By Richard Hodgson
Global Processing Services
Despite the overwhelming challenges of a global pandemic, 2020 saw an enormous amount of resilience, ingenuity and innovation in the world of fintech, payments and financial services. As we reach the final days of this most eventful of years, we're setting our sights on 2021 and sharing our predictions of what to expect from the next 12 months.
It is now well established that COVID-19 has accelerated many pre-pandemic trends. For example, while the number of cashless payments was already rising globally (a 14 percent increase in non-cash payments between 2018 and 2019, totaling 708.5 billion transactions, according to Capgemini), lockdown restrictions to combat the coronavirus have supercharged the trend. Who could have imagined that the World Health Organization would advise against using cash for health reasons?
The impact on the digitization of financial services has been dramatic. In the UK, 6 million adults (or 12 percent of the population) downloaded an online banking app for the first time during the initial lockdown, 90 percent of face-to-face transactions made in April were contactless, and in July 2020 there were 1.5 billion debit card transactions (20.8 percent more than in June 2020). This is according to research published by Wired, Charged and UK finance, respectively.
In the APAC region, which was already the global leader in non-cash transactions (243.6 billion cashless transactions in 2019, according to Capgemini) due to high adoption of mobile payments and digital wallets, a Mastercard survey found that 91% of consumers in the region had transitioned to contactless payments as a result of COVID-19.
However long the pandemic lasts, these trends in consumer behaviors will persist throughout 2021. Cashless payments will continue to outpace cash, digital-only banking will see more widespread adoption and digital wallet usage will expand. Financial services providers that can quickly and effectively react to these changes will thrive.
While Innovate Finance reported that investors pumped £1.8bn into UK fintechs in the first half of 2020, an increase of 22% over the second half of 2019, more than half of that amount was invested in just five companies—Revolut, Checkout.com, Starling Bank, Onfido and Thought Machine—with early-stage fintechs raising just 8% of total investments.
Has the ongoing economic uncertainty surrounding COVID-19 pushed investors towards 'safer' bets on more mature, later-stage fintechs? It's hard to say for certain, but we predict that startups may find capital harder to access in 2021 as investors focus on "category winners" and become more conservative and risk averse.
Fintechs seeking investment in the next 12 months will thus need to have a differentiated proposition, a clear path to profitability, strong leadership, and partnerships with credible, experienced suppliers.
Aside from COVID-19, embedded finance has been the industry topic of 2020. It encapsulates the idea that financial products in and of themselves are less important than the context in which a customer needs them. While the traditional core banking model has offered diminishing returns, brands like Amazon, Apple, Uber and others have seen success by embedding payments, loans and insurance directly into their offerings. It's not hard to see the value of, for example, a car rental company offering car insurance during the hire process, or a house hunting app offering mortgages.
According to research by 11:FS, the embedded finance opportunity will be worth $3.6 trillion by 2030. This will be supported by the banking-as-a-service (BaaS) ecosystem, which offers the full banking stack to any business, regardless of industry, seeking to improve customer experiences with capabilities it would have been unable to build alone.
The BaaS model has now reached a level of maturity that will likely see a proliferation of brands capitalizing on it in 2021. The floodgates have therefore been opened, and as the number of businesses embedding finance into their offerings increases exponentially, so will the number of traditional banks offering their services to companies via the BaaS model.
The coronavirus pandemic has thrown the inequalities of our society into sharp relief. It is a crisis that, according to the UN, disproportionately affects the poor and vulnerable, illustrating how the inability of some groups to access financial services requires a meaningful solution.
In 2020, we've seen some ingenious, innovative solutions addressing financial inclusion: Starling's Connected Card allows people to make purchases on someone else's behalf (for example, self-isolating vulnerable relatives); Soldo Care enables governments and charities to distribute money quickly and safely while maintaining budgetary controls; and B4B Payments' partnership with Migrant Help has provided specially designed prepaid cards to individuals without the ability to access a typical bank account.
And these innovations aren't just limited to Europe. In Brazil's Marica neighborhood, a basic income distributed through the Mumbuca digital currency has provided support to people out of work as a result of the coronavirus. In the Asia Pacific region, there has been greater acceleration towards financial inclusion with the imminent issuing of digital banking licenses in Singapore and Malaysia. Through these we are seeing the emergence of exciting propositions like the Razer Card by Razer Fintech, which is targeting the banking needs of the underserved millennial and Generation Z segments through its Razer Youth Bank arm.
In 2021, we will likely feel the full of effects of a coronavirus-driven recession. It will fall to fintechs and the broader financial services ecosystem to build on the shining examples of financial inclusion in 2020 and ensure the least fortunate in our society do not get left behind.
More than anything, 2020 has shown how our industry can respond to massive upheaval with agility and innovative thinking. As we enter 2021, these qualities will be more important than ever as we seek to deliver hyper-personalized and inclusive experiences and products that customers demand in these constantly changing times. 
Richard Hodgson is chief financial officer at Global Processing Services, www.globalprocessing.com. For businesses seeking to understand what investors are looking for in the next fintech, this GPS blog post will be helpful: https://bit.ly/2KO9Oi7. Organizations looking to understand BaaS, and how it is changing the financial services game forever, can watch the 11:FS Decoding: Banking as a Service video series, sponsored by GPS, at https://bit.ly/2M7z17l.
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