2020 Annual Review

Accelerated shift to digital bodes well for fintech

A warehouse employee works in Beijing. © Greg Baker/Getty Images
A warehouse employee works in Beijing. © Greg Baker/Getty Images


Accelerated shift to digital bodes well for fintech

Incumbent banks, fintech startups and tech giants are ramping up competition—often through partnerships—as demand for digitalization spikes in financial services 

Social distancing accelerated a shift to digital that was already well underway in financial services before COVID-19. Customers flocked to all manner of digital products and services, including contactless payments, digital wallets and mobile banking. The scale of the shift may be most evident in global e-commerce retail sales, which increased 25 percent in 2020 compared to 2019.  

As a result, financial institutions are accelerating their digitalization strategies. But they’re often held back by legacy information technology systems and regulatory regimes that inhibit innovation. So many are looking to partner with fintech startups that have best-in-class technology and may not be subject to the same regulatory restrictions. 

Fintechs obviously benefit from the digital shift. Due to their lean operations, many are well positioned to weather the crisis (their total cost of operation can be 70 percent lower than incumbent banks with large branch networks). 

But fintechs often struggle with the costs of customer acquisition and rate of consumer uptake. To get to scale, many are partnering with incumbent banks or jockeying for acquisition by incumbents or other fintechs. Others are obtaining licenses to become banks themselves so they can take deposits, build brand trust and offer more products and services. Success, then, depends on the ability to navigate complex banking regulations.

Of course, tech giants aren’t sitting on the sidelines. They have the size, scale and technology to succeed in the space, and a number of them have already launched products and services or have plans to do so. 

Though the pandemic dramatically accelerated the digital transformation, no digital models have yet risen to dominance in financial services. The coming years will likely be pivotal.