For decades, traditional financial services institutions have remained comfortably complacent in their business models, resistant to significant change or disruption.
While the major players in other industries—such as retail, automotive, travel and real estate—have embraced innovation and adapted to a new and shifting consumer buying climate, many banks have stuck to archaic beliefs and strategies. The old guard’s reluctance to change left an open door for innovators from outside the traditional financial sector. Now, disruption is on the horizon.
While the COVID-19 crisis has dealt a heavy blow to the financial services industry, the technology sector has been relatively stable. This places fintech in a strong position—with the resiliency of the technology industry creating an opportunity to solve many of the challenges banks are now grappling with. A CB Insightsreportfrom early this year (pre-pandemic) indicated that fintech will “continue to shift the financial services value chain…[and] investors are continuing to bet on fintech startups successfully building a new financial infrastructure.”
Consumer financial dislocation and credit score impacts
With tens of millions of American consumers un- and underemployed, and with a staggering amount of loan payments being deferred, the lending environment...
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In some ways, the impacts of the pandemic will accelerate this shift, and five years from now, our financial services industry will look very different from the one we’ve known. Below are the key areas of impending change.
Industry segmentation and consolidation. It’s become improbable for a bank to provide a full suite of quality products and services that can beat the competition in every category. There are too many new players and niche products entering the race. This is going to drive increasing consolidation among the largest players in financial services, and edge out mid-market banks. The trend is already taking shape: 2019 was the biggest year for financial sector M&A since 2015, and analysts expect the trend to continue. Many mid-tier players will either be bought up by a large bank, become behind-the-scenes transactional players or fail. Vertical banks, which specialize in, design and offer financial products and services for specific customer segments, will continue to proliferate, and in turn, take a larger share of the pie. Silicon Valley Bank, which is laser-focused on serving entrepreneurs and startups, is a prime example of a vertical bank that wins by serving a targeted customer vs. the general population. Amid segmentation and consolidation, customer centricity will be an important determinant between success and failure, as consumers place more emphasis on trust, security and privacy.
Technology advancements: The very nature of the fintech industry is to alter the landscape of traditional financial services. Cryptocurrency has held strong as the industry darling for years. While banks await the real impact of cryptocurrency to materialize, technology innovations in AI, banking-as-a-service APIs and digital transformation solutions are gaining traction. Accenture’s commercial banking trendsreportfor 2020 highlighted both the displacement of legacy tech and the expansion of “relevant AI” applications that influence decision-making as key opportunities for industry leaders to adopt and leverage for competitive advantage.
Cashless will be king: Cash will become less and less prominent over time, especially in developed countries. We’re already seeing a significant shift away from cash amid the COVID-19 pandemic. Contactless transactions, formerly considered a time-saver and convenience, suddenly became relevant to public health and safety. In the remittance space, customers around the world are quickly embracing digital solutions that provide a cashless, remote option for sending money. Recipients in developing countries will continue to rely on cash more than those in developed countries, but will also begin to embrace digital options as cashless options become more widely available and trustworthy. Providers will be forced to introduce additional digital banking services for senders, and begin addressing the unique needs of recipients in developing countries.
Globalization takes on a new look: Before COVID-19, I would have said that globalization was inevitable, and that recent increases in nationalistic rhetoric were nothing more than a drop in the bucket. But now, after countries have closed their borders to curb the spread of the virus, and people worry about broader global health implications, it’s possible that nationalism might continue to gain traction. The world will still become global—people are already deeply connected across borders in so many ways—but progress may now take more time. In the coming five years, it will be important for companies to remain focused on globalization, and the global supply of talent, to fuel economic growth.
Remittances will endure: The magnitude of remittances and the impact they make are often understated. Remittances to low and middle-income countries have risen steadily for more than two decades. Last year, the World Bank issued data indicating that segment of the remittance market would hit $597 billion in 2021, exceeding foreign direct investment to those countries. In 2019, remittances became the largest source of income for developing countries. Even as millions of people in the U.S. have navigated economic hardship due to the coronavirus pandemic, and traditional remittance providers reported declining numbers, digital remittances have grown. Recentprojectionsestimate a less than 20% drop in overall remittances this year. Despite possible setbacks, I expect that over the coming five years, the financial significance of the remittance industry will net out higher than what it was before the COVID-19 crisis.
The financial services industry has been in need of meaningful disruption for a long time. There is a lot of work to be done, and technology will undoubtedly sit in the driver’s seat. Many of the changes on the horizon were inevitable, but the pandemic has accelerated the shift to digital, forcing banks to reevaluate their models and pivot toward faster technology adoption. Those that don’t will struggle to fully recover or maintain resiliency in future crises. Ultimately, the landscape will become one in which financial institutions do a better job of meeting customer needs and offering targeted solutions for specific customer segments.
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