering completely in March to focus solely on its enterprise play.
According to US venture capital (VC) firm, Andreessen Horowitz, embedded finance is set to increase the profitability of a customer by more than five times. As a result, BaaS has become a focal vertical of growth this year for investors. Movers in the space include solarisBank, Railsbank, Modulr, Marqeta and Société Générale-backed Treezor.
But their global expansion is only just beginning. “BaaS platforms have remained stubbornly local in a world that has become increasingly global,” says Railsbank’s chief operating officer (COO) in North America, Dov Marmor.
Tune in to episode 17 of our What the Fintech? podcast, where we speak to Vinoth Jayakumar, partner at Draper Esprit, to discuss whether the term “embedded finance” deserves to be in our “Fintech Jail”.
Competition and monopolies
“There is a huge market demand for standardisation in the fintech space”
This year saw some major mergers and acquisitions (M&A) in the fintech space – kicking off with Visa’s $5.3 billion acquisition of data aggregator Plaid, shortly followed by SoFi’s £1.2 billion purchase of BaaS provider Galileo.
“The steps the industry has taken to develop open banking and open APIs have had real impact in the M&A landscape,” says Chermaine Hu, chief financial officer (CFO) at Episode Six.
“They have allowed for smoother transitions and unified systems and are starting to drastically reduce the challenges associated with legacy technology.”
In the world of payments, French firm Worldline bought rival Ingenico for $8.6 billion in February. Italian firm Nexi merged with SIA in October, before buying Copenhagen-based Nets a month later to create Europe’s largest payments processor by volume.
Michael Kent, Azimo’s co-founder and chairman, thinks investors in the payments sector “are keen to finance ever bigger firms”. The EPA’s director general Tony Craddock adds that “when a conventional payment transaction can involve from 8-11 companies […] buying your client, supplier or partner, or investing in them, is entirely natural.”
Suresh Vaghjiani, former CEO of Tribe Payments, thinks “there is a huge market demand for standardisation in the fintech space”. But this “standardisation” is also spurring regulators to bite back.
Whilst Mastercard’s acquisition of Finicity – a deal more than $4 billion less than Visa’s open banking bid – was approved by the US Department of Justice (DOJ), its rival wasn’t so lucky. “Visa seeks to buy Plaid – as its CEO said – as an ‘insurance policy’ to neutralise a ‘threat to our important US debit business’,” says the DOJ in its claim against the deal.
WhatsApp Pay is also caught up in competition concerns in Brazil. The Big Tech’s launch was blocked in June, just a week after it went live. Chinese Big Tech, Ant Financial, saw its record $35 billion IPO dreams shattered after authorities imposed fresh, bank-like sanctions to curb its growth. Ant is one of a number of large tech firms the country’s regulators are looking into due data and competition concerns.
Elsewhere in the Asia-Pacific region – particularly in Hong Kong and Singapore – virtual banking licences are stirring competition, especially from non-financial companies.
Andrew King, Synechron’s Hong Kong head, expects this won’t slow down anytime soon in 2021. In Hong Kong, eight licences have already been granted, and in Singapore – despite just two full licences on offer – more than 21 companies and consortia have applied.
“Competition is mounting,” says King. “In neighbouring Singapore […] Grab and Singtel are rumoured to be on the list to receive a digital banking licence.”
He also highlights that recent deregulation in China, which allows foreign companies to have full ownership of life insurers, futures and mutual fund companies, “will create further competition” in the APAC region.
Open banking beyond data
The Second Payment Services Directive (PSD2) came into force for the UK back in January 2018. In September, the UK hit two million open banking users among the big nine banks, increasing from one million in January. Whilst this number – just 3% of the UK’s population – doesn’t include the progress made by digital disruptors, True Layer data suggests this doesn’t make much of a difference.
In the Nordics, open banking adoption is happening a lot quicker than in the UK
Other countries which made progress with open banking regulation this year include Australia, Brazil, and the United Arab Emirates.
“Open banking is no longer on the horizon – it’s very much here,” says Ade Sturley, international growth head for banking solutions at FIS.
Sturley envisions the future for banks and opening banking to be customers “followed by an invisible army of ‘digital advisors’ that guide their daily financial decision-making”.
Luke Massie, VibePay’s CEO, thinks opening banking will really kick off when data and payments can be combined through the technology.
“Creating a new payments and data insights gateway for consumers and businesses alike will push the boundaries of open banking. It will make it easy to transact online with seamless, data-driven, account-to-account (A2A) payments – accelerating the demand for digital payments in the future.”
In the Nordics, open banking adoption is happening a lot quicker than in the UK. Less than six months after PSD2 went live in the region in September 2019, roughly half of fintech-related businesses – including major banks – already developed new products around the regulation, according to a Nordic API Gateway survey.
“Real open banking means getting access to everything,” says Rune Mai, Nordic API Gateway’s CEO and founder. The firm has helped a number of major Nordic banks feed each other’s accounts into their respective apps – a move other banks around the world are not bold enough to make yet.
“It’s now about becoming the primary interface [in the Nordics],” explains Mai. “People are still talking about it [open banking] as if it’s a war [between fintech and banks]. But in reality, there was never a war. There was a huge tectonic change.”
Part of this war-like imagery comes from the opinion that banks and fintechs still aren’t working together smoothly. A Salt Edge survey of 31 European countries including the UK found that 58% of API integrations take more than ten days.
Anton Komukhin, Unlimint’s product management head, also points out the “major challenge” of compliance. “Current regulation makes access to this technology quite slow and painful which has stalled adoption for many.”
Both Komukhin and Chirag Shah, Nucleus Commercial Finance’s CEO, agree that open banking offers up huge opportunities not just for consumers, but also for small and medium-sized enterprises (SMEs). “We are likely to see SMEs able to make decisions on their financial services providers based on value-adds such as faster decisions, better loan rates and terms,” says Shah.
The race for CBDCs
With access to finance restricted like never before during this pandemic, the race to create the world’s first central bank digital currency (CBDC) is speeding up.
“It’s crucial to remember that simply making a currency digital does not make it the future of money”.
China takes a clear lead. The central bank’s deputy governor, Fan Yifei, revealed at Sibos 2020 that until “late August”, the bank had processed more than three million transactions totalling RMB 1.1 billion ($162 million).
“An aggregate of 113,300 personal digital wallets and 8,859 corporate digital wallets have been opened,” Yifei explains. The deputy governor thinks digital fiat currencies will one day solve the cross-border payments trilemma – low costs, low risks, and high efficiencies.
Other countries making movements towards CBDCs this year include Australia, France, and Sweden. Companies trying to capitalise off the trend towards digital money include Mastercard, Consensys, Accenture and Billon. Banks thinking of creating their own stablecoins include Russia’s Sber and Austria’s Raiffeisen Bank International.
This year, the UK’s chancellor, Rishi Sunak, announced that the Bank of England was putting together a CBDC discussion paper – but it’s still very early days. In the US, Democrats considered using digital dollars and digital wallets to expedite emergency funds to unbanked consumers during the pandemic. But the idea didn’t make it into the final bill.
Despite the US and the UK lagging behind, a report by the World Economic Forum, Deloitte, and McKinsey suggests 10% of global GDP will be digitised through tokenisation by 2027.
But whilst the opportunities of a CBDC are many – China has already piloted 6,700 use cases including bill payments, transportation, and shopping – it’s arguable to what extent it will change what money fundamentally is.
“It’s crucial to remember that simply making a currency digital does not make it the future of money,” explains Ido Sadeh Man, Sögur Monetary Technologies’ chairman.
“In fact, central banks deploying CBDCs risk entrenching the challenges of ‘traditional money’, which was conceptualised hundreds of years ago, in the future.” Sadeh Man suggests the idea of writing democracy into the code of a currency to truly distinguish it from physical money.
Pete Wickes, general manager for EMEA enterprise at Worldpay, thinks the UK isn’t set up for a CBDC like China is – at least not yet, anyway. The firm’s data found that e-wallet usage in China would make up 81% of global ecommerce sales, and more than 50% of global in-store transactions, by 2023.
“In the UK, […] the use of e-wallets is still gaining traction,” explains Wickes. “The majority of UK consumers are not yet in a place where we will see immediate large-scale usage. There needs to be a marriage of trust and opportunity for technology to see mass acceptance. The Bank of England may provide the former, [but] it will be exciting to see what the use case that drives adoption will be.”
