Liam Gray, Tech Nation’s FinTech Programme Lead
FinTechs and the FinTech industry as a whole have experienced a year of mixed fortunes. A recent report by the CCAF, the World Bank and World Economic Forum found that all segments of FinTech, including digital payments, wealthtech and digital savings experienced an increase in traction, with only digital lending seeing a decline.
These insights reflect FinTech trends that I believe will become even more important in 2021: 1) Transitioning to a cashless society; 2) Increasing financial literacy; 3) revisiting traditional approaches to lending.
These trends have been gaining momentum for a number of years, but this year has supercharged their progress. Therefore, I’m keen to outline where we’ve gotten to as an industry now and what the year ahead could have in store.
Transitioning to a cashless society
According to Worldpay’s Global Payments Report, cash has become the second most popular payment method, with debit cards leading the way. The report states that despite the UK being a leader in payments innovation, in 2019, cash accounted for 27% of spending at the point of sale.
However, following the pandemic individuals and businesses have been forced to adopt digital payments methods both online and in-person. Therefore, I’d assume that many of those who have used online payments, digital wallets, QR codes and other contactless payment methods will continue to do so going forward. This suggests that the 27% of transactions that took place using cash in 2019 will have decreased in 2020 and will decrease even further in 2021. However, we must remember that living in an increasingly cashless society bears its own risks, with increased vulnerability to cyber attacks and network failures being two of the largest. These are threats that Sweden has come to realise in recent years, as they have pioneered becoming a cashless nation.
Increasing financial literacy
A study conducted by the Money Advice Service found that of the 6,000 people that they surveyed, the average score for a respondents’ long term financial security was only 4.8/10. The study then went on to state that ‘people scored most poorly on the planning ahead for life events behaviours’, highlighting that poor financial planning is a key driver of this problem. That being said, in recent years we have seen a plethora of propositions helping consumers plan better financially, save and invest.
Now looking at 2020, an unexpected – yet interesting – byproduct of people being forced to work from home, was the reduction in costs associated with travelling to work. A distinct segment of people were able to save significantly more money during 2020, prompting them to explore new areas to place that additional disposable income. Many have simply chosen to save this income (taking advantage of offerings like Chip), but given the low interest environment we’re currently in, others have turned towards capital markets. The uptick in wealthtech transactions really reflects the quantity of consumers that have studied and subsequently invested in capital markets using platforms such as Freetrade, PrimaryBid and WiseAlpha. Although the excess income that fueled the new interest in saving and investing might disappear, a new wave of retail investors have been born, who will encourage others to do the same in future.
Revisiting traditional approaches to lending
For many businesses and individuals, the beginning of the pandemic brought with it a substantial reduction in income and an increased need for credit. However, quite counterintuitively, there was actually a reduction in digital lending. Though this outcome was undoubtedly influenced by a number of factors, many will argue that one contributing factor lies in the fact that the traditional lending criteria wasn’t sufficient in assessing and providing credit.
There is however a silver lining here. Although overall digital lending fell globally, numerous UK FinTechs were able to participate in the distribution of government backed loans. As a result, a wave of new customers have transacted with FinTechs instead of the traditional lenders they would have previously engaged. Moreover, this has also provided fintechs with the opportunity to really test the efficacy of their novel credit assessment algorithms which inform their lending decisions. Like the large incumbent banks, companies like Iwoca and OakNorth have lent in one of the most precarious lending environments of all time, and it will be very interesting to compare the performance of their loans when we look back. I believe that we will look back on 2020 as the year that FinTechs proved they could lend as well as – if not better than – their larger incumbent peers.
These are only a handful of trends that I believe were accelerating in 2020 and will pervade 2021 and beyond. Despite the many obvious negative consequences of pandemic, it’s clearly been a catalyst for the adoption of FinTechs and their propositions.