How will 2021 be a catalyst for the future of financial services?

By Theodora Lau and Bradley Leimer of Unconventional Ventures

With challenges come opportunities. How will 2021 be the catalyst for another wave of innovation and transformative applications of technologies within financial services and the industries that surround it? While we don’t (yet) have artificial intelligence that can predict the future, we certainly have seen so many iterative ideas rearrange banking’s business model. 

After this past decade, and especially this past year, welcome to the new normal when it comes to the pace and breadth of change. Digital transformation is no exception.  

Digital is not a channel —  but the key to our ability to react to change

The pandemic has accelerated the need for nearly everything to become fully digital. From remote work and virtual learning to banking and on-demand services, access to digital services has shifted from a nice-to-have to a must-have across all industries and every vertical. 

But going digital means more than just having access to a website or a mobile application — or moving operations from face-to-face to a digital medium. Thoughtful considerations must be given to access, usability, and scalability — as well as toward ethics, trust, and responsibility. 

This pandemic was hardly the first crisis nudging the industry toward fully digital relationships. Going back to the Great Blizzard of 1978, the impact of this single storm event and closed bank branches led to widespread use of ATMs, which saw its usage go up 20% overnight by New Yorkers, who had yet to embrace this new technology. 

Similarly, unforeseen circumstances due to COVID-19 have greatly impacted how businesses and their employees interact with their customers and the adoption of digital as a way to do business. From online ordering to curbside pickup, we have witnessed firsthand how companies, especially small businesses, adapt, and be present. 

Entering 2021, with changing behavior around digital adoption, enabled by extended social isolation, we believe that there will be more meaningful efforts by financial institutions in enabling digital capabilities that are truly helpful — beyond just providing slick user interfaces. 

We expect data to continue to be the fuel to drive hyper growth of digital solutions; the lens through which banks can understand the true needs of consumers; and the enabler in driving actionable insights and creating meaningful and personalized solutions to drive towards improved financial outcomes and long term financial security. 

Will this also be the year when we can begin to see open finance bear fruit?

Forget unbundling and bundling; vertical is the new black

As we have witnessed the past decade, fintech startups have gone from unbundling financial relationships based on products, toward rebundling them through both the utility and value to the consumer. Look no further than the class of fintechs that began by focusing on one capability (such as money transfer or wealth management), then expanded tangential areas of financial services (such as deposits & savings or payments).   

The year 2020 was also a record year for venture capital megarounds, with nearly 100 investments of $100M or more going to privately held companies as of mid-December, according to CB Insights. This includes the likes of fintechs Chime and Robinhood, showing investor interests and appetite in larger (and later stage) companies impacting banking.  

While there is no shortage of challenger banks offering digital banking services to consumers, we believe the more notable moves will come from vertical integration, where established players move up the value chain. This is where embedded finance takes an interesting turn.

Such is the case of GoDaddy’s acquisition of Poynt, an omnicommerce payments platform used by over 100,000 merchants that has over $16 billion in annual gross merchandising volume (GMV). It is anticipated that the acquisition will help to address the small businesses’ needs for more integrated payments experience across in-person and digital worlds. 

Another interesting example came from IBM’s recent acquisition of Expertus Technologies Inc., a Canadian fintech that helps process more than $50 billion in transactions a day, whose platform is used by more than 1,000 banks, credit unions, regulatory agencies and corporations. 

It is in the rebuilding of our financial infrastructure within non-financial enterprises where both the opportunities and the pitfalls of the coming decade will coexist. 

New Players, New Business Models, and Embedded Opportunities 

Along with the vertical integration, we are seeing more examples of the functions of financial services disappearing into non-banking applications — from payments to credit to savings — as the value and utility of financial services become more disconnected. One can imagine a world where nearly every aspect of traditional banking can simply be an invisible feature of another industry’s customer experience. 

The past year has only accelerated this trend toward embedded banking and more open financial business models, as venture funding and fintech startup development has further expanded financial choices and challenged the industry’s often tenuous relationship with its customers. And now regulators around in nearly every market are accelerating this trend.  

The ever-growing list of Banking-as-a-Service (BaaS) providers are benefiting from this changing regulatory landscape. From Singapore and Hong Kong, throughout Southeast Asia, and to Europe and the U.K., it seems that any company will be able to provide a fuller spectrum of traditional financial products and services within their business model. 

And the U.S. is not immune. With new options for bank charters in the U.S. (as Varo Bank demonstrated this past year), and the OCC signaling changes to brokered deposits to enable more types of fintech partnerships, it’s no surprise that Angela Strange, General Partner at Venture Capital firm Andreesen Horowitz, said “Every company will be a fintech company.” 

And in many ways, she might be right. The past decade has fundamentally changed how we bank, and the past year has deepened our dependency on digital platforms. Business models have followed a similar path, and financial services is no exception. 

While we will all need banking services, as consumers, our options are no longer limited to incumbent financial institutions anymore. Same can be said about small businesses, who now have more tools at their disposal to control the end-to-end customer experience.

How will banks respond? Some things remaining in their favor, despite regulators themselves opening up the industry to more competition, are that the underpinning transactions of these financial accounts remain under the oversight of existing regulatory protections, and that primary financial relationships are still based on trust, not just utility. 

These alone demonstrate the value of partnering with service providers that have extensive experience with not only the financial technology behind the vast array of financial functionalities, but also a command of the complex requirements that regulate them.   

Journey toward cloud 

If 2020 was a year of social distancing and disruption, 2021 will be a year of reshaping conversations. To fulfill the rapidly changing needs in the new world, financial institutions must evolve to an open architecture that supports new models and new partners across different ecosystems, industries, and verticals. 

Instead of a one size fits all approach, an open hybrid multicloud strategy will enable financial institutions to balance flexibility, agility, and scalability with security and regulatory compliance, and redesign how they operate and with whom — without being restricted to a single technology provider or platform. Such foundational environments will allow banks to transform and respond to changes in the marketplace and compete effectively.

As we have written before, the move to the cloud is a journey that banks must undertake in order to thrive in this new world. So what are you waiting for?

This article was sponsored by IBM. Read more about banking on open hybrid multicloud.