We took a look into our crystal ball to try and predict what might happen in digital banking in 2021.
To use what must be the word of the year so far, it’s safe to say 2020 has been unprecedented.
The year started off strong, with digital banking starting to enter into the mainstream, despite some early shakeups, such as N26 leaving the UK citing Brexit as its main reason.
Since then, Covid-19, and the ensuing lockdown, has thrown some curveballs towards fintech but, despite that digital banks have continued to thrive, with Starling and Monzo constantly battling it out as the most switched-to bank accounts in the first half of the year.
In light of the complete unpredictability of 2020, the AltFi team has peered into our crystal ball and taken a gander at what we think 2021 might hold for digital banking.
We have seen nothing short of the start of a boom in fintech M&A this year. This trend, I argue, will play out for the next 5-10 years. Visa’s eyebrow-raising $5.3bn play for Plaid in January and Intuit’s $7.1bn Credit Karma purchase in February are going to look less jaw-dropping in 12 months time following a string of big deals and digital banks will play an interesting role within that. They have customers, reach and tech talent aplenty. Some even might be the ones doing the acquiring perhaps? A D2C bank brand acquiring an open banking infrastructure provider or merging with an SME-focused name could be an interesting path to profits.
It has been a year like no other, of course, with big challenges and silver linings for standalone digital banks such as Monzo, Tide, Starling and N26. In 2021, we can reasonably expect a similar year from a macro perspective with the same factors, namely the global pandemic and a weak economy to continue.
For these banks, however, I predict that 2021 will be a year of some sort of accelerated consolidation. This hasn't been the case in the past 12 months which have been dominated by a push towards sustainability (by way of survival). This renewed focus on profitability has been successful at least from a snapshot point of view towards the end of the year at Starling and Revolut. Monzo has had to raise new cash recently, following on from its infamous down round earlier in the year but has grown too.
No actual collapses or hurried sales, though. That’s because digital banks are still pretty bullish for their prospects. And rightly so. That being said. I expect we are likely to see at least one well-known name acquired by a large banking group in Europe before this time next year.
Starling Bank’s chief Anne Boden has often teased an Initial Public Offering as the most likely outcome for the bank and while 2022 was recently mooted as the minimum time frame I think we might see something sooner from the sector as a whole.
It might not be Starling, the first digital bank to announce profitability, but after a dearth of fintech public listings since Funding Circle’s own disappointing 2018 debut, I wager that a digital bank will go for it. Some of the rest will buy or be bought.
Oh, 2020. The year that was supposed to be fintech’s coming-of-age turned out to be a dumpster-fire of disarray, as plans for global expansion were quickly scrapped.
Monzo was supposed to crack the US, N26 was supposed to become a real UK challenger bank, and Revolut was planning a 24-country launch bender.
Sadly none of the above happened, and even Revolut, the hyper-growth challenger, failed to launch in many of the countries it outlined, including Brazil, New Zealand and Russia.
Blame Brexit, Covid-19, SoftBank Vision Fund’s implosion or the looming global recession, but, whatever the reason, I predict serious global expansion for consumer-facing fintechs will remain on-ice for 2021.
There simply won’t be the appetite for the hiring and capital expenditure needed to open offices, offer customer support and establish local development teams needed for proper global expansion.
The exception? Business-to-business providers.
Indeed, while the venture capital funding taps are being firmly tightened for marketing-intensive consumer-facing fintech brands with often sky-high customer acquisition costs and unproven profitability, I expect the tale will be very different for B2B fintech.
Whichever buzzword you prefer—banking-as-a-service, embedded finance, Open Banking or Open Finance—these fintechs have proven recurring revenues based on lengthy sales cycles.
Looking at the largest funding rounds from the last few months, it’s clear to me that the smart money is heading into B2B fintech and if there’s any global expansion in 2021, this is where it’ll be found.
It’s pretty safe to say that 2020 didn’t exactly turn out how we expected it to.
Starting off the year with a series of big fintech moves, Visa acquiring Plaid and N26 leaving the UK to name but a few, we were then plunged into a national lockdown with no end in sight.
Of the winners and losers of 2020, it’s safe to say that digital banking and the wider adoption of open banking, have been some of the winners.
Lockdown did open banking the world of good, with open banking really having its time in the spotlight this year, doubling its user base to two million users in the last six months here in the UK.
I, for one, don’t think that mobile banking will ever retreat from the prominence it saw this year, with more people than ever downloading their bank’s apps as branches up and down the country were forced to close, some permanently.
With that being said, we’ve still only seen baby steps being made towards open finance, as consumers tentatively dip their toes into the open banking waters.
In June 2020, we saw the long-awaited Pensions Dashboard Programme (PDP) enter into the next stage of its development, something that is a jump towards open finance and bringing open banking to the masses.
Under the PDP, people will be able to see all of their ghosts of pensions past and present, in the one place, something that those who aren’t too digitally-focused won’t have experienced before.
And while the PDP is a step in the right direction, there remains too much misinformation around open banking for us to reach open finance any time soon.
It’s also important to note that open banking as we know it will turn three in January 2021 and with only two million users, roughly just four per cent of the UK’s adult population, it doesn't look like we’ll reach open finance any time soon.
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