2021 FinTech Outlook

Payroll and Wages Take Center Stage (NEW)

You’ve heard of early wage access or payroll advances (based on income history). These efforts have largely come from neobanks and challenger banks as an added perk or benefit for their customers, offering a small amount to bridge the gap until payday. However, payroll companies and providers hold the true value in powering how innovative this service becomes in 2021.

November’s Sector Spotlight of “Banking Payroll with FinTech” showcased how financial services are easily embedded with payroll — paycards and daily wage access are already here. Banking from payroll providers and lending based on payroll data comes next.

BaaS Market Continues to Open Up (EXISTING)

There was an industry high on Banking-as-a-Service towards the end of 2020. Goldman Sachs and Stripe threw their name in the race. Smaller firms with a tech-based offering focused on improved partnerships and integrations with partner banks. As the field becomes saturated with players and offerings, we can expect:

Pricing will become a leading differentiating factor to win new business as platforms shop around for the lowest overall cost;
Support (compliance, platform, end-user, and overall program management) will separate the market participants and industry leaders;

BaaS (in one form or another) has been around for the last 5 - 8 years, experiencing similar struggles that traditional banks face of onboarding customers, providing proper compliance and risk controls, minimizing fraud, and deepening their user base and deposit share. New players may have a strong tech stack or capital backing, but ultimately lack the experience of running the critical support components for banking platforms. More names will get added to the BaaS list, but many will stumble in gaining traction by the end of the year.

Embedded Finance is Here to Stay (NEW)

The concept itself isn’t new, but the level of adoption and traction taking place in 2021 will be. Companies that offer some type of financial service (e.g. insurance, remittances, retail, ecommerce) will add deposit accounts, which can have payments and cards added on top.

We’ve seen numerous financial accounting firms for businesses explore banking their clients, especially for freelancers parsing out tax withholdings — the rise in BaaS providers takes this to a new level by the end of 2021.

Payment Options Galore (EXISTING)

In 2020, PayPal achieved an industry milestone in allowing Bitcoin to become a payment option. This enterprise-level FinTech opened its payments infrastructure to now include cryptocurrency and push the industry closer to mainstream adoption.

Similarly, Buy-Now-Pay-Later (BNPL) has emerged as a new payment option for e-commerce. Affirm is well-known in the US to offer this structure throughout its vast network of merchant partners, which include Walmart. This movement in lending has multiple industry giants around the world competing for the #1 spot — Klarna, AfterPay, and Sezzle. Each of these unicorns will continue to differentiate its offering through partnerships, product features, and banking add-ons this year.

LaaS Becomes the New BaaS (NEW)

With the industry’s attention on Banking-as-a-Service, a similar but separate with credit and loans will make a splash — Lending-as-a-Service (LaaS). Much more complex than BaaS due to federal and state-by-state regulation, compliance and program support will be the key differentiator for LaaS providers. These companies may have their own lending licenses and funding sources, or partner with other firms while providing the tech stack.

Lending is still a new area for FinTech to build and automate. The rise in demand for BNPL and products that help build credit (such as secured credit cards or credit builder loans) creates a path for LaaS, especially from existing BaaS players deepening their suite of solutions.

Direct Regulatory Approach to Crypto in the US (EXISTING)

Regulators in the US were active in 2020 when it came to FinTech. We saw through numerous bank charter approvals, starting with Varo Bank (the first FinTech to become an independent bank), and specialized licenses. The Office of the Comptroller of Currency (OCC) was vocal in using licenses as way to provide government oversight and increase consumer protections.

This regulator activity started to expand towards cryptocurrency discussions at the OCC, Securities Exchange Commission (SEC), and Financial Crimes Enforcement Network (FinCEN) as 2020 ended. There is proposed legislation to identify transactions over specific limits of $3,000 and $10,000 — similar to banking with purchasing monetary instruments and depositing/withdrawing cash at a bank (respectively). This directly impacts crypto’s value proposition of anonymity and security.

Here Comes NeoBank 2.0: FINANCIAL WELLNESS (NEW)

The first wave of neobanks and challenger banks was to offer an option outside of traditional banking that was open to a wider customer base (which included the unbanked and underbanked) and provided an improved customer experience. These two goals have been met over the last 5 years for consumers and businesses throughout the world. Customers now have multiple choices in digital-only banks and can easily switch within minutes their primary banking relationship.

With the field now crowded, competition has intensified and there’s an urgent need for differentiation. Some neobanks have focused on their card offering — providing debit and credit functionality to their users, all in one card. Others are adding credit-building capabilities, such Chime, to boost their customer’s credit standing. This trend will ultimately become a bundling of financial services, in which customers expect more than a banking relationship — either support for credit, savings, or other long-term goals that build financial wellness.

RegTech Makes its Presence Felt (EXISTING)

RegTech companies rarely make headlines as they typically run in the background, helping banks and fintechs with risk and compliance controls. As regulators become more involved in the new world of financial services, new requirements and legislation will pass to help deter fraudulent activity and new ways to scam the financial system.

Financial providers will need help more than ever not only to adhere to new standards, but also ensure losses and regulatory complaints are minimized as much as possible. Despite innovation and FinTech making financial services more easier and efficient, companies should follow guardrails (of anti-money laundering policies and Know Your Customer requirements) to avoid fraud and reputation risk. Improved customer experience should not come at the cost of lax operational and compliance monitoring.

Consolidation between Big Banks and NeoBanks (NEW)

Traditional banks, especially those existing for 50+ years, will target neobank acquisitions and partnerships. There are headlines about top neobanks (such as Revolut, N26, Starling) as potential targets in 2021. This move won’t make sense for certain financial institutions, but others (such as JPMorgan who has announced expansion to the UK) will have a better fit. Some of this change comes as neobanks struggle to grow this year, in light of more players in the space. The Build-Partner-Acquire model reaches the acquisition state for some of the larger banks around the world in 2021.

The Road ahead for 2021

The year ahead will be exciting for the financial services industry, with something for everyone regardless of sector or product offering. FinTech, as we know it today, is about 10 years old — no longer just challenging the status quo, but a fundamental part of the payments and banking ecosystem. Cryptocurrency has made a dramatic leap beyond a store of value into a payment rail. Regulators are taking an active role in the use of technology and innovative banking structures in order to provide proper oversight. The world’s largest banks are no longer waiting to see where the industry is heading, but taking a stance to transform themselves. Banking (not just payments) will be accessible for everyone through banks, e-commerce, payment providers, and retailers.

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William Morales, Founder