Rising above: Fintech up for bigger grabs in 2021

11 Feb, 2021 . 4 minutes

Although 2020 was a tough year for many, 2021 will see a rise of fintech companies to be more innovative and agile. According to a survey by Fintech Connect, financial technology professionals believe the coronavirus pandemic, Brexit, and the rise of open banking will be the key catalysts for change next year. About 61 percent of them also expect the growth of digital payments to exceed that of all other fintech industry segments in 2021. Swedish fintech firm Klarna's buy-now-pay-later model is one of the major gamechangers setting the pace in the alternative payment trend.

Across the globe, enhancing operational resilience is likely to remain a top priority, with national regulators seeking to implement global standards and firms working toward compliance. Fintech industry predictions Scott Donnelly, chief executive of leading European fintech lender CapitalBox, expects 2021 to be a significant year for the industry. He spelt out the top predictions for the fintech sector and what is to come in the new year. One of them is better technological solutions and partnerships for e-commerce to succeed.

The pandemic has massively enhanced e-commerce, which grew by about 77 percent, according to a report by American multinational computer software company Adobe. More relevant payment options have enabled e-commerce to survive the transition that is shaping the trend in 2021. Donnelly also said Brexit may present more regulatory hurdles for UK companies that mainly trade in the EU market. On the other hand, updated regulations will benefit continental fintech players with multiple regulatory ecosystems to navigate across borders for a bigger presence next year. London-based multinational law firm Linklaters also published its analysis and predictions in "Fintech Year in Review 2020 & Year to Come 2021," a publication that summarises key legal and regulatory developments in the fintech space and addresses global, EU, and country-specific developments. The analysis includes key predictions for the coming year. "2021 promises to be another busy year for fintech," said Fionnghuala Griggs, global co-head of fintech at Linklaters.

According to the Linklaters publication, the pandemic has accelerated digitization in businesses, while regulatory frameworks must also catch up with innovation as tech giants increasingly enter the financial sector. "Next year should bring some long-awaited clarity as to how the UK will regulate fintech post-Brexit," added Harry Eddis, global co-head of fintech at Linklaters.

As regulators continue to promote a more diverse payment landscape, alternative payment models should be ready to face the competition in the coming years. One of the booming models is buy-now-pay-later, or BNPL. Payment processing firm Worldpay forecasts that use of the BNPL model will grow by 39 percent annually in the UK and double its market share by 2023. The report also includes a pre-pandemic projection that the model could attract up to 3 percent of global ecommerce spend by the same year. The turnabout in customer spending has led to BNPL creating new revenue streams. Divido, the world's largest finance platform, reported that BNPL prospects are estimated to be worth $361 billion.

Given the promising figures, large investors such as US private equity firm Silver Lake, Singaporean sovereign wealth fund GIC, and American multinational investment management corporation BlackRock see big potential in fintech companies adopting the BNPL model, like Klarna.

Fintech players should be aware of the shifting opportunity as it could lead them to exponential growth, new business models, and innovative solutions that respond to the demands of a growing society. The rise of open banking The pandemic has prompted a surge in digitization and e-commerce, with small businesses turning to online models. As everything goes online, payment options get wider.

Fintech participants have noticed the potential of open banking in streamlining digital financial services. By opening access to financial data, open banking offers broader consumer control through third-party collaboration and assistance with fintech companies. As it gradually becomes a hub for innovation in the financial sector, open banking is poised to reshape the competition and consumer experience in the banking industry.

Countries such as EU member states, Britain, India, and South Africa have adopted open banking to initiate fluidity inside their core banking services. The global open banking market has escalated with open application programming interfaces, new banking applications and services, supportive government regulations, as well as enhanced customer engagement. As more tech companies race to introduce advanced financial functionality in their apps, more customers will expect a seamless financial process with their primary bank.

Ian Liddell-Grainger, chairman of the All-Party Parliamentary Group on Open Banking and Payments, said financial technology can establish a stronger market presence in the UK if market players adopt better open-banking policies. Luc Gueriane, chief commercial officer of financial services provider Moorwand, has made a similar prediction on open banking. He said open-banking use cases will go beyond account aggregation in 2021, and that these will be driven by fintech companies, not incumbent banks.

Allied Market Research reported that the global open banking market could generate $43.15 billion in revenue by 2026, which would be a 24,4 percent increase in its compound annual growth rate from 2019. Klarna taking over The Swedish fintech firm has gained global recognition for its ground-breaking digital payment system "Pay Later with Klarna" thanks to its partnership with Britain's largest fashion retailer, As Seen On Screen (ASOS).

The BNPL model might not be a new thing, but the duo has popularized the method, especially among Millennials. As online demand soars amid the pandemic, Klarna-ASOS aptly capitalizes on the method, revitalizing shoppers in the UK to get back on their carts. Since its UK launch with ASOS in 2017, Klarna has reached out to more than 200,000 retailers, including Schuh, JD Sports, Topshop, and H&M.

Klarna, founded in 2005, saw its valuation almost quintuple to a whopping $10.6 billion in 2020 from roughly $2.5 billion in 2018, making it the fourth-largest private fintech firm in the world, according to The Guardian. Klarna allows shoppers to "try before you buy" for several days before making payment. Customers can get their orders delivered, try the item on, and return it if not to their liking while paying for what they keep.

The method offers no interest, fees, or late charges, and the approval only requires soft credit checks, credit history, and other factors. As it claims to increase online store's orders and customer spending by an average of 30 percent, Klarna only charges retailers to keep it profitable. The genius BNPL business model has led to Klarna's speedy expansion in the UK, with more than 10 million customers and 95,000 new accounts opened per week. The fintech company has also attracted more than 85 million customers globally.

Sebastian Siemiatkowski, chief executive and co-founder of Klarna, told The Guardian that retail and finance have hit an "inflexion point," supercharging a shift in demand for online retail to offer flexibility and ease of payment. Andrew Quartermaine of payments firm ACI Worldwide holds a similar view. He said Klarna's soaring valuation reflects a shifting habit with consumers demanding more flexible online payment methods due to the pandemic. The future of fintech in cross-border payments As cash becomes less popular, the trend has been pushed toward contactless payments, highlighting the complexity of managing cross-border payments.

Daniel Webber, founder and chief executive of financial data firm FXC Intelligence, predicts that mobile wallets and "X-as-a-service" models will shape cross-border payment trends and adoption by fintech companies in 2021. The Financial Stability Board (FSB) in October 2020 presented G-20 leaders with two reports likely to be instrumental in shaping the future of payments, one of which is on enhancing cross-border payments.

The FSB laid out a roadmap to establish "ambitious but achievable goals" for tackling inefficiencies in cross-border payments. The roadmap primarily focuses on areas of improvement for the existing payments ecosystem but it also touches on alternative payment arrangements. Public consultation set for May 2021 is aimed at forming a joint public and private sector vision to enhance cross-border payments, according to the FSB. The future does seem bright as the total value of business-to-business cross-border payments is expected to hit $35 trillion by 2022, a 30 percent growth projection from 2020, according to a new study by Juniper Research.

"The next year will bring even more to these ever-changed industries," CapitalBox's Donnelly said, suggesting that players look at the fintech industry's potential in 2021. There is a major role for fintech in restoring the hardest-hit sectors. But the increased focus on fintech acquisitions and the e-commerce boom will help more businesses to rebuild and offer an optimistic start to the new year.

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